“What Attracts High Performance Factories? Management Culture and Regional Advantage”

Peter Doeringer, Christine Evans-Klock, David Terkla
IED Discussion Paper 125, January 2003

Studies of business location typically concentrate on traditional cost factors such as wages, unionization, taxes, and agglomeration economies to explain the geographic dispersion of businesses. Today, however, a new element in location decisions is emerging, based on differences in the way that firms are managed. More and more firms are replacing traditional management practices with so called “high performance management” practices, which emphasize concepts such as production flexibility, problem-solving, and the enhancement of labor productivity. Because firms that use high performance management utilize labor in different ways from traditionally managed firms, one would expect these firms to consider a somewhat different set of factors when making their location choices. Doeringer, Evans-Klock, and Terkla devise a test to compare the location choices of two types of new manufacturing plants with differing management practices and cultures. The data they use come from in-depth case studies of 48 new manufacturing plants conducted by the authors and they rely on both qualitative analysis and econometric modeling. They discover that new Japanese-owned plants adopt high performance management practices far more frequently than a matched sample of new domestic plants. Even more important, Japanese-

owned plants reinforce their high performance management practices with high performance management cultures that motivate higher labor productivity, whereas domestic U.S. plants continue to rely on traditional practices of monitoring and discipline to maintain labor productivity.

Using Japanese-ownership as an instrument for the adoption of high performance management practices and cultures, the authors find significant differences in the factors that influence business location between Japanese transplants and similar new domestic plants. The standard location model provides a good explanation of the location decisions of domestic plants, but is less capable of explaining location choices of Japanese transplants. While Japanese plants use many of the same criteria, they also value the types of workforce attitudes found in rural areas, they avoid unions because they can promote adversarial relationships with employees as well as raising wages, and they value large pools of high school labor for selection purposes as well as for human capital reasons. The most interesting difference, however, is that Japanese transplants choose to locate in relatively high wage locations when compared to domestic plants, perhaps indicating a preference for workers that have experience working under efficiency wage incentives. Understanding the factors determining the location choices of firms adopting high-performance management practices and cultures provides useful insights for regional development policy.