Traversing global production networks: The experience of Indian IT firms in the Netherlands
Global production networks (GPNs) allow firms from the developing world to insert themselves into global value chains. However, these firms need to manage the delicate balance between societal, territorial and network embeddedness.
The emergence of global production networks (GPNs) is part of an important shift from ‘the development project’ to ‘the globalization project’ manifest in the move from state-led import substituting industrialization in favour of an export-oriented development strategy. This shift to export-oriented development models was made possible by rapid advances in transport, data communications, information technology (IT) and fragmentation of production, enabling its relocation across international borders, while being coordinated and controlled by MNCs. The initial research focused on issues of economic governance that sustained accumulation with little mention about the broader network of forces that impacted the capacity of lead firms to move up the value chain. Besides this, there was little focus on suppliers in the value chain.
In this article, we have shifted the usual analytical focus of the GPN framework from lead firms to suppliers in the network and from production to services. The attention is on Indian IT suppliers who are still strongly embedded within the international IT network dominated by the US. In this regard, the concept of embeddedness has a threefold characterization; societal, territorial and network. Societal embeddedness refers to how firms that operate in a global economy are influenced by their ‘home territory’ characteristics and grounded in their societal ‘heritage’. In any case, entering new markets requires a different set of assets as well as management of operations in different institutional and cultural set-ups which influence and shape the action of individuals and collective actors, within and beyond their respective societies. This is often referred to as territorial embeddedness, that is. an extent to which an actor is ‘anchored’ within legal, regulatory and economic interactions in a particular territory or place. Lastly, GPNs are also characterized by connections between network members regardless of their country of origin or local anchoring in particular places. Network embeddedness relates to formal and informal inter and intra-firm networks with suppliers, customers, competitors and other organizations that firms’ negotiate in order to operate in the host market.
In this short piece we focus on the interaction between societal, territorial and network embeddedness. We argue that the extent of territorial embeddedness of Indian suppliers in the US context was so strong that it impacted them even beyond American shores. In fact, the Indian state was forced to facilitate the dis-embeddedness of the Indian IT industry from its local, social and institutional context while simultaneously aiding the industry to create its own regulatory and cultural context which met the requirements of the US clients. This was because, firstly, the US clients were sensitive to service offshoring because it impacted their politically active white-collar workers who could force a reconsideration of the outsourcing strategy; secondly, Indian suppliers try to build an image of a client-savvy organization both in terms of trustworthiness and effectiveness in delivery, in this sense, Indian firms try to de-territorialize from the Indian context in order to get embedded in the US-dominated IT network but end up with a hybridized model. Our article focuses on how the transfer of this newly constructed societal embeddedness of Indian IT firms interacts with territorial embeddedness in a third location like the Netherlands.
Indian IT firms, buoyed by their ability to dis-embed substantially from the Indian context, tried to display their newly constructed Indian societal embeddedness when they moved to Netherlands. They tried to espouse a strong corporate strategy by attempting to transfer their own norms and routines and displacing existing legacies in the Netherlands. This attempt to dis-embed was reinforced by clients in the network who demanded control over cost. With every renewal of the contract, clients wanted improvements in performance, with little concern about how suppliers reached these results. The client’s persistent threat of changing the suppliers, fostering inter-supplier competitive pressure to lower costs and enforcing unfavourable conditions locked Indian suppliers into low-end work reducing the prospects of upward mobility in the IT chain. Overall, client domination prevailed because of the position Indian suppliers had in the IT value chain. However, while Indian IT suppliers were preferred because of their low pricing and long hours of work, clients also insisted on compliance, with the institutional context of the Netherlands (especially for employees with Dutch contracts) constraining Indian firms from fully transferring Indian practices to the Netherlands. For instance, clients forced Indian suppliers to absorb all Dutch contract employees under Transfer of Undertakings (Protection of Employment) Regulations (TUPE) and preferred suppliers who had instituted works councils. This indicates how other actors in the network (beyond Dutch clients) influenced the extent to which Indian suppliers had to be territorially embedded, giving rise to hybridization in terms of polices. This also meant that though firms have the ability to transcend territorial boundaries, they do not get de-territorialized. It seems that the societal embeddedness of Indian suppliers was in direct conflict with the requirements of territorial embeddedness and the interests of other actors in the Dutch network. Thus, Indian IT supplier firms had to handle contradictory pressures. While, on the one hand, the unreasonable client work demands (e.g. infeasible deadlines and flexibility) for cost arbitrage forced upon Indian suppliers made adherence to local labour laws difficult, on the other hand, this non-adherence put the latter’s reputation in the local geography at risk and in conflict with other actors in the network. In short, hybrid practices and asymmetric power relations are by no means mutually exclusive conditions.
Naturally, Indian IT firms who were restricted to the lower-end of the value chain got their advantage from outsourcing rather than territorial agglomeration. This was bolstered by the fact that since Indian suppliers performed most of the work offshore under the Global Service Delivery (GSD) model, offshoring of services may be more footloose than that of manufacturing because of lower capital intensity and sunk costs. This position in the value chain also had implications for territorial embeddedness. The concentration of low-end services did not give the suppliers the courage to anchor themselves in the Netherlands. The maximum that Indian IT firms did to adapt to local institutions and demands, was to recruit Dutch locals for marketing, client management and human resource management (HRM) functions and set up a sales office in Amsterdam. Territorial embeddedness was considered to be secondary to inter-firm relations. Nonetheless, given the limits to the mobility of especially tacit knowledge, to move up the value chain, Indian suppliers will have to find ways to territorially embed. Therefore, recently, Indian suppliers IT are trying to change their standing within value chains by increasingly establishing local service delivery centres, acquiring local suppliers, developing strategic partnerships with Dutch firms by contributing to their innovation, building platforms and introducing distributed agile technologies to cut costs and beat the competition.
(For further details refer to Noronha, E., D’Cruz, P., & Banday, M. U. L. (2018). Navigating embeddedness: Experiences of Indian IT suppliers and employees in the Netherlands. Journal of Business Ethics, https://doi.org/10.1007/s10551-018-4071-3. Read full article here https://rdcu.be/bbLFP)