Offshore employment practices: an empirical analysis of routines, wages and labour turnover.

Abstract. Theories of efficiency wage and human capital formation suggest that both should have a significant influence on employee turnover in offshore manufacturing sites. This influence is explored and examined empirically with a stratified, random sample of northern Mexican maquilas--the historical choice for offshoring in that country and one of the world's earliest and most enduring offshore manufacturing sites. Statistical tests reveal the strong influence on production-level turnover of direct wages and human capital formation when the latter variable is measured in terms of "maquiladora generations". The distinctive human resource practices of the maquiladora generations are then presented and discussed.

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When the first Mexican maquilas appeared in 1966, no one used terms like offshoring, near-shoring or outsourcing to explain them. Their raison d'etre was simply low-cost labour activity subject to special bi-national rules. Prior to the NAFTA era, this low-cost labour was leveraged with a tariff-avoidance mechanism provided by the Mexican Maquiladora Program (MMP). Upon re-exportation of assembled goods, only the value added to the imported "raw" materials by the low-cost labour in Mexico was assessed a tariff in the United States. Combined with ample tax breaks, this incentive provided American and other foreign corporations with a strong rationale for making significant investments in operating facilities and outsourcing activities in Mexico. Since the passage of NAFTA in 1994, tariff avoidance has become a moot issue, as it has for many other countries due to the spread of free trade agreements and the WTO. Nevertheless, investments in offshoring ventures using low-cost labour have increased substantially in recent years, and their growth and impact have led to economic and social concerns across diverse groups--NGOs, the popular press, business and government entities, trade associations, and research scholars.

As international business research scholars we can and do appreciate the concerns of these other groups, but our approach to offshoring, as illustrated by this study, is empirically based and conceptually driven. With data from a stratified, random sample of northern Mexican maquilas, numerous statistical tests are conducted to determine the relevance of existing theories to employment outcomes for the labour force directly involved in offshored activities. These tests reveal that the employment challenges faced by those who offshore operations to emerging economies can be better addressed by closer attention to efficiency wage theory and human capital formation than has been generally advocated in the recent business literature (Miyamoto, 2003; Miller, Horn and Gomez-Mejia, 2001).

To highlight these challenges as much as possible, the remainder of this article has been organized into six parts. The first looks at globalization in terms of its impact upon the labour force directly employed by offshore operations. Here, we highlight the influence of organizational design on decisions that determine who receives the value added through offshoring. In addressing these decisions empirically, the focus is on the concern for achieving acceptable labour turnover and effective employee retention, which is now an acute problem in India's business process outsourcing (BPO) sector (Scheiber, 2004) and China's manufacturing sector (Lee, 2006). This part concludes with a brief historical review of the MMP in which we begin to discuss the important concept of maquila generations.

The second part presents relevant theories and uses them to develop employment-related hypotheses. We note that theories of efficiency wage and human capital formation complement the dominant "OLI paradigm" of international business scholarship (Dunning, 2003) (1) and help to explain corporate strategies which rely upon offshoring.

The third and fourth parts respectively present the research methodology and data utilized in the study, and the results of the data analysis. The data were obtained during a larger project investigating institutional dynamics in the MMP as it adapted to the NAFTA. Early on in our field interviews, we discovered that labour turnover in the maquilas was inordinately high--commonly measured on a monthly basis at a rate of 5-12 per cent. In other words, maquiladora workers were voting with their feet against their current jobs when there were opportunities for employment elsewhere.

The penultimate part of the article considers theoretical and managerial implications of the supported hypotheses from the perspective of globalization and human resource management practices. For more highly developed outsourcing operations, the findings of this study support economic theories regarding the efficacy of efficiency wage theory and human capital formation at the micro and macro levels alike. We discuss the relevance of these theories for corporate decisions about organizational design and human resource practices in offshore operations.

The final part concludes with a brief discussion of implications that the study's findings have for possible directions of related research in the future.

Globalization and labour in offshoring operations

In a recent keynote address to other central bankers, Ben Bernanke, the chairman of the United States Federal Reserve, observed that if globalization is to continue with its open economic borders, it will be necessary to "build a consensus for welfare-enhancing change" (Guha, 2006). His concern centred on the "plight of workers" in the globalizing economy.

One overarching question for scholars to consider when studying any complex phenomenon is: How does the selection of a conceptual frame bias a view of the status quo and the interests of distinct societal actors? Hinings and Greenwood (2002) raised this crucial question with their concern about the beneficiaries of efficient and effective organizational design. In our study of offshoring and the MMP, we have chosen to examine the economic outcomes for the MMP in a conceptual framework that moves beyond the conventional and obsolescent view that low-cost offshoring facilities exist solely for the economic benefit of shareholders and consumers. In our view, offshore workers should be regarded as legitimate organizational stakeholders, as well. To redress this oversight, we include a consideration of the benefits that offshoring has--or has not--provided these workers. Has such employment been viewed as valuable or satisfactory by those workers themselves to the extent that they choose to remain with their current employer? To determine such value we think it beneficial to analyse labour turnover rates in one of the oldest settings of offshore operations: the MMP. Broadening the scope of analysis in this way does more than simply include a neglected stakeholder constituency. Indeed, we believe that analysing the maquiladora employment relationship will yield insights that are also likely in the long term to benefit those with traditional interests linked to shareholder and consumer value.

The focus of our perspective is on the Mexican maquiladora labourer vis-a-vis the economics of the job itself, i.e. pay and expectations. By analysing the relationship between labour turnover, direct wages and human capital in a sample of Mexican maquilas, we hope to nurture the scarce literature in this area, which should in the future include studies of similar facilities located throughout the world in special economic zones or export processing zones (EPZs). These zones are the primary locations for much outsourcing activity. The total number of people working in EPZs worldwide is estimated at some 50 million (World Bank, 2002; AFL-CIO, 2008). This is several times the absolute number of individuals working in the entire manufacturing sector of the United States. Given the large number of workers in the EPZs of the world economy, there is a legitimate and very compelling reason to ask how economically efficacious MMP organizational design has been for its labourers.

For those who find the border and its legends to be stimulating, the beginnings of the MMP can best be visualized in a small border town along the Rio Grande (known as the Rio Bravo in Mexico) in 1966. That was the first full year of the Program, which had been approved by a countervailing Mexican Presidential Decree in late 1965. The legend is not wrong, but it fails to capture the full context and complexity of the MMP. That context cannot be appreciated without recognizing that the Program is actually a bi-national institution also utilized by numerous Asian and European corporations. In order to function institutionally, it has required rules (North, 1990), defined routines (Nelson and Winter, 1982), and efficient governance structures (Williamson, 1975) on both sides of the border. Historically, its most fundamental rule has focused on tariffs and their assessment. Without special tariff treatment from the United States for products assembled offshore (discussed with industry details by Gruben, 2001), the MMP could have never begun.

This form of production typically takes place in developing countries, within special geographic zones that carry various labels like "EPZ". Materials (and equipment) temporarily imported into these zones for processing (and operation) are exempted from tariffs. The establishment of such designated zones within a country facilitates the record keeping and inventory control required by this mode of production. In practice, the MMP was an EPZ that initially developed only along the border, but it then quickly expanded to the whole country. By the early 2000s, its growth and future seemed secure: there were more than 3,300 plants with about 1.3 million employees, accounting for 10 per cent of Mexico's formal-sector workforce. Functioning as an EPZ, the MMP thus performed well as a generator of employment.

The initial activity of assembly plants evolved over the years into a second generation of activities that included manufacturing, and then into a third generation of activities, which relied upon Mexican employees to perform complex design and engineering tasks (Carrillo and Hualde, 1997). These three generations of maquiladora activities are essential elements of our research and represent the different levels of human capital formation used in our analyses.

Analytical framework and hypotheses

If the high labour turnover often reported in Mexican maquilas, Chinese manufacturing plants and Indian BPOs is assumed to be a problem or a valid measure of employee dissatisfaction, as it generally would be in developed economies, then analysing it systematically to find adequate solutions presents a challenge.

Relying on an analytical framework based on market economics, as we do, seems warranted if the following labour conditions apply:

* individuals seek employment to sustain their economic well-being (supply),

* employment alternatives are available (demand), and

* workers may freely compete for jobs among available alternatives (choice).

We have chosen a market-based economic framework of analysis--instead of a culture-based perspective as advocated by Miller, Horn and Gomez-Mejia (2001)--because Mexican workers do have the legal right to seek employment (choice) with alternative employers (demand) and must work to survive economically (supply). We do, however, recognize two "collective" caveats to this economic reality. First, the baseline for the compensation of individual labour--i.e. the minimum wage (a floor to wages in the formal sector)--is established by the Government for three distinct wage regions across Mexico. The second caveat to our selection of a market-based economic model is the presence of trade unions in many Mexican …