CHAPTER 1
Introduction
Industrialization in the North created what has come to be called 'Fordism', referring to the assembly-line technology that played an important role in the success of the T-Ford automobile production at the beginning of this century. The Fordist type of production organization is usually coupled with 'Taylorism' in management. This implies a clear line of command, and a highly-developed division of labour and stratification within the factory, which places management and workers on different sides. This has been seen as a fundamental weakness of many Western economies by many critics, e.g. Best (1990). Furthermore, the Fordist paradigm has come under criticism in the wake of increasing difficulties in balancing an economic scale of assembly-line production with existing consumer demand.
Hence, elements of a post-Fordist industrial paradigm have emerged in the wake of economic troubles in the seventies and the eighties. The central feature of this discourse is the emphasis given to increasing flexibility. In developed countries this means automation, electronic information systems and robotization. In addition, neo-Fordism is based on semiautonomous groups of producers, often small firms. Their co-ordination depends on a centralized information system, which is often located within an established corporation. Through this form of organization, producers are able to respond efficiently to fluctuations in the volume and quality of sophisticated and differentiated consumer demand.
These developments have also suggested that industrialization does not necessarily have to mean an increasing share of mass production in large-scale enterprises. Indeed, the flexible specialization concept puts small industries at the centre of the industrial strategy debate. Piore and Sabel (1984) suggested that the deterioration in industrial performance in a number of Western countries results from the limits of the mass production model and saw flexible specialization as a future alternative. They emphasized in particular the decentralization of big factory chains and redeployment of productive forces in small units, which take advantage of flexible technologies. Dissolution of rigid mass production systems and introduction of more innovative ways of producing, using multi-purpose equipment and employing skilled workers, would enable crisis-ridden economies to react to continuous changes.
Schmitz (1989) explicitly discussed the applicability of these ideas to the Third World. He distinguished a small enterprise variant and a large firm variant of flexible specialization. In the first case, flexible specialization results from the clustering of small firms and a strong interfirm division of labour. The large firm variant exists when large firms decentralize and specialize internally or use specialized suppliers. The latter in particular has produced organizational innovations such as 'Just In Time' (JIT) inventory management techniques.
The small-firm variant of flexible specialization presumes that clusters of small producers can reach collective efficiency. Innovative behaviour is expected in such an environment and competition is tempered by co-operation. Suppliers of parts in the automobile industry can and do compete, for example, but co-operation between the 'assembling' firm and its suppliers, or between suppliers, in solving specific technological problems, also occurs.
Clustering of enterprises can enhance this co-operation and help the enterprises in surviving economic adversity by increasing their capacity to adapt to changes in the environment. In many cases small enterprise clusters are not only able to survive during hard times, but actually increase their share of total production, at the expense of mass producers (Piore and Sabel, 1984:12). This has inter alia been demonstrated by their ability to withstand and respond to the oil and debt crises.
The problem remains of how to measure flexibility, innovative mentality and collective efficiency. The last concept can easily be confused with localization, urbanization or other agglomeration economies. Innovativeness and flexibility at the level of enterprise clusters are not as easy to identify in the field. Several papers in this volume, however, suggest different approaches to this problem.
Enterprise environments and collective efficiency
A key element in the theory of flexible specialization is the realization that the individual enterprise cannot be understood in isolation from the specific environment in which it is operated. Both the structure and the efficiency of the enterprise depend on the products and services available from other private or public enterprises in the area, on the structure and qualifications of the labour force, and on the size and structure of the market. Agglomerations of differentiated interacting activities may achieve what Schmitz (1990) has called collective efficiency. The areas where they are clustered are often called Marshallian (industrial) districts after the English economist Marshall who wrote about such districts in the beginning of the twentieth century (see Pyke, Becattini and Sengenberger, 1990; and Pyke and Sengenberger, 1992).
If needed services or production inputs are not available on the market the enterprise will either have to produce them itself, accept an often much-reduced efficiency, or choose a technology which reduces its needs for external inputs. The choice of technology also depends on the structure of the labour market, and the choice of product depends on the size and structure of the market.
Flexibility in a production system is a response to instability and uncertainty in the market (Salais and Storper, 1992). Large-scale production requires a relatively large and stable market to be profitable. To secure the necessary market stability, large-scale producers are forced to opt out of the smallest and most unstable markets and leave them to niche producers, to subcontractors or un-serviced.
Enterprises venturing into these smaller and more unstable markets have, briefly, three options:
* They may invest in multipurpose machinery and employ skilled labour which make it possible for them to shift production between different markets and thus create stability for themselves, although their individual markets may fluctuate. This option corresponds to what has come to be known as flexible specialization, or what Pyke and Sengenberger (1992) call the 'high road' to industrial restructuring.
* They may minimize their investments in machinery (and preferably treat investments as sunk costs) and rely on unskilled labour which can be hired and fired at short notice. In this way the enterprise may be able to survive, although its market fluctuates wildly. This option leads to what could be called sweatshops often operated as simple subcontractors. It corresponds to what Pyke and Sengenberger (1992) call the 'low road' to industrial restructuring.
* Finally, in the smallest and most unstable markets, very small or household-based enterprises may survive on a semi-subsistence level. Capital investment is insignificant, and only part of the labour of the proprietor and family is devoted to the venture, which is supplemented by other sources of income from agriculture or formal or informal wage labour.
These options form a hierarchy with respect to size, capital intensity, productivity and market. The competitiveness of each option depends not only on output market structure, but also on labour markets, input markets and the general social context in which the enterprises operate. Examples of each will be given in the following chapters.
Flexibility of labour markets
For the large capital-intensive enterprise, stability of the labour force, especially but not only in the higher echelons, is important for stable production and high-capacity utilization. The needed qualifications will often be highly specialized and enterprise specific, and in order to reduce the costs of training and labour turnover the enterprise will often train people so narrowly that their qualifications cannot be utilized in other enterprises. On the other hand, it will also be willing to pay above average wages in order to keep its trained personnel. Thus the enterprise will attempt to create an internal labour market where the enterprise and at least its core personnel have a common interest in reducing labour turnover.
Enterprises choosing the flexible specialization strategy will require a core labour force with broader and more general qualifications. However, it will be relatively easy for the qualified workers to switch from one enterprise to another. Therefore, the enterprises will also be unwilling to finance training, which is rather paid by the trainees themselves or by the government. On the other hand the high mobility of labour is important for rapid innovation diffusion among the enterprises and it will often be relatively easy for workers to start their own enterprises.
Enterprises choosing a sweatshop strategy will typically offer relatively poor working conditions, low wages and unstable employment. However, even in the sweatshop, on the job training is often important, and although the enterprises hire and fire workers according to seasonal and cyclical demand, the same workers may often be attached to the enterprise for long periods. Especially in rural areas there may be a mutual interest in such permanent seasonal employment if it complements the agricultural work seasons.
Finally, the very small semi-subsistence enterprise will typically offer employment only to the owner and possibly to some family members. It will often be a part-time activity supplementing agricultural work or some type of wage work. The incomes earned in such activities vary widely depending on the activity, the qualifications of the owners, their investments and the priority they are able and willing to give to the enterprise.
In principle, all four enterprise strategies are likely to be pursued in any society. However, the importance of each strategy will vary, depending on the character of local and global markets and their accessibility. The larger the accessible market, the more important will the mass production sector be.
The growing importance of flexible specialization
In the industrialized societies, flexible specialization is often said to have become more important partly because the market for more specialized high-income consumer goods has expanded and partly because subcontracting and what has been called 'labour market informalization' has become increasingly important. However, the increased demand for small and medium-scale flexible production is also a more direct result of the development of large-scale production itself; firstly, because large-scale production requires more standardization which increases the demand for niche products to cover markets which cannot be satisfied by the standardized product. Secondly, with increasing levels of mechanization and automation the large-scale producer needs a growing supply of dedicated, non-standard machinery and equipment to maintain and renew the production system.
In the developing countries the situation is very different. Markets are significantly smaller and less stable. Consequently, the room for large-scale production is much smaller than in the industrialized countries. In spite of this, the goal of industrialization policies in many developing countries has been to develop large-scale industries. Supported by government and donor funds, production capacity has in many cases been expanded well beyond the feasible level. This has resulted in low capacity utilization, which the government has attempted to increase by granting monopoly status to these companies. Instances of preferential treatment in allocation of scarce resources and foreign currency also abound, and outright state ownership is common in many countries. This strategy has effectively blocked the development of other alternatives. Semi-subsistence producers and small workshops have remained at that level, and frequently suffer from harrassment by the authorities.
The absence of small-scale service establishments and input suppliers in the local environment has often led large enterprises to develop such auxiliary activities within the enterprise. Such activities are usually not operated at an optimal level and this therefore further reduces the efficiency of the large enterprise at the same time as they undercut the chances for developing such activities on a market basis.
As a result, the intermediate enterprises which do develop tend to grow out of the demands of the semi-subsistence producers and consumers, rather than as a response to the large-scale sector. However, their development is limited by the low purchasing power of their main customers, and they are unable to break out of this vicious circle because of the closed, monolithic and monopolistic nature of the mass-production sector, and the attractiveness of its products for the local elites, middle classes and labour aristocracy. Expansion therefore tends to create sweatshop groups, rather than flexibly specialized enterprise networks.
Because of this, it can be difficult to distinguish between nascent flexible specialization and proliferation of sweatshops. They coexist side by side, and only a closer look at their operations will reveal which trend is dominant. Where flexible production and Marshallian districts could be said to exist it is often at the same level as or at an even lower level in terms of wages, skills and employment security than the sweatshops. This problem is discussed in several contributions below, but particularly by Knorringa and Wilson. Furthermore, Cho shows that even South Korea, which started its industrialization on the basis of very large-scale production, has developed a production system during the 1980s based on a mix of large-scale production, flexible specialization, and sweatshops, particularly in the garment sector.
Lastly, low-income levels and instability in the economy often force people to rely for their survival not on one activity, but on a mix of wage labour and entrepreneurial activities in small or large enterprises. Their association to labour market organizations and unions, therefore, tends to become rather unclear, while on the other hand social and family networks become more important. For small entrepreneurs the result is often that they are only able to focus part of their energy and resources on their enterprise and, therefore, are also less likely to succeed.
The new competition and flexible specialization
Best sets himself the task of integrating 'a theoretical analysis of the business enterprise with extra-firm concepts of markets, competition, regulation, and planning that have been the preserve of economists' (1990: viii). He uses the term the 'new competition' to refer to the prevalence of firms that are organized to 'pursue strategies of continuous improvement in product and process within a regulatory framework that encourages industrial restructuring' (Best, 1990: 252). The emergence of this phenomenon has increased pressures on firms everywhere to reorganize or restructure their operations.
Best's book addresses the failure of the United Kingdom and the United States to compete with Japan, the newly industrializing countries (NICs) and some European countries. His main point is that big business in the United States suffers from rigid command structures and control routines in production organizations, and he calls for restructuring according to the organizational principles of his theory.
At the centre of this paradigm is the entrepreneurial firm; 'an enterprise that is organized from top to bottom to pursue continuous improvement in methods, products and processes' (ibid: 2). Such firms seek a competitive edge by superior product design (which may or may not lead to lower costs) and organizational flexibility, which manifests itself in a variety of interfirm complexes, ranging from groups of small Italian firms linked by co-operative associations for joint marketing, technological advance and financial underwriting, to giant Japanese organizational structures coordinating trading companies, banks and manufacturing enterprises. Such firms will also try to capture export markets where possible and Best argues that the emergence of the 'new competition' has taken the United Kingdom and the United States by surprise.
