CHAPTER SIX

6. Employment and Diffusion of Skills 6.1. Background Export processing zones have been seen as an efficient way of generating employment, earning much needed foreign exchange, attracting foreign direct investment and transferring technology (Basile and Germidis, 1984; Rondinelli, 1987; World Bank, 1992). EPZs have created jobs and where successfully managed and developed, a remarkably high number of them1. For instance, employment in the zones in the Dominican Republic grew by some 16,857% in an 18 years period (Dauhajre et al., 1989). The Mauritian zone has also witnessed substantial increases in its employment figures. Employment during the period 1980-1990 period rose from 21,000 to almost 90,000. As at end of June 2000, employment in the EPZ sector stood at 90,765, comprising 61,068 female and 29.697 male employees. During the period January to June 2000, the number of jobs created totalled 5380 of which 394 by the 18 new enterprises. However, the number of job losses amounted to 5989 of which 514 through closures of 11 enterprises. Foreign employment in the EPZ has reached 14,158 as at the end of June 2000, increasing by 733 (404 females and 329 males ) over December 1999 figures2. Hence, in terms of employment figures, the manufacturing sector absorbs 30% of the total workforce in 1999, of which the EPZ sectors account for 59%. Nevertheless, EPZs have often been criticized for the routine and unskilled nature of employment they offer, the low level of linkages established with the rest of the local economy (Wall, 1976) and the high proportion of women workers (Dror, 1984). Furthermore, a central issue concerning the zones is the level of wages and working conditions, particularly since the government, through its systems of incentives, is the main promoter of the jobs created (Lee, 1984). Criticisms
1 2

EPZs in East Asian Tigers were very successful in creating employment. Source: http://epzda.intnet.mu/industry/statistics.

concerning this aspect of zones abound: workers are said to be exposed to a range of exploitative and unfavourable conditions which include low wages, hazardous and unhealthy working environment, lack of employment security and long working hours often involving night work and shifts while trade union rights are curtailed (see for example, UNIDO, 1980 and Basile and Germidis, 1984). There is also the argument that export processing zones are self-obsolescing in that their very success may render them uneconomic in the long run due to rising local wages (Flamm, 1984). In addition, there are a number of countries where the development of a zone, and the resulting employment creation, did not live up to expectations (e.g. ILO, 1998 for Senegal and Philippines). However, the criticisms of harsh working conditions, combined with claims that zones firms exploit their workers and enjoy enormous profits at the expense of potential employment in similar labour intensive industries in developed countries, are mostly exaggerated3. Castro (1982), in his study on working conditions, wages and worker characteristics in the Philippines Bataan EPZ and in similar industries elsewhere in the country, found there was a clear income gain from moving to a job in the zone. Warr (1985), allowing for differences in living costs, argued that real wages for unskilled workers were roughly the same in EPZs as in similar employment elsewhere in the economy. 6.2. Multinationals and Employment Creation Multinational corporations have played an important role in labour-intensive industries, mainly in export-processing zones that have proliferated in many developing countries. In contrast to the exploitation of natural resources, labourintensive production methods are used in these types of operations; hence their impact on employment is significant. Given that most developing countries have abundant labour, sustained growth would entail substantial long-term expansion in employment. Depending on the extent of backward and forward linkages, multinationals are also capable of
3

See for example ILO/UNCTC (1988); Kumar (1987); and World Bank (1992).

generating significant indirect employment (ILO, 1984; Riedel, 1975; UNIDO, 1981; Blomstrom et al., 1983). However, despite the evident significance of multinationals in creating employment in host developing countries, the exact links between foreign direct investment and employment are difficult to trace quantitatively (ILO, 1981a, 1981b, 1984; Bailey et al., 1993). Nevertheless, the contribution of multinationals towards creating employment in developing countries are likely to be dependent on the following factors: The size and mode of entry Greenfield investment is bound to create more employment than investing in a host country by way of acquiring an already existing local or foreign company. This is however more likely to be true in the short run, when takeovers will not involve new capacity, than in the long term when both modes should lead to converging behaviour; The nature of the techniques chosen this will reflect factor prices in the host country, the nature and the flexibility of the technology concerned, the competitive environment and the market orientation. But it is becoming increasingly evident that the employment effect depends less on the choice of techniques than on the ability of the host country to master the imported technology, adapt it and improve on it; The industrial strategy of the host country surveys have shown that an exportoriented strategy tends to provide grater employment opportunities than an import-substituting one4. An increase in exports can have diverse effects on employment. First, it will create jobs for workers who are engaged directly in production of the export commodities (direct effect). Second, if raw materials and machinery used in such production are supplied from the host market, more labour will be employed. At the same time, new jobs will be created in supporting service industries, e.g. electricity and water supplies, transport, storage and commerce (linkage effect). Third, the enhanced purchasing power
4

For example, see Lall (1992, 1994).

of the workers who have found jobs as a result of these effects will create more effective demand for various goods and services and this in turn may create additional employment (multiplier effect). Firms that are vertically linked to the multinationals will generally see a positive effect on employment if the investor increases the demand for local inputs and services and raises quantity sold. Closer linkages with local suppliers can be an important means of diffusing technology and skills and helping those firms to enter export markets. Multinationals can also encourage investment by foreign suppliers with whom they have linkages overseas; Firms competing with multinationals can experience both positive and negative effects. On the positive side, the entry of foreign direct investment can force local firms to become more efficient and may provide spillovers in skills, management techniques or technical knowledge. On the other hand, they may drive competitors out of business. 6.3. Multinationals, Training and Skill Diffusion. There has no doubt been a great deal of knowledge spillover from the creation of export-processing zones in less developed countries. Anecdotal support abounds about how a previously unskilled labour force has become semi-skilled and skilled workers via training and learning by doing on-the-job (Rhee et al., 1990). Given high labour turnover in the zones, domestic firms get the opportunity to benefit from the training and skills acquired by hiring workers previously employed in the zones multinational firms. Some employees also receive training at the managerial and supervisory level, thus enriching the entrepreneurial capabilities of the host country. Also, the presence of export-processing zones allows local firms and workers to benefit from observing and copying the traits that make the multinationals operating in the zones successful exporters.

Training of the local workers is a key factor in the process of the transfer of technology and also in the promotion and mobility possibilities of workers. Export-processing zones have often been criticized for offering few opportunities for the transfer of technology since the operations located in the zones are mainly unskilled or semi-skilled with few tasks requiring higher level skills and thereby any transfer involves only a limited number of workers (UNCTAD, 1983; Basile and Germidis, 1984). Nevertheless, there is an overwhelming consensus that multinationals do contribute towards upgrading both the technical and managerial capabilities of developing nations. Gershenberg (1987) for example, in his study on the training and spread of managerial skills in Kenya, found that multinationals offer more training of various sorts to their managers than do local firms. Chen (1983), on the other hand, commented that the major contribution of multinationals in Hong Kong manufacturing was not so much the production of new techniques and products, but the training of workers at various levels. UNCTAD (1994) also described several cases of multinationals contribution to skill development in host developing countries. It noted that they spent more on training than did local firms and they also tended to use more advanced technologies requiring higher levels of skills. Chen et al. (1986) found that training was provided to local employees at parent or sister plant overseas and with experience, many local subsidiaries became technologically self-sufficient, even as the parent company has transferred more and more high-skill operations5. 6.3.1. Types of Training The types of training provided by these foreign firms range from on the job training to seminars and more formal schooling to overseas education, depending on the level of skills needed. The training of the local manpower is firstly undertaken within the firms and is of technical nature, aiming at acquainting the local employees with the technology of the parent company. Such familiarization

See also Ranis and Schive (1985) and Wan (1994).

also involved tuition on technical and engineering aspects as well as corporate systems of quality control and marketing. The bulk of industrial training, depending on the nature of the manufacturing operations, generally takes place on the job under the supervision of more experienced workers or professional trainers. Typically, on the job training has the advantages of being cheap, effective and very much relevant to the requirements of the respective firms. In addition, it is also a highly efficient way of imparting skills and has proved to be a fast and flexible method of creating industry and companyspecific skills (Wan, 1994). To the extent that the foreign affiliate has strong linkages with other local firms, the process of training may be extended to include the subsidiary suppliers. The objective of such training is to minimize uncertainties regarding the technical specification and quality of intermediate products and to ensure the smooth flow of deliveries of such materials from the suppliers to the subsidiary. Vendor training is also a very popular form of training dispensed to workers of multinationals. This is conducted by the overseas supplier of equipment and machinery as part of a package in which training is included. Vendors may train trainers who in turn train their staff. The process of transfer which commonly takes place in-house and on-the-job, involves vendor staff putting on short courses and supervising the use of equipment; and where the transfer is more elaborate, purchaser staff may be sent to the vendor headquarters overseas. 6.3.2. Diffusion of Skills The transfer of skills through training is a potentially valuable contribution of multinationals to developing countries (UNCTC, 1988). But, though there is a strong presumption that multinationals, upon providing significant training benefits to developing countries, do create spillovers, this has however proved very difficult to evaluate empirically.

Furthermore, there have been claims that any skills acquired by multinational workers are too specific to the company in which they are employed and that there is little or no spillovers to the economy as a whole. Also, the skills obtained through training and learning by doing are not very sophisticated and may not advance the local workers careers once they move to domestic firms (Tzannatos and Kusago (1997); Rhee et al. (1990)). Indeed what may be more important and valuable in the long run than the actual skills is the acquisition of the discipline required to work in an industrial environment. Nevertheless, there is an overwhelming consensus as to the benefits of training of labour and management or investment in human capital by multinational firms, which may then become available to the economy in general. Such type of spillover is very important, even more so in developing countries, where such factors are scarce. The benefits to the host nation of the managerial superiority of multinationals are threefold (Blomstrom and Persson, 1983): Managerial efficiency in operations arising from better training, higher standards of recruitment, faster communication with the parent company and the world as a whole; Entrepreneurial ability in seeking out investment opportunities, organizing suppliers and markets and even developing new technologies to suit particular conditions; Externalities arising from training received by employees who later leave the firm and the demonstration effect on competing local firms, suppliers and even government officials who come into contact with the practices adopted by multinationals. The third type of spillover is the most common mode of skill diffusion by multinationals to developing countries. Managers of multinationals very often

move to local firms and contribute to the diffusion of know-how (Blomstrom and Persson, 1983). Katz (1987), for example, reported that managers of locally-owned firms very often started their career in multinationals6. Furthermore, there have been claims to the effect that managerial vacancies are always occupied by expatriates or by personnel from the parent company and that the training dispensed to local staff is only at the basic and middle management levels. But, while it is true that although multinationals can rely on expatriate personnel, at least at the beginning of their operations, they nevertheless have a strong incentive to limit the number of such personnel working in host countries, and use more locals in the labour force and management, as soon as it is practically feasible. This is due partly to the higher costs of employing expatriates and also partly due to political pressures and local regulations in the host country for the employment of local population. In this respect, the supply of domestic skill and hence national education policy is an important determinant of training and the replacement of expatriates. However, very often, the upper reaches of management of the subsidiaries are still likely to be retained by personnel of the parent company. This is mainly done to ensure the coordination of the subsidiaries policies with those of the headquarters.

See also Wasow and Hill (1986) and Yoshihara (1988).