Chapter 24: Office Relocation

Overview: Factors touching on Compensation and Benefits you must consider when relocating an office or plant within the United States or overseas.

INTRODUCTION

A news article a few years ago announced that a company founded in California over 80 years ago was considering relocating to another state because of the huge increases in electric power costs. Changes in technology and market demand had reduced the company's space needs so that even if the company did not move to another state, it would move to a new facility. The article interviewed employees who would be affected adversely, since it was not clear whether the company intended to take them to the new location. In the end, it was a very complex and vexing decision for the company, which would eventually take a couple of years for them to sort out: the human element complicates matters.¹

Indeed, a plant's location and/or relocation requires a complex set of business decisions involving many factors. While this chapter will touch on many of these factors, the emphasis will be on the human resource aspects of plant relocation, particularly compensation costs. There are a number of reasons for this focus. The most important is that labor costs are the organization’s largest expense. Second, labor costs are, or are perceived to be, quite variable between various locations. Industrial movement, such as from the Northeastern to the Southern United States, is seen as a move toward cheaper labor. However, just taking into account variations in wage rates does not always translate into lower labor costs. The wage rate is only one part of total compensation costs, and labor productivity must also be taken into account.

This chapter will examine the reasons behind plant/office relocations. Then it will look at the steps involved in closing down a facility, including the transfer or lay off of current workers. After this, we examine how to choose a location for a new facility, either within the United States or overseas.

WHY RELOCATE?

The decision to relocate a plant or office is not one that should be taken lightly. The costs, economic, time/energy and psychological are extensive. These reasons need to be examined closely to insure that moving is the best alternative and that the best location is chosen. Although the list of reasons can be very long they can usually be classified into either changes in company strategies or inadequacies of the present site.

Organizational Changes

Organizations are, or should be, constantly re-assessing their strategy in order to take advantage of emerging opportunities and/or avoid threats. This ongoing process leads to the need to change what and how the organization operates.² Part of these changes may involve the need for new facilities located in a different physical location. The reasons for relocation need to be made clear and be related to the changing strategies of the organization.

Increased demand. Maybe the simplest reason for relocation or for a new facility is an increased demand for the product. A new location, as opposed to expansion of an existing plant, can take advantage of changing market conditions or other movements that are taking place.

New products. Similarly, a new product is an opportunity to locate a facility more closely attuned to the market of the new product. The new product may require different suppliers or resources than other company products, making a new location a good solution. For instance, a new facility that will perform research and development for the company will most likely need to be located near an area where there are universities and other research facilities.

Changing markets and resources. Geographically speaking, there have been a number of changes in the United States that have had a strong impact on location decisions.³ The first is geographic diversity or dispersion. Industries have been spreading themselves across the U.S. instead of concentrating in particular regions. This has occurred for two reasons. The first is improved transportation and communication. Transportation has become both cheaper and quicker. Likewise, communications have become almost instantaneous via fax machines and internet. The second factor is a narrowing of wage rates between regions. This reduces the advantage/disadvantage of various regions for cost savings, making wages less of a factor in plant location. Both of these trends open up new areas for a company interested in relocation.

Another change is the movement of people to the Sunbelt (Southwestern United States). This increases the markets in Sunbelt regions and decreases them in colder areas of the United States. In addition, this creates an increased labor supply in an area of the country already noted for having somewhat lower wages, less unionism, and a strong work ethic.

A third change is the movement out of city centers to the suburbs. This movement combined with an increase of smaller companies and smaller organizational units in large companies has created a vast array of commercial and industrial plants across the U.S. landscape.

A fourth change, that of internationalization of production and markets, will be discussed in detail later in this chapter.

Inadequacies of the Current Site

Physical facilities grow old and obsolete, making more and more maintenance, and/or upgrades, necessary. There comes a point when it costs less to start over than to repair the current facilities. Further, there are newer machines, new processes and new plant layouts that improve productivity. All of this can make a new facility look like the best choice. Still, the tendency of the human mind is to play up current facility's shortcomings while downplaying the costs of starting up a new facility. It is human nature to idealize how well everything will go at the new site.

Not all the negatives about the current site are necessarily within the plant. The community may have changed in ways that are negative to the company. Rental prices may have risen substantially. Taxes, likewise, probably have gone up. Labor costs and the availability of labor may have changed for the worse. Resources in the area may be dwindling, and suppliers may have left the area.

Before exploring new sites, the inadequacies of the current location need to be well documented. Exploring the reasons for the inadequacies is necessary. This provides a basis for developing a plan to look for a new site. You do not want to have the same problems plaguing the company in the new facility.

CLOSING A FACILITY

Unlike expansion, relocating a facility requires closing the present facility. This is an expensive and time-consuming process. There are a number of decisions to make. Most companies that have been through this attest that it takes more time and money than was planned. Major decision areas range from what to do with the property to how to handle the current staff.

Selling or Leasing the Current Property

Based on whether the current site is owned or leased, selling or getting out of the lease is required. Depending upon the market conditions, this may take many months; and it can result in either a gain or loss.

Disposition or Transfer of Equipment and Furnishings

Sometimes one of the major reasons for the relocation is to purchase new machinery and equipment to increase the productivity of the plant. If this is the case and nothing is to be moved, then disposal of equipment and furnishing must be accomplished. If old equipment and furnishing are going to be used in the new site, then moving plans need to be made. Most major moving companies have a division devoted to industrial transfers that will provide all the necessary planning, as well as the movement of equipment and furnishings.

Dealing With the Local Community

While this may not seem to be of major importance, all case histories of plant closures spend a lot of time discussing community relations. This can be very important if your company received incentives, such as tax breaks, to entice it to the area in the first place. The company may find it now owes taxes for some time period to make up for the original lowered tax rates.

Some communities, especially large ones, may be able to absorb the closure of a facility easily. There may be jobs in other companies in the area, so there is little effect on local social services. However, in small communities the impact of closing even a fairly small facility may be great. The economic impact of the move may be very large, leaving many people unemployed at a time when it is hard for the local community services to respond. Working through the move with local leaders takes time but can pay off in helping make the move a smooth one.⁴

Human Resources

While the above issues are important, the focus of this chapter is on the impact of a plant closure upon the employees. This is the most complex issue in plant relocation, as it may involve legal regulations, union-management relations, transfer issues, layoffs, and staffing.⁵

Communication. This act requires employers to provide notice to their employees 60 days in advance of a plant closing or mass layoff if 50 or more employees at a single site are to be laid off. Covered employers have 100 employees or more, including temporary ones, but not counting employees who have worked less than 6 months or who work an average of less than 20 hours a week, or have 100 or more workers who work at least a combined 4,000 hours per week. Governmental organizations are not included but quasi-public entities are. All employees in covered organizations are covered by the act. Employers must notify the union (if there is one), the state dislocated worker unit and appropriate units of local government.

There are three exceptions to the 60-day notice period:

1. Faltering company. This exception, to be narrowly construed, covers situations where a company has sought new capital or business in order to stay open and where giving notice would ruin the opportunity to get the new capital or business. It applies only to plant closings.
2. Unforeseeable business circumstances. This exception applies to closings and layoffs that are caused by business circumstances that were not reasonably foreseeable at the time notice would otherwise have been required.
3. Natural disaster. This applies where a closing or layoff is the direct result of a natural disaster, such as a flood, earthquake, drought or storm.

Violators of the 60-day notice period are liable for payment to all affected employees of up to 60-days back pay and benefits. In addition, for non-notice to local governments the company may be fined up to $500 a day. For further information go to: www.dol.gov/.

This act has created something of a controversy as to whether companies should be forced to give notice of intent to close a plant. The arguments in favor stress that notice facilitates employees' search for new jobs and reduces the personal shock that they feel. In addition, notice to the state and communities allow these bodies to gear up to help workers and perhaps to find ways not to have to close the facility. Opponents of notice argue that notice restricts the free mobility of capital, increases worker turnover and reduces productivity. Retaining workers at the plant until the shutdown may become a problem.

Unions. If your company employs union workers, it must inform the union, as indicated above. Depending upon what the union contract says, more than 60 days of advanced notice may be required. In addition, the union contract may include other clauses dealing with plant closure. These may include requirements for consultation, severance pay for union members, payments for benefits, early retirement programs and other restrictions. Unions see this time period as an opportunity to bargain for better layoff benefits for their workers.

Employee Retention. Keeping key employees until the plant is closed down is a serious issue. The employees who have the best chance of getting a new job quickly are exactly those that the company needs until the very last. Without them, productivity will suffer greatly and may even come to a halt. Many organizations find that in order to keep these employees, they must offer them incentives to stay until the end. This usually involves offering employees an increased and generous severance package if they will stay with the plant until a planned date. Even with this incentive, the company must expect to lose some of its most valuable employees very soon after notice is given.

Transfer. The most important human resource decision to make in plant relocation is whether to transfer employees or to lay them off. Either choice is going to be expensive. It is unlikely in a plant relocation that all employees would be laid off. At a minimum, management would be transferred and probably any professional staff. Some of the variables to consider in deciding between transfer and layoff are:

1. Reason for the relocation. If the purpose of the relocation is to take advantage of cheaper labor, then transfers should be held to a minimum.
2. Labor force in the new location. This is a question of both quantity and quality. If the relocation is of a research facility to a location that has few technical people, then relocating trained employees is the logical choice.
3. Specialization of the staff. This variable may work in both directions. If it takes a lot of training to perform the organization's tasks, then transfer is a good alternative. If the new facility employs a different technology, then current employee's skills are redundant and hiring new employees with the appropriate skills makes sense. Regardless, leaving old employees behind means losing a great deal of "organizational knowledge" of how things are done in your company.
4. Corporate responsibility. Some companies feel a responsibility to their employees, and therefore offer their current employees positions at the new plant. Even with this mentality, some employees will choose to uproot their lives and move with the company to its new location and others will not.

In reviewing case studies of plant relocations, one of the constants is that the planners underestimate the costs involved in dealing with Human Resources. Relocation of employees has a number of expenses tied to it: aiding the employee in selling his/her present home, moving costs (both of the family and their furnishings), as well as finding and financing a new home. These are discussed in detail in Chapter 23.

It needs to be emphasized that even if the company wants to transfer an employee, it is up to the employee to accept the transfer. This means that the more the company desires the employee to move, the better the transfer offer needs to be. This may include purchasing the current residence, moving not only furnishings but cars and other items, helping the employee obtain financing for a new home and increasing the employee's salary.

A major variable in an employee's decision to transfer is the cost of living in the new location. If the cost of living is significantly higher, the chance of the employee turning down the transfer is great. Offering a higher salary may entice the employee to the new location, but in the process, it could have negative effects upon the total wage structure in the new location. Methods for overcoming this problem are discussed in Chapter 23.

Layoffs. Those employees who have not been selected for transfer need to be terminated. This is rarely a single day event. Closing down a plant may take place over a period of time. It is necessary to plan out when each phase of the closing will occur, and which employees become redundant at these times. These plans need to be shared with the affected employees, community social services and the state dislocated workers unit. State dislocated workers units have many services available for workers who have been laid off. (See www.dol.gov/ for a listing of contacts for each state.) Communication is very important, not only for providing notice, but for informing employees about what they have coming from the company upon their termination.

1. Wages. By law, the company must remunerate a terminated employee for any unused vacation or personal time, all regular and overtime hours worked, previously unpaid earned bonuses and any other earned pay. This payment is to be made on the last day of work.
2. Severance pay. Unlike most countries, the U.S. has no requirement for paying terminated employees' severance pay. However, most union contracts do require severance pay and most companies have some severance pay statement in their human resource policies. Severance pay policies ordinarily base the amount of severance pay on years of service. The most common basis is one week per year of service. Higher-level employees typically receive higher severance pay schedules.⁶
3. Leave. As indicated above, all vacation leave needs to be paid upon termination. Sick leave need not be paid unless all leave has been grouped into personal leave.
4. Medical and Health Insurance. Under COBRA, employees are able to purchase extended health care coverage if their jobs ended for any reason other than gross misconduct, or if their hours were reduced. To qualify, the employee must have been a participant in the company's group health plan. Upon their termination, the company must provide the employee with written notice explaining the employee's rights under COBRA. The employee has 60 days from the date of notice to elect COBRA coverage. This coverage begins the day that health care coverage ended and lasts for up to 18 months (and longer in some cases). The employee pays the entire group rate premium for health care coverage plus a small surcharge.
5. Retirement. Effected employees must be given information detailing the company's retirement plan and their standing within the plan. Depending upon the type of program, some action may be needed by the employee. For instance, in a 401(k) plan it may be necessary to roll over any distributions into another plan in order to avoid taxation of the distributions.
   
   Depending upon the age makeup of the plant's workforce it may be prudent to offer early retirement to employees. This can be done by reducing the age at which employees are eligible to retire and/or by increasing the benefits for those who take retirement. The latter can be done by adding funds to the employee's retirement account.
6. Insurance. Coverage in other types of insurance plans, usually life and disability, need to be resolved. Typically, employer-provided life and disability insurance coverage ends when the employee is laid off.

Unemployment Insurance. Most employees will be eligible to apply for unemployment compensation for some time period between being laid off and obtaining a new job. The time period and the amount depend upon the current laws, the employee's current salary and the state in which the layoff takes place. For further information see: www.careeronestop.org.

Unemployment insurance is a program run jointly by the state and federal government. It is funded by employer contributions. These contributions are a percentage of the employee's salary. The contributions are experience rated: the more claims from a company the higher the contribution rate. A substantial lay off will increase the company’s contribution to the maximum. For information regarding unemployment insurance rates see: oui.doleta.gov.

Outplacement and Retraining. These programs are not required by law but are highly recommended for a number of reasons. Outplacement programs address the concerns of the effected workers so that they can keep more focus on their jobs during the closure process. Further, these programs can reduce the probability of legal action being taken or provide some defense that the company was doing all it could.

The purpose of the outplacement program is to prepare the employee to search for a new job and to provide information about possible job openings. Since most employees have not been in the labor market for a considerable period of time, they may have little idea about how to go about looking for a job. Outplacement starts with having employees do a career assessment to find out what they wish to do and are capable of doing. An important part of this is to develop a resume that accurately describes the employee's abilities. The outplacement program provides labor market information so the employee knows where to look for work. When specific contacts are made, the program provides training in interviewing. If, during the assessment, it becomes clear that the employee requires training in order to reach desired work goals, the program can identify appropriate training programs. Where technology has made current employee skills obsolete, the company may wish to subsidize a certain amount of training.

Outplacement can be done as an internal program if human resource personnel have the skills for performing such a program. If not, there is a wide range of consultants who specialize in outplacement.

CHOOSING A LOCATION

In the example at the beginning of this chapter, the major reason the company was considering relocation was the cost of electricity. Indeed, in the state of Oregon (where they were considering moving), the cost of electricity was lower than in California. But even if the decision is based solely on this one criterion it leaves two questions unanswered. The first is: Where in Oregon? It is not clear that the cost of electricity varies greatly within the state of Oregon. If it does not, the decision of where to move within the state will be made based on other criteria. The second question is: Why Oregon? While it is true that Oregon has lower electricity costs than California, it does not have the lowest costs in the United States. It would appear that there are already criteria beyond electricity prices that are guiding this company's decision processes.

The intent of this section is to explore the various major decision criteria that go into plant relocation decisions, and to describe ways to integrate these different decision factors.

Factors in Plant Location/Relocation

There are two sets of factors involved with plant location and relocation: proximity and the characteristics of the community or area. Plant location is a complex multi-factor decision process in which these factors have different values depending upon the circumstances.

Proximity

A major concern in locating a facility is the distance of the location from markets, suppliers, resources and other parent company facilities. It is imperative to remember that distance costs money and takes time.

Markets. For products that are large, bulky and heavy, being near the market is very important. Transportation costs can be a major consideration in this circumstance. In addition, being close to modes of transportation, highways, railroads and water can be critical. Another circumstance where being close to the market is important is when the company's customers are the general public, for instance, fast food establishments. Alternatively, if the product is information, being close to the market is not very important. In fact, the market is probably so spread out there may not be any central location.

Suppliers and Resources. Being close to suppliers reduces the time it takes to obtain needed supplies. In turn this allows the company to establish a production system that requires keeping less on hand, such as a just-in-time system.⁷ As was stated, firms with bulky and heavy products may need to be near their suppliers. For example, paper mills benefit from being near forests.

Parent Company Facilities. Where there is a great deal of interaction between plants, distance becomes a major consideration. This interaction may be a result of each plant being a part of the total production process or the fact that plants share services or staff. Coordination becomes more difficult with distance.

Site Characteristics

Proposed sites for a new plant may have considerably different characteristics, making some more attractive than others. Some of these characteristics are the local labor market, cost of living, quality of living, utilities, taxes and local attitudes. These factors are briefly introduced here and will be expanded upon later in this chapter.

Labor Market. The labor market has two interrelated aspects, availability and cost. Availability is whether there are sufficient numbers of potential employees with the skills needed or who are trainable, within the surrounding area. The cost aspect is the wage rates in the area. An interaction occurs when the company tries to hire personnel and finds that they must lure them away from other employers, thus raising the local wage rates.

Surveys of the importance of various factors in site selection always show labor factors at or near the top of the reasons given for selecting a particular site or deciding to relocate.⁸ These factors are broader than just wage rates. The most common one is called favorable labor climate. This factor is a combination of wage rates, training requirements, attitudes toward work, worker productivity and union strength. Since there is a persistent feeling amongst many company executives that unions are a negative force, then low unionization or low prospects of unionization are seen as positive. Note that some labor factors are readily measurable (such as wage rates, for example), while others (such as attitudes toward work) are qualitative measures.

Cost of Living. The cost of living may or may not be reflected in local wage rates. The cost of living is determined by the supply of and demand for goods and services in the area. Wage rates, on the other hand, are determined by the supply of and demand for labor in the area. (These distinctions are discussed more fully in Chapters 3 and 7.) The cost of living does play a major role when the company is transferring employees to the new plant from another location or when the company recruits on a national scale for employees. For instance, the labor market for most engineers is national, and the cost of living can be an important factor in recruiting them.

Quality of Living. This consists of factors such as the quality of schools, recreational facilities, crime rates, weather patterns, access to higher education and health care as well as cultural events and other such things that determine the lifestyle of the area. The quality of living is important to most people, especially those with a higher degree of education.

Utilities. Many types of plants do not use significant utilities, but for others the cost of a utility (such as electricity) can be the deciding factor. Water may be especially important if it is used as a disposal element.

Taxes and Regulations. There are a variety of taxes to consider in plant location. States have different corporate tax rates and requirements for space, safety, etc. Cities and counties have property taxes and a whole series of building codes and ordinances for industrial sites. Communities that are trying to attract industry are often willing to adapt requirements and grant tax relief to incoming plants.

Local Attitudes. Some communities try to attract new industry while others make it difficult to settle there. Communities seek to attract plants that they perceive are compatible with the community, both in a physical and a cultural sense.

Decision Model

A general way to combine the above factors into a decision model follows these steps:

1. Identify the relevant location factors and divide them into primary and secondary criteria. Primary factors have two qualities (1) they affect costs significantly and (2) vary between locations. This latter is important. A factor may have a great impact on the costs of production, but if the cost is approximately the same regardless of where you are located, then it is not an important criterion for location purposes. The same can be said for a factor that varies enormously but is a minor cost of production. In the example at the start of the chapter, electricity cost is the primary factor, but is it the only primary factor? Labor costs are both an important cost factor and may vary significantly by location. In addition, shipping costs for finished products may be an important factor.
2. Weight the factors that are to be considered. Allocate 100 points among the chosen factors based upon their desired weight. This goes beyond dividing the factors into primary and secondary. Contribution to production cost is a good criterion for those factors that affect production cost and are thus measurable. Other factors may not be amenable to quantitative measurement, and judgment must be used to determine their relative weights.
   
   Here is a sample list of scored factors...
   
   

   Importance of Factors for New Manufacturing Plant
   Factor	Score
   Cost of living	5
   Distance to Customers	10
   Distance to Headquarters	10
   Distance to Suppliers	7
   Labor Cost	18
   Quality of Labor	8
   Political Climate	5
   Taxes	7
   Unemployment rate	5
   Utilities	25

3. Score the factors. Using a scale (such as 10 points with 10 being highest), develop a score for each factor. Developing the score for each factor may require gathering a great deal of information. For factors that are amenable to measurement, the relative score will be related to the differences in measurement. Non-quantitative factors may also have some quantitative measures. For instance, the labor force has quantitative aspects (such as wages and unemployment rates) as well as non-measurable aspects (such as quality of the labor force). Most of the rest of this section will focus on finding information to score these location factors.
   
   

   Bend, Oregon
   Factor	Score
   Cost of living	7
   Distance to Customers	7
   Distance to Headquarters	5
   Distance to Suppliers	8
   Labor Cost	9
   Quality of Labor	3
   Political Climate	4
   Taxes	6
   Unemployment rate	5
   Utilities	10

4. Develop a weighted score for each factor. This score is the weight times the score for the factor.
   
   

   Bend's Weighted Score
   Factor	Score
   Cost of living	35
   Distance to Customers	70
   Distance to Headquarters	50
   Distance to Suppliers	56
   Labor Cost	9
   Quality of Labor	162
   Political Climate	20
   Taxes	42
   Unemployment rate	25
   Utilities	250

5. Develop a weighted score for location. Combining the weighted scores for all the factors produces a single score for the location. This score can then be compared with the scores for all other possible locations that have been developed in the same manner. The location with the highest score would be the best location.
   
   

   Location	Total Score
   Bend, Oregon	734

Adjusting the model

The factors that relate to distance are the location of major markets, target customers, suppliers, resources and other company facilities. The distance between the proposed locations and the target factors are calculated. The location involving the least distance is judged best. This simple model can be adjusted for either load weight or importance of the factor or both. Distance times the weight provides a load-distance model. If it is more important to be near either the market or the source of resources, then the factors can be weighted as was done above. This is a simple cost reduction model based upon distance. Other more sophisticated models have been developed which can be explored in the referenced articles.⁹

Gathering Data

We will now look at where you can gather the data you need to score these facts.

Labor markets

The focus of this chapter is on labor market aspects of plant relocation. The term market usually means an area within which buyers and sellers are in sufficiently close communication that price tends to be the same throughout the area. Labor markets are characterized by incomplete information. Neither workers nor employers have sufficient information about labor markets and must seek it in order to make decisions about wages and employment. Both unemployment and job vacancies exist at the same time, usually more of the former. Moreover, workers are reluctant to quit their jobs and employers are aware of their investment in present employees. See Chapter 3.

Segmented labor markets. In the 1960s economists began dividing labor markets into two types. In the beginning, the distinction was between internal and external labor markets. Since most workers were employed in large organizations, the way they dealt with employees created an internal labor market. These organizations hired employees for beginning jobs, trained them to move up, and paid according to internal worth of the jobs and employee seniority. The external labor market was where market forces prevailed, and wages were set by supply and demand. Workers in this labor market were those new to working, poorly trained or marginal for any number of reasons.¹⁰

This dichotomy was then redefined as primary and secondary labor markets.¹¹ The primary labor market was seen as having "high wages, good working conditions, employment stability, chances for advancement and due process." This was the world of the large corporation. The secondary labor market had opposite characteristics, those of "low wages and fringe benefits, high turnover, little chance for advancement and poor working conditions."

Starting in the 1970s and accelerating in the 1990s to today is a change in American industry. Competition from other parts of the world showed the stagnation and clumsiness of the large bureaucratic organizations. Organizations strove to be more flexible and able to respond to new market forces. The results were large-scale layoffs (permanent ones) and smaller organizations with fewer levels of management. The primary market model no longer worked. The majority of workers affected by these downsizings were ones who had worked under the promise of the primary labor market. Essentially, the primary market workers became a smaller part of the organization's workforce; they were a new set of core employees. But this core now had wages set more by market forces and performance with little guarantee of permanent employment.¹²

The rest of the company's employees are now classified as peripheral. They are both numerically and financially flexible from the organization's standpoint. They consist of many part-time and temporary employees. They may be employed directly by the organization or through subcontracting, and they are much larger in number than the old secondary workers.¹³ They exist at all organizational and skill levels. It is this changed world into which workers now venture.

Defining your market. For labor markets, the size of the area may vary from the neighborhood to the whole world. Labor market size varies with skill, both type and level. Managers and professionals, for example, have a national or international market. For most manual, clerical and technical jobs, labor markets are local, often defined by commuting distance. A locality contains many specialized markets for various occupations and skills; these markets are linked by the possibility of transfer between occupations. The type of workers the company requires will determine the definition of the labor market. If recruiting efforts are not successful, the definition of the labor market must be expanded. See Chapter 3.

Labor market data. The data that needs to be gathered for evaluating a plant location consists of the size of the labor force, the unemployment rate and the wages paid in the area. Figures for the size of the labor force and the unemployment rate can be found at www.bls.gov/. This data is very general, providing a picture of the overall size of the labor force and the employment situation. It does not provide information about the specific types of workers that the plant requires. Somewhat more specific data is available by state at: www.bls.gov/.

Information on wage levels in the proposed plant location as compared to the current site can be obtained from ERI's Geographic Assessor® software. This software provides comparisons of wage and cost-of-living levels in multiple areas. For wage data specific to individual job titles, refer to ERI's Salary Assessor®. Subscribers can get detailed salary range information for over 13,000+ positions in the United States, Canada, the United Kingdom, and Europe. Salary calculations may be adjusted for user inputs of geographic area, industry, organization size and salary planning date.

Productivity. In the end all of this information about the labor market is to aid in determining the productivity of labor and the resulting unit labor cost. However, there is no source for labor productivity by geography or geography within the United States. The statistics are either for the U.S. as a whole or for specific industries. (See www.bls.gov/productivity/home.htm.) It would be hard to develop such statistics, and they may not be very useful in this decision process anyway. Productivity depends on a number of factors that are not necessarily connected to the site. The types of management style of the managers as well as management’s concern for productivity are both major factors in plant/office productivity. This concern can be expressed through variable pay plans (see Chapter 16).

Moving to a new site and installing the latest machines and new processes should increase productivity substantially. Moving to an area where the labor supply is trained in the processes used in the company's product will tend to enhance productivity, while moving to an area where workers are less trained should have an opposite effect. Having qualified suppliers nearby can reduce the costs of inventory.

One final comment regarding labor markets: As stated at the beginning of this section, labor markets are where the demand for and supply of labor meet. When you place a new plant or office in an area, you change the demand for labor. Depending upon the size of the labor market and of the plant, this effect may be negligible or substantial. A large company moving to a small town may use up the total local labor market and literally change the size of the market by recruiting from adjacent labor markets or transferring a large number of new workers. So, while the figures regarding the labor market may be accurate before you got there, you may be in for surprises as the new plant is opened.

Cost of Living

This factor was not considered under wage rates, as the two are very different factors. Wage rates are determined by the supply of and demand for labor. The cost of living is determined by the supply of and demand for products that go into daily living, for example housing. It is not unusual to have an area in which wages are low and housing costs are astronomical. The cost of living does come into play when the company is transferring employees from the old location to the new one. The company may need to make some adjustment to salaries or allowances to entice employees to transfer if the cost of living is substantially higher in the new location. To find out how to set these allowances, see ERI DLC Course 57: Relocating an Employee Within the United States.

ERI has two products that deal with cost of living, the Geographic Assessor (discussed previously) and the Relocation Assessor® software. The Relocation Assessor allows users to create unlimited two-city relocation analyses using the most current research data available. Additional screens display cost-of-living graph comparisons, benchmark listing comparisons of summary cost-of-living differentials, and per diem rates in up to 99 cities at a time comparing the data to one base area (e.g. headquarters) or a National Average (U.S., Canada, Europe). Data may be adjusted according to user specifications for earnings/spending level, home size, home ownership (U.S. and Canada only) or rental, family size, number of automobiles, miles driven, and automobile value.

Required Benefits

Most required benefits are mandated by the federal government, making them common anywhere the plant is located. States do, however, differ on what benefits they require and the cost of various benefits. State requirements can be found online at:

• www.benefits.gov
• workforcesecurity.doleta.gov

The Community

Locations vary considerably in terms of how attractive they are for a new plant. Some of these factors can be examined by collecting data and some must be experienced: personal scouting of the area is a must as part of the learning process. An important question to ask is: What kind of community is this to live in? The list of things that could be included is almost endless, and what to look for depends upon the desires of the managers and the workers that the plant hopes to attract. For instance, a professional-level workforce will almost surely desire a university nearby where they can pursue additional education.

A source for researching some of the factors in proposed locations is the CIA's World Factbook, www.cia.gov/the-world-factbook/.

Regulations. Each community has its own set of government regulations that must be considered. These regulations range from zoning to not allowing large trucks on certain streets. Communities that are trying to attract industry will tend to have fewer regulations or be willing to adapt local regulations to accommodate new industry. Today, regulations regarding the environment are particularly stringent.¹⁴

More and more governmental units are opting for a "living wage" as opposed to the minimum wage. These laws require anyone dealing with the governmental unit to pay a wage higher than the minimum wage: one that guarantees the workers can live on the wage.¹⁵

Taxes. While most taxes are state or federal, local communities do have their own taxes. A state-imposed tax that can be burdensome is one on company inventories. There are also taxes on real estate and personal property to consider.

START UP

In this chapter we do not intend to cover all the factors required to start up a new facility nor all of the costs that are created in so doing. You can assume that things will come up that were not thought of, and the costs will usually be higher than expected. However, here we will look at four important human resource issues: recruitment, selection, training, and compensation systems.

Recruitment

Recruiting is hiring the proper number of workers, with the proper skills to start work at the time they are needed. The timing is very important. Hiring workers before they are needed is costly; so is not having the proper workers available when they are needed. Recruiting takes time, and that time is variable with the skill levels of the workers. This problem is the reverse of the problem of who to layoff and when while closing a plant. But it is made more difficult because hiring the new staff takes time. It is necessary to think through and estimate how long it will take to find and hire workers at various skill levels for the new plant. Generally, the higher the skill, the broader the labor market and the longer it will take to find and bring "on board" new workers. This is not the difference between a few days and a few weeks but rather the difference between a number of weeks and a number of months.

Recruiting must be seen as a priority beyond the Human Resource Department. The first step is to know what kind of worker is needed. This requires a job description (see Chapter 10). The last section of most job descriptions is a job specification that describes the qualifications required to perform the job. If management and Human Resources cooperate in ensuring this statement is accurate, it will save a great deal of time and money and result in a better qualified workforce.

The next step is to determine where to best search for the needed skills. If the local labor market has the skills, the time and costs are reduced; but if a national search is called for, both time and money are required. The third step is to determine the recruitment techniques that will be most effective in reaching the desired workers. Techniques vary from placing advertisements in local papers to sending out recruiting teams to cities that are known to have workers with the required skills. Along with this, the organization must put together a compensation package to offer prospective employees.

Selection

Recruiting ends and selection begins after contacts with prospective employees have been made and applications are in hand. Here managers and Human Resources again must work together to cull through the applicants for those best qualified for the jobs.

Two problems can occur at this juncture: too few and too many applications. The former means that the second step of recruitment didn’t work and that a new definition of the labor market is needed. Thus, more time is required. The latter means that more time is taken up, usually in Human Resources, in culling through the piles.

Selection techniques may require testing and interviewing before a final selection is made. Making an offer does not mean that the organization has a hire. Depending upon the labor market, some ratio of acceptance needs to be established. If the ratio is exceeded, it may mean that the compensation package was better than it need be; if lower then you may need to enhance the compensation package.¹⁶

Training

Once "on board" employees need to be trained. At a minimum an orientation program is needed for all employees, since this is a new facility. This orientation needs to cover the philosophy of the company, layout of the facility, where things are, the policies and procedures of the company, and the compensation program (including benefits). Some, or most, employees will need job and/or skills training, depending upon how successful the recruitment program was. It is very likely that more training needs will become apparent as the plant starts operation and management realizes that employees do not have the knowledge or skills for the new operation.

Compensation Systems

Wages and benefits must be incorporated into a compensation system. This can be done either by developing a new compensation system for the plant or by adapting the compensation system within the company to the particular circumstances of the new plant. The former alternative would be appropriate where the new plant is engaged in a new and different product and the ties to headquarters are not strong. For most plant relocations it would be appropriate to adapt the company's compensation system to the new location. For more information on making this decision, see ERI DLC Course 83: Designing a Branch Office Salary Structure.

PLANT RELOCATION OVERSEAS

The most dramatic change in plant relocation in recent decades has been the trend to move plants overseas. This has caused considerable consternation and hardship for some regions of the United States. The reasons for this movement and the processes required to relocate overseas are covered in this section.

The Changing American Economy

During and shortly after World War II, the U.S. economy was the undisputed leader in manufacturing throughout the world. While most countries had suffered destruction of their manufacturing facilities during the war, the U.S. had been protected from damage. By 1954 the U.S. accounted for 44.7% of industrial production throughout the world. However, the United States lent support to nations that were hard hit by the war to help them rebuild their industries. So, while American industry continued to expand, the percentage of the total world production started to fall.

Further, the mix of employment began to change. There had been a long-term decline in agricultural employment, but now there began a shift of employment from manufacturing to services. This shift has become so pronounced that today the great majority of American workers are employed in the services. In describing these changes and their effects, two sets of ideas are used: the post-industrial society and deindustrialization.

Post-Industrial Society

This term, coined by D. Bell, defines the post-industrial society as one in which the majority of workers are not involved in the production of tangible goods. The predominant group of workers is known as knowledge workers. The demand for manual and unskilled workers declines. A result of these changes is an increasing wage gap between worker groups: while highly paid workers obtain large increases in real wages, low-paid workers lose in terms of real wages. Bell’s observations are those of a sociologist. He proceeds to predict a great deal about changes in power structures in the society based upon information and knowledge. In fact, he sees a change in change itself, with a condensing of change into a constant factor of society that forces people to look forward continuously.¹⁷

Deindustrialization

The economists' term for the same observation that Bell makes about the movement to a service economy is called deindustrialization. This movement is seen to happen to all economies as they mature. Indeed, the trend can be noted in all advanced economies of the world today, although the degree may vary by country. The United States may be the clearest example of the phenomenon. In 1979, 22% of nonfarm workers were in manufacturing; this dropped to 9% by 2019. While this appears to be a natural part of advancement of the economy, it comes at a cost — that of labor displacement. Advanced economic countries all have experienced increased structural unemployment with this change. Further, the unemployment is unlike that caused by the business cycle where a lack of demand creates an unemployment situation, but when demand increases the workers' jobs return.

This new unemployment is structural. Companies no longer do what they did before, or they do it much more efficiently so the jobs are gone. Other jobs appear but the workers may not have the requisite skills for these new jobs, or the jobs may be service-oriented and pay less.

Economists have a number of explanations for the breakdown of manufacturing, the shift toward services and the resulting unemployment problems. Some of these follow:

• Technology. One of the more benign explanations is the difference in the ability to increase productivity between manufacturing and services. Manufacturing by its nature can take advantage of changing technology since the product is a concrete object. Services are more personal in nature, requiring more human interaction that is more difficult to automate. This creates a disparity between the two that forces workers from manufacturing into services.¹⁸
• Imports. High-wage local manufacturing cannot compete with imports from low-wage countries. Also imports from other high-wage countries are preferred for both cost and non-cost reasons. The preference of some Americans for Japanese or European automobiles would fall into this category.
• Overseas Relocations. The flight of capital from industrial areas of developed countries to developing nations. The movement of industry to China and India would be an example.¹⁹
• Regulations. The restrictions placed upon manufacturing companies that reduce their ability to compete. These include high taxes, labor unions, and government regulation.
• Poor Management. An indictment of management that includes concerns over poor long-range planning, failure to change the organization's structures to adapt to the new realities, and a short-term profit perspective.

None of these explanations alone can explain the reason for deindustrialization, while all have had their effect.²⁰

Staying Competitive

To stay competitive as manufacturers in a world in which more and more countries are industrializing, U.S. companies have had to become more efficient and flexible. There are three major ways in which companies have responded to this challenge.

Reorganization and downsizing. In the past 30 years, industry has moved from Fordism to flexibility. (Fordism is the bureaucratic, specialized mass production form of organization with multiple layers of management.) Organizations have removed many layers of hierarchy and laid off thousands of workers. The remaining organizations are smaller, use suppliers more efficiently, have flatter decision structures and are more integrated.²¹ These changes require a more flexible and trained workforce, as well as the use of more temporary and peripheral employees.

New Technologies. The effect of computers was seen later than expected but began to have considerable impact on manufacturing in the 1980s. The combination of new machines and new types of organizations allowed labor to become much more productive. Indeed, productivity continues to rise as technology continues to evolve.

Relocation to Lower Cost Areas. Increased competition from international companies has made it imperative for industry to lower costs. A major way to do this is to relocate facilities to locations where costs are lower. This trend can be seen in the textile industry that was originally located in the Northeast area of the United States. The search for lower costs moved the industry to the South and eventually overseas. Although it is a simplification, each of these moves was seen as a movement toward lower labor costs. Since the industry is highly labor intensive, this certainly is a major factor. Therefore, this industry keeps moving throughout the world, as an examination of one's wardrobe would show.

Why Relocate Overseas?

The obvious answer to this question is that it pays to relocate. In a large sense overseas relocation is an extension of a process of economic specialization that has occurred throughout modern times. Location of industry has always been a matter of being close to markets and resources — including labor as a resource. Pittsburgh, Pennsylvania became the center of the steel industry because it was at the confluence of two rivers that brought together coal and iron ore. The major Eastern cities were the first stopping place for immigrants to the United States, providing a large workforce. These advantages changed over the years and industry moved to gain new advantages.

Comparative Advantage

Economists describe the trend toward international trade as one of comparative advantage. Adam Smith introduced the concept of absolute advantage, which is simple and intuitive. If country 'A' can produce more of a product for the same inputs as country 'B', and country 'B' can produce more of a different product for the same inputs as country ‘A’, then these two countries should engage in trading the two products with each other and specialize their production in the product that they can produce more efficiently.

Comparative advantage was put forth by David Ricardo and is more counter-intuitive. The situation that describes comparative advantage is one in which country 'A' produces both products at a lower cost than country 'B'. Logic would say that there is no reason for country 'A' to trade with country 'B' for either of these products, but Ricardo argues that it does make sense. Just because country 'A' is better at producing products than country 'B' does not mean that country 'A' produces all products equally well. The argument for comparative advantage states that country 'A' should specialize in producing the product(s) that it produces "most best" and that country 'B' should specialize in the product(s) that it produces "least worse." Assuming that these are not the same products for both countries, the two countries can engage in trade, as they have specialized in those products that they produce most efficiently.

Comparative advantage was later put forth by David Ricardo. The situation that describes comparative advantage is one in which country 'A' could produce both products. However, its opportunity cost for producing one of the products is lower than the opportunity cost that country ‘B’ has for producing it while country ‘B’ has lower opportunity costs for producing the other product. So, it makes sense for each country to trade for the product that the other country can produce for a comparitively lower opportunity cost.

Take producing T-shirts as an example. In the United States, a company could produce T-shirts using sophisticated automated cutting and sewing equipment reducing the need for high-cost labor while producing quality garments with little waste. However, the equipment is expensive and there is a relatively higher level of education needed to operate and maintain the machinery. In a developing country, the T-shirts are made in a very labor-intensive process with relatively simple machines, but because the labor cost is so low, and even taking into consideration transportation and rejected product, it makes sense for T-shirts to be imported into the United States from the developing country. The developing country has a comparative advantage in producing T-shirts. The United States may have a comparative advantage in producing sewing machines (the developing country may not have this capability at all) and exports them to the developing country.

What this suggests for relocation of industry is that firms will tend to relocate overseas when they find that they are becoming less efficient in producing the product in their home country vis-à-vis other products. The move will be to a country that produces the product most efficiently for that country. In fact, one can see a change in American manufacturing from basic products to highly sophisticated products.

Markets

A major reason for locating a facility overseas is to be close to the market for the product. For a product such as fast-food, it is essential to locate overseas if you expect to sell overseas. International markets have become much more important to American firms in the past 30 years. At the point where the domestic market becomes saturated, companies have to decide whether to expand markets overseas or not expand production any further. At the same time that saturation of domestic markets is taking place, the efficiency of production is increasing so that more can be produced with fewer facilities. Relocating facilities to new overseas markets may be a way of expanding and becoming more efficient at the same time.

Resources

Another reason for relocation is to be close to the resources required to produce the product. The relocation may be initiated because the supply of the resource is dwindling or the demand is growing. Oil is an example of both these reasons in the United States. Without tapping into overseas resources, the costs of those resources would rise making the product less competitive in the marketplace. In addition, in the U.S. there are more restrictions and regulations on using certain resources that also drives up the cost of these resources.

Labor

A major resource needed in manufacturing is human labor. When discussions of overseas relocation take place, the relative cost of labor here and abroad assumes a major role. For some advocates and critics, the whole discussion centers on the cheaper cost of labor elsewhere in the world as the reason for relocation overseas. While it is certainly an important variable, it is not the whole story.

Labor needs to be examined in terms of its quantity, quality and cost. There are many countries in the world in which there is a large quantity of labor but the quality of that labor makes it difficult to use effectively. In some countries it is difficult to tap into the quality of labor required. Japan is an example. Given the traditional labor market system within the country, a foreign company has trouble obtaining the best of the labor market. Foreign firms find they must hire people who, for a variety of reasons, have dropped out of the traditional system.

Most often comparisons of labor between the U.S. and other countries are done on the basis of some measure of average wages. Often this shows a great difference between American workers and the comparison country. But cost is not always what it seems. The company is not hiring "average" workers but workers with certain skills. These workers may already be in short supply within the country and fully employed. The relocating company may find that wages for what they want in a worker are much higher and will rise as the company enters the local labor market.

Also, wage rates are not the same thing as labor costs. Even in the U.S. there are a whole series of costs associated with hiring labor that increases the wage bill by 50% or more. Foreign countries, particularly European countries, have much higher required benefit costs than the United States. Also, labor laws are different from those in the United States. Terminating employees may be more difficult and certainly more costly. It is important to remember there are variances in the productivity of workers between countries.

Entering a Foreign Location

The decision to relocate overseas can be viewed as a contest between two opposing factors: entry advantages and spatial entry barriers. The entry advantages are those factors relating to the organization that provide it leverage in establishing and operating a plant in a particular location. The spatial entry barriers are those factors in the location that make it difficult to start and operate in that area.²²

Entry advantages

Companies seek to use the competitive advantage that has given them success in their current markets to expand into new markets and areas. Their purpose is to grow and increase their profitability, as well as to develop a stability that comes with new markets and resources.

Size. Multinational corporations (MNCs) have considerable advantage in starting up plants in foreign countries. One of these advantages is having the resources to gather the information needed to successfully begin a start-up operation. In addition, starting up a plant is usually one step in an overall plan in which the MNC's products are already being sold in the target country.

Size also provides an advantage in dealing with local government officials.²³ Since any new plant will be in competition with local firms for resources (labor and otherwise), the size and power of MNCs gives them an advantage in this competition. Lastly, size provides a staying power that enables large firms to put up with the inevitable hold ups that occur.

Smaller companies have more trouble getting established in foreign countries, basically because they do not have the advantages that come to the MNCs. Smaller firms most often find that joint agreements and franchising are more attractive arrangements, as they rely on locals for expertise on the target country.

Capital. Starting a new plant in a foreign country or taking over one in that country entails Direct Foreign Investment (DFI). The recipients are spread over the globe, but most of it is still invested in highly developed countries. This infusion of capital, that would be hard to obtain locally, is a major advantage to firms wishing to establish overseas facilities.

Product. As communications have expanded along with modes of advertising, many company's products become known throughout the world. Establishing a plant close to the market can best fill the demand for these products, thus the expansion throughout the world. Even for products that are not as well known, the company is likely to have patents or the know-how to produce the product, information not available in the foreign country.

Technology. Any relocation of a plant is an opportunity to install new technology in order to increase productivity. Even though management may look at the overseas relocation in terms of cheaper labor costs, the opportunity to apply new technology will likely be explored. Technology that is very advanced may have a downside, however. If the technology requires worker skills that are hard to find in the foreign country, then the technology could prove to be useless. For example, an American businessman traveled through a valley in Albania where he found that a huge iron mill had been abandoned. He discovered that the Chinese had built it for the Albanians then left when the two countries had a disagreement. Since the locals did not have the necessary knowledge to operate or repair the equipment, the plant fell into disrepair and was closed.

Markets. MNCs have highly sophisticated marketing channels that provide outlets to all major markets. These expand the possibilities for a particular country to tap into these vast markets. This can be a double-edged sword. On one hand products can be produced in a developing country then marketed in the more advanced countries. The downside of this is that workers may be producing products that they can never personally afford. This can lead to considerable dissatisfaction among the workers.

Today many companies can be considered basically marketing firms, at least as far as their home country is concerned. The manufacturing of athletic shoes is a prime example of this trend. The design and marketing of these shoes is done in the home country, while all manufacturing is done abroad, mostly in developing countries.

Entry barriers

Despite the advantages MNCs have in relocating to foreign countries, there are always countervailing barriers and problems facing the company that wishes to establish a plant overseas. One way of looking at this is to say that a company seeking to establish a plant in a foreign country needs to have a competitive advantage over a local firm in order to compensate for a variety of entry barriers that the local firm does not face. This competition may be for either resources or markets. This difference between the local firm and the company trying to enter the country lies in a "knowledge gap." The local firm knows how things are done while the entering company has to spend time and energy learning how things are done in the country.

Each country has a unique environment. While these differences in environment may be partially a function of physical properties and geographic differences, there are other differences that need to be taken into account. These factors are often classified as psychological distances.²⁵ The important ones for plant relocation are: the economy, culture, government and institutions.

The economy. Countries vary widely in the degree of development in their economies. This obviously means a lot to plant relocation if the reason for relocation is to develop new markets. Even if the main purpose is cost minimization through cheaper labor, less economically developed countries may not have a workforce of sufficient caliber to staff the plant. In some agrarian countries less than one-third of the adult population that would ordinarily be part of the workforce has ever been employed.

Another important economic variable is the degree to which the economy is directed by market forces as opposed to direct government intervention. The more that government is involved, the more the plant may be subject to greater regulation. Controlled economies are also more likely to have restrictions (such as tariffs on imports) than market economies do. In addition, labor laws and regulations are often extensive, and wage rates are set by administrative direction.

A great deal of information about economies throughout the world can be found in the CIA World Factbook.

Culture. Probably the biggest factor that causes a psychological distance is the difference in culture between countries. Even with the increased communications between peoples of different countries, the cultural differences are still apparent. These cultural norms involve many aspects of behavior, values, and feelings of right and wrong. Culture influences the nature of business relationships and that of the employment relationship. Many of these are reflected in differences in the laws and regulations of the country. The company wishing to establish a plant in a foreign country must learn all these differences. For instance, executives sent overseas are usually required to take not only language training but also cultural training in the country to which they will be assigned.

Recent events have accentuated one of the aspects of culture, that of religion. Christianity, particularly Protestantism, is credited with aiding the rise of capitalism.²⁶ Other religions have not been as accepting of open markets or even the idea of a market economy. Within the plant, understanding and responding to local religious practices is important to the plant's success.

Law. English common law, which is the basis of the legal system in the United States, is not that common throughout the world. Other countries have legal systems based upon other legal principals. For instance, each year visitors to Mexico who end up in trouble with the law find out that there is no law of Habeas Corpus, and they can remain imprisoned for long periods of time. These differences extend to commercial law, making it imperative that the company contemplating a plant in a foreign country understands the laws of that country and how they affect the way the plant will be operated.

Government. In the United States, people tend to think that there is a connection between a democratic form of government and a capitalistic economic system. While the two tend to be consistent with each other, neither is necessary for the other. If the company decides to build a plant in a country with a government that believes in central planning, the company can expect much more direct regulation of its activities than if it located in a country that relies on market forces.

The United States also has a government that is highly fragmented. There are three independent branches to our government and 50 state governments as well; and this doesn't include the myriad of local government bodies. Other countries may have a much simpler centralized system in which the federal level is supreme and one branch controls business activities. On the other hand, Canadian firms coming to the United States find that the dual federal-state laws on subjects such as benefits are confusing, since almost all such legislation is based in the provinces in Canada.

A major variable in the determination of plant location is the stability of the government. A well-run totalitarian state may provide a more stable environment than will a democracy. The major concern is this: if a company has an agreement with a particular government, what will happen to this agreement if that government is no longer in power? Since in the United States such agreements are based in law, a change in government doesn't have much effect on the way business operates; but this is not true in other countries.

Just like in plant relocation within the U.S., countries and their governments are going to differ greatly as to how eager they are to have a plant located there. Countries that are trying to develop their economies are likely to be eager to "make a deal" that is mutually beneficial. This may entail forgiving or lowering taxes, bending rules, and providing special facilities. Other countries, often for cultural reasons, fear new plants as a threat to their way of life and will make it difficult to obtain the proper permissions to start up a new plant. One of the ways to tell which kind of country you are dealing with is to find out if it has a Development Group that is devoted to helping foreign companies locate there. Information regarding this can be found in the Country Commercial Guides of the Department of Commerce www.trade.gov.

The Obsolescing Bargain

The concept of the obsolescing bargain comes from the observation that the agreement between a country and a foreign company changes over time.²⁷ The basic premise of the concept is that the company desiring to establish a plant has the best bargaining power during negotiations to establish the plant; but that after the plant has been established, the power shifts to the host country. The reasons for this shift are many but the two most important are:

• The host country begins to gain information and expertise on operating the plant and marketing the products.
• The company now has invested capital in the host country that is a sunk cost for which it is trying to derive a profit.

These two reasons provide the host country with a stronger bargaining position. The bargain will then tend to be renegotiated on terms more favorable to the host country. In some cases, the trump card for the host country is nationalization of the plant.

On the other hand, the company finds that its initial entry barriers are lower. The company has gained the knowledge of the local conditions and has formed friendships and connections with the locals. This makes an expansion of the original investment an easier task than the initial relocation.

Choosing a Location

All overseas locations are not the same. Which one is best depends upon what the company's goals are in establishing the plant. Earlier in this chapter the goals of market expansion and cost minimization were examined. This section looks at these two goals in terms of various major decision criteria that go into plant relocation decisions. We describe ways to integrate these different decision factors. (The decision model discussed earlier can be used for overseas relocation as well.)

Market size

The market must be of a size sufficient to absorb the output of the plant. In addition, the people must be able to purchase the item and desire it.

For example, a Dutch bakery opened in Korce, Albania. This bakery sold a fine-grained white bread; the only bread previously available in town was a heavy dark bread. Although the new bread cost more, the Dutch bakery was able to sell all of their output daily. In fact, one had to get up early and stand in line just to get a loaf of the fine bread. There was a problem, however. The quality flour required for the new bread wasn't always available, so some days there was no bread.

Proximity

In general, the distance from the market is going to be greater for overseas plants selling their products overseas. But the proximity is much closer than it would be if the company was shipping from a domestic plant. As indicated before, when the product or resources are heavy or when the product is perishable (as in food products), then it is important to be located within the country where the product is sold.

Physical Resources

Just as proximity to the market is important for certain products (those that are heavy and bulky), it is also important to be near the physical resources that go into the product. The same calculations for distance and for weight/distance can be done for input resources as for the markets. In fact, the decision model described earlier can be expanded to include both sets of proximity issues into a single calculation for optimum placement to both resources and markets.

Labor market

The emphasis of this chapter is on the labor market aspects of international plant relocation. The definition of a labor market assumes that 1) the market operates through the interplay of the supply of and demand for labor and 2) the conditions of employment are determined by this interplay of the two forces. All societies have intervention into this marketplace by the government and/or other cultural factors. This may be very minimal, such as prohibitions on child labor and some form of minimum wage. It may also be extensive. In some communist countries the supply of labor was controlled by telling young people what skills they were to learn and controlling all entrance into education, as well as by defining all aspects of the employment relationship including wage rates. Most countries influence the supply of labor through encouragement for or barriers to education. All countries have some regulation of the employment relationship, particularly benefits. Some countries exert control over the wage rates paid to employees in private industry. Exactly how the labor market operates in a particular country under consideration is information that must be collected by the company before it makes any commitments.

Defining your market. Labor markets are defined in terms of geography. The geographical size of the area may vary from a neighborhood to the whole world. It is unlikely the plant would operate in a single labor market, as labor markets vary with skill required, both type and level. Managers and professionals, for example, have a national or international market. For lower-level jobs the labor market is local. A locality contains many specialized markets for various occupations and skills; these markets are linked by the possibility of transfer between occupations. If recruiting efforts are not successful, the definition of the labor market must be expanded.²⁸

Labor market data. As stated before, specific data that needs to be gathered for evaluating a plant location consists of the size of the labor force, the unemployment rate and the wages paid in the area. Figures for size of the labor force in a country can be found at the CIA World Factbook. This source also contains information on the unemployment rate and a basic breakdown of the occupational components of agriculture, manufacturing and services. Remember that in many countries the percentage of people in the workforce may not be as high as it is in the United States and other advanced economic countries. Another source of information is the ILOSTAT. Many countries also have a national statistics office that maintains economic data for that country. Cautionary note: these sources tend to be inconsistent and their accuracy questionable.

Wage data. Obtaining wage data for foreign countries can be difficult and expensive. Unlike the United States, most countries do not have a plethora of wage surveys. Some compensation-consulting firms have wage surveys for individual countries or can provide special surveys upon demand. The International Labour Office collects some occupational wage data.²⁹ Use ERI's Salary Assessor application for wage information by job title in Canada, the United Kingdom, most of the European Union and the United States.

Remember, as stated before, when you place a new plant or office in an area, you change the demand for labor. So, while the figures regarding the labor market may be accurate before you get there, you may be in for surprises as the new plant is opened.

Required benefits

Most countries have a set of required benefits. There are five standard areas of benefits that need to be examined. They are:

• Old Age and Survivors: These plans are similar to OASDI in the U.S. but are often more extensive, require higher employer contributions and include a further pension plan.
• Sickness and Maternity: Many countries have a government-sponsored health plan that relieves the employer of having to provide a health insurance plan. However, the employer contribution may be high. Almost all countries have a maternity leave policy that is far more liberal than in the United States.
• Unemployment: These plans are like those in the U.S., but usually have more liberal rules for collecting unemployment.
• Worker Injury: These plans are similar to U.S. Workers' Compensation.
• Family Assistance: These programs require employers to either contribute to a fund for workers with large families or to pay direct aid to these workers.

Information regarding these benefits for each country can be obtained through the International Social Security Association or www.ssa.gov/international/index.html.

Other benefits

Government regulations and local customs create other requirements for employers hiring local nationals. These may extend from providing meals to paying taxes for employees. Extensive perquisites may be expected by local executives far beyond an automobile. One of the more common of these requirements is a "13th month" of pay. This is an annual bonus of an extra month's pay. Failing to take this expense into account when making location decisions can be an expensive mistake. In addition, most countries have more paid leave than does the United States, with vacation time running around four weeks per year.

Termination

Another important difference between U.S. and many other countries is in employee termination. The U.S. still relies on the legal principle of "employment-at-will." This makes termination easy, even though the principle has been chipped away at in recent years both through laws and judicial decisions. Other countries grant employees more ownership of their jobs. Termination can be expensive, both in time and money.

Productivity

Knowing the cost of wages and benefits is not enough to make a comparison between locations. You must know what the productivity of the people will be in each location. Having low wages and benefits is not useful if the productivity of the labor force is so low that the labor cost per unit is still high. Measuring or estimating productivity is not easy. There is no source for measures of employee productivity in various countries. The skill level of employees will generally be related to productivity. But other social and cultural factors play a part. In the United States, the use of incentive programs is seen as a way to improve productivity. Yet in countries where community values are stronger than individualistic values, incentive plans do not work well.

Compensation System

Wages and benefits must be incorporated into a compensation system. This can be done either by developing a new compensation system for the plant or by adapting the compensation system within the company to the particular circumstances of the new plant. This is a challenge in any relocation or establishment of a new facility. Moving overseas just exacerbates any problems.

Establishing a separate compensation plan means that employee movement between this plant and other locations is made more difficult. Using the headquarters plan may mean that the system does not adequately deal with local issues. Thus, most companies try to develop a system that defines the goals and objectives of the system in a common manner but leaves the implementation up to each plant. Developing a full compensation plan for overseas employees is covered more fully in Chapter 22.

Staffing the Overseas Facility

Since a major reason for locating a facility overseas is to take advantage of the local labor force, it seems reasonable that the main source of labor would be local. In some cases, this may prove to be impossible or impractical. In these cases, companies must rely on expatriates. Companies also need an understanding of the way the local labor market works in order to obtain the needed workforce.

Expatriate or local?

As indicated above, local labor is almost surely cheaper, and expatriates are the most expensive way to staff an overseas plant. Why then would the company choose to use expatriates? A major reason would be that the knowledge and skills needed in the job are not common in the population of that country. Another related reason is that the expatriate has knowledge of the company that is necessary for coordinating activities in the foreign branch with the home company. A third reason is to provide managers and executives with the kind of development and perspective needed to be an executive in a global economy. Employees chosen for this reason may be at an early stage of their careers or at a later stage when they are being groomed for a high-level position.³⁰ Information on expatriate transfer and compensation programs can be found in Chapter 22.

If the above conditions do not apply, then using local labor is more effective. Besides lower labor costs there are other advantages to using local labor. Most importantly local people have knowledge and language skills that few expatriates can be expected to have. In some cases, the host country government defines how many and what positions must be filled with local labor. Information on local employee compensation programs can be found in Chapter 22.

Cost of Living

If the company does transfer employees, then the local cost of living comes into play. If living expenses are higher in the new plant location, the company should provide the expatriates with cost-of-living allowances. In some countries, danger and hardship pay may also be required to entice employees to relocate. See Chapter 22 to learn about setting these allowances.

Local labor market

Very often, recruiting in foreign countries is an informal process. Getting the word out through current employees or contacting local officials is all that is necessary. Typical sources are:

• Advertising. While this is the most common technique used in the United States, it may not be as useful in other countries. Newspapers or job boards may not exist or be read by the workers that the company is trying to attract.
• Agencies and Brokers. This is a likely source in foreign countries. The advantage of this source is that the broker knows the local labor market, how to access it, and can provide some initial screening for the company.
• Unions. In other countries, unions can vary from non-existent to all-powerful. The more powerful, the more they are likely to play a major part in recruiting employees. Some countries allow for what is outlawed in the United States, a closed shop where only union members are allowed to work,
• Government. The government may provide a service similar to the employment services of American states. It may take an even more aggressive stance and require certain numbers and types of workers to be hired. In particular, as indicated above, the government is likely to limit the use of expatriates.

Local customs

A basic assumption of the selection process in the United States is that of hiring on the basis of merit, but this isn't true throughout the world. Other factors are very important. For example, an American businessman was hiring workers in Albania. He found their top hiring factor proved to be the village the family came from. When questioned, the locals said that people from their village "could be trusted." Bribery also placed high on their list. Thus, using American criteria may lead to results that are contrary to what the locals feel is correct selection.

SUMMARY

Over the past 50 years there has been a dramatic relocation of U.S. industry and population. The trends in plant locations have been:

1. Diversification of location. Industries are spread throughout the U.S.
2. The move to the Sunbelt. The western and southern states have become much more popular.
3. The movement from the central city to the suburbs. Industry is placing smaller branches in industrial parks located outside major cities.
4. The move overseas. This remains a major and controversial trend for America. Moving a plant or office is not a decision to take lightly. There are many factors to take into account in making such a move.

Why Relocate?

The first step is to know why you are planning to relocate. The reasons usually center around two things. The first is to take advantage of an opportunity. This may be a new product or a new market or a change in the resources required to produce the product. The other set of reasons deals with the inadequacies of the current location. Besides size, there can be high costs or dated equipment. Sometimes it seems best just to start over.

Shutting Down

Perhaps the hardest part of plant relocation is closing down the present plant. This is very hard on the employees, both those that are transferred and those laid off. There are a number of legal requirements that must be met when closing a plant, although far fewer than in most other countries.

Choosing a New Location

In selecting a new plant location there are many factors to consider. The first centers on proximity: locating a plant so that the costs of transportation are minimized. The second revolves around the location itself. Here a key component is the nature of the labor market: the quantity and quality of workers needed to staff the new plant must be affordable. While complete information may be impossible to find, there is much information available to help in these decisions. Other factors regarding the site are the cost of living, regulations, taxes, community attitudes and amenities.

Start Up

In starting up a new facility, having a workforce in place at the right time is necessary. The recruitment and selection process must be planned so that there are neither gaps in needed workers nor workers hired without anything to do. In addition, most employees will require some training, if only in the processes of the new plant.

Overseas Relocations

Opening a facility in another country requires additional research and decision making. Become familiar with the country’s culture, government, regulations, and resources (material and labor), before making a decision.

Finally, remember that plant relocation is an expensive process and will probably take your company more time and money than relocation planners expect.

Footnotes