Multinational Firms and Industrial Relations in Central Europe : An Institutionalist Approach

This article is based on an institutionalist approach. More exactly, the article is an extension of the “Varieties of Capitalism” analysis. The “Varieties of Capitalism” researchers distinguish two distinct economic and social systems which diverge in their institutional organization: the Coordinated Market Economies, with Germany as a reference, and the Liberal Market Economies, with the United States as prime example. The social protection, labour relations, corporate governance and skill training serve to organize an institutional architecture that is different in the two systems of capitalism. Different institutional matrixes will engage countries in original trajectories. The ownership advantage of a multinational firm is directly linked to this institutional matrix. The organization, performances and even the behaviour of a multinational may change according to the institutional characteristics of its country of origin. Sometimes multinationals choose to invest in countries belonging to the same system of capitalism. But the internationalization of a firm can also sometimes be the occasion to take advantage of institutional characteristics which are different from those of the country of origin. The originality of the combination of different institutional characteristics will be decisive for its international competitiveness. Indeed, it is not in the multinational’s interest to escape totally from its country of origin and to adopt the same strategies as its rivals: this would eliminate the potential of differentiation of the firm, which is the basis of its competitive advantages. Multinational firms coming from Coordinated Market Economies have massively invested in Central European countries. They have built their ownership advantages on the collective bargaining system of their countries of origin and have invested in the Central European countries to complete these advantages with the advantages that they will obtain from a place where they will have an “organizational freedom.” The Central European countries have indeed inherited from the planned economy a firm culture lacking dialogue and participation. The politicization of labour unions combined with their inability to represent workers have lead to the collapse of unionization and prompted firms to engage in direct bargaining with the workers. The new private enterprises have not been interested in employers’ associations. The absence of any intermediate organization and the process of State withdrawal have led to new industrial relations: the bargaining takes place directly at company level, or even at plant level, between the employer and the employee. This means much more freedom for the Western European firms in the setting of wages and also in the discussion of working conditions. This evolution of industrial relations in Central European countries has influenced the number, the strategy, and also the behaviour of foreign investors. But the behaviour of the multinationals also has a feedback effect. Multinational firms will put pressure on local and national authorities in order to obtain the definition of those laws and the rules of the game that reinforce their freedom of action in the management of the firm and in their relations with the labour factor. In order to continue to attract high levels of foreign investment and to root the foreign firms, the authorities of these countries have engaged in a reduction of employment protection legislation and promoted unconstrained practices of corporate governance. Multinational firms play an important direct role in the economy of the Central European countries and also have a demonstration effect on local players. By privileging decentralized bargaining with their employees, the multinationals reinforce the weakness of the trade unions, the absence of centralization and the coordination of agreements. Multinational firms directly contribute to lock-in these countries in the trajectory that they have initially chosen: the Central European Countries’ industrial relations bear an increasing resemblance to those of the Liberal Market Economies