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Regional Studies

ISSN: 0034-3404 (Print) 1360-0591 (Online) Journal homepage: http://www.tandfonline.com/loi/cres20

Globalization, Local Economic Development and the Branch Plant Region: The Case of the Aberdeen Oil Complex Andrew Cumbers To cite this article: Andrew Cumbers (2000) Globalization, Local Economic Development and the Branch Plant Region: The Case of the Aberdeen Oil Complex, Regional Studies, 34:4, 371-382, DOI: 10.1080/00343400050078141 To link to this article: http://dx.doi.org/10.1080/00343400050078141

Published online: 18 Aug 2010.

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Regional Studies, Vol. 34.4 pp. 371± 382, 2000

Globalization, Local Economic Development and the Branch Plant Region: The Case of the Aberdeen Oil Complex AN D RE W C U M BE R S Department of Geography, University of Aberdeen, Elphinstone Road, Aberdeen AB9 3UF, U K

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(Received March 1998; in revised form October 1998) C U M BE RS A. (2000) Globalization, local economic development and the branch plant region: the case of the Aberdeen oil complex, Reg. Studies 34, 371± 382. In recent years, there has been considerable debate over the consequences of globalization for local economic development. For some, globalization is seen as strengthening the position of transnational corporations (TN Cs) and core regions over branch plant regions. For others globalization oVers opportunities for the latter to create local advantages, particularly if they can construct more eVective `learning’ relationships with the branch plants of transnational corporations. This paper contributes to this debate through a case study of the Aberdeen oil complex in the North East of Scotland. It suggests that while there are opportunities for branch plant regions to upgrade their activities in the short term, they still face huge structural problems in creating more sustainable forms of competitive advantage. Globalization

Branch plants

Learning regions

Oil-related development

C U M BE RS A. (2000) Mondialisation, de veloppement eÂconomique local et re gions aÁ eÂtablissements: eÂtude de cas du complexe peÂtrolifeÁre aÁ Aberdeen, Reg. Studies 34, 371± 382. Dans les dernieÁres anneÂes, les conseÂquences de la mondialisation pour le deÂveloppement eÂconomique local est un sujet treÁs controverseÂ. Certains consideÁrent la mondialisation comme la consolidation du positionnement des socieÂteÂs transnationales et des re gions centrales par rapport aux reÂgions aÁ eÂtablissements. D’autres estiment que la mondialisation leur oVre des possibiliteÂs de deÂvelopper des atouts locaux, notamment s’ils re ussissent aÁ eÂtablir des rapports d’apprentissage plus eYcaces avec les eÂtablissements des socieÂteÂs transnationales. A partir d’une eÂtude de cas du complexe peÂtrolifeÁre aÁ Aberdeen dans le nord-est de l’EÂcosse, cet article cherche aÁ contribuer au deÂbat. On laisse supposer que les reÂgions aÁ eÂtablissements se trouvent confronteÂes aÁ d’eÂnormes probleÁmes structurels a® n de deÂvelopper un avantage compeÂtitif plus durable, bien que des possibiliteÂs d’ ameÂliorer leurs activiteÂs se preÂsentent aÁ court terme. Mondialisation Etablissements ReÂgions d’apprentissage DeÂveloppement lie au peÂtrole

C U MB ER S A. (2000) Globalisierung, wirtschaftliche Entwicklung am Ort und die Zweigstellenregion: der Fall È lkomplexes von Aberdeen, Reg. Studies 34, 371± 382. des O In den letzten Jahren wurde die Frage der Folgeerscheinungen der Globalisierung fuÈr wirtschaftliche Entwicklung am Orte vielfach diskutiert. WaÈhrend manche Globalisierung als StaÈrkung der Stellung staatenuÈberschreitender KoÈrperschaften (transnational corporations5 TNCs) und der Kernregionen im VerhaÈltnis zu Zweigstellenregionen betrachten, sehen andere sie als sich letzteren bietende Gelegenheit, Ortsvorteile zu schaVen, besonders wenn es ihnen gelingt, eVektivere `Lern’ beziehungen mit den Zweigstellen staatenuÈberschreitender Unternehmen aufzubauen. Dieser Aufsatz traÈgt zu der Debatte bei, indem er eine Studie des Falles È lkomplexes um Aberdeen im Nordosten Schottlands des O vorlegt. Er weist darauf hin, daû Zweigstellenregionen, obschon ihnen MoÈglichkeiten zur kurzfristigen Verbesserung ihrer geschaÈftlichen Unternehmungen oVenstehen, sich bei der SchaVung nachhaltigerer Formen von Wettbewerbsvorteilen immer noch enormen Strukturproblemen gegenuÈbersehen. Globalisierung Zweigstellen È lbezogene Entwicklung O

I N T RO D UC T I O N In recent years there has been considerable debate about the implications of globalization for local and regional economic development in advanced industrial countries. For some, globalization is leading to widening inequalities between regions, bolstering the position of

Lernregionen

core regions that are home to the headquarters of transnational corporations (hereafter TNCs), and worsening the position of peripheral regions (A M I N and T HR I FT , 1992). Core regions are able to draw upon key factor advantages in human, infrastructure and information resources, while peripheral regions, lacking the resources of core regions, are forced into cost-based

0034-3404 print/1360-0591 online/00/040371± 12 ©2000 Regional Studies Association

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competition to attract the branch plants of TNCs. For others, globalization represents a qualitative shift in the nature of economic competition towards a more `knowledge-intensive capitalism’ (F L OR I DA , 1995a, p. 531). This oVers opportunities for peripheral `branch plant’ regions in particular to create new forms of competitive advantage, by using the presence of TNCs to access emerging global networks of production, consumption and information exchange, while simultaneously harnessing existing local knowledge and capability. The task for local economic development (hereafter LED) in branch plant regions, is therefore to build `learning regions’ (F LOR I DA , 1995a; M O R GAN , 1997) that have the innovative capacity to respond ¯ exibly and incrementally to changes in an increasingly dynamic global economy. The `learning region’ captures the potential that supposedly exists to use the activities of TNCs to enhance the position of branch plant regions within the global economy. Not only are TNC branch plants seen as important conduits for the transmission of `global’ knowledge and best practice, but increasingly they are viewed as the source of key innovations in their own right, through important `learning-by-doing’ and `learning-by-using’ activities taking place in the day-to-day production process (L U NDVAL L and J O HN S ON , 1994). Consequently, branch plant regions, as learning regions, are no longer seen as passive recipients of the economic development process, but instead, are the site of important learning activities, which can be translated into competitive advantage (M O R GAN , 1997). In this sense, the learning region represents an attempt to go beyond older debates about branch plant regions that were concerned with the merits of inward investment based strategies against endogenous growth. What proponents of the learning region approach appear to be saying is that much of the existing debate about branch plant regions is a `red herring’. Rather than viewing branch plants as the root cause of these regions’ failure to create sustainable economic growth, we should be regarding them as potential assets, in connecting up otherwise peripheral local economies with new developments at the global level. The concept of the learning region raises interesting questions about the possibilities for LED in branch plant regions against a backdrop of globalization. However, to date, there have been few systematic attempts to ground these ideas in empirical research. The evidence to support these theoretical claims has mainly come from `recently reconverted’ older industrial regions in Western Europe and North America (C O OK E , 1995) with a focus upon the 1980s wave of Japanese inward investment. As such, it is too early to make any de® nitive judgements about the longer term implications of such developments. At the same time, these examples represent a set of highly speci® c regional industrial circumstances and the ® ndings may not be applicable to the experience of branch plant regions elsewhere.

In attempting to widen the empirical basis of the debate on the implications of globalization for branch plant regions, this paper presents some preliminary ® ndings from an on-going study of the Aberdeen oil region in Scotland. For over 20 years Aberdeen (de® ned for our purposes here as the former Grampian county region) has enjoyed unparalleled economic growth within a UK context, having been at the heart of North Sea oil and gas developments. It has also been host to some of the world’s most powerful oil TNCs and their leading contractors and suppliers. Consequently, Aberdeen has been transformed from a relatively self-contained local economy to one heavily dependent upon events in the global oil industry. This situation has led many commentators to categorize the Aberdeen oil complex as a branch plant economy and a short term boom phenomenon, given the footloose and ephemeral nature of the global oil industry (H A L L WOO D , 1986; H A R R I S et al., 1988). After two decades of growth however, some of these assertions are open to question. Nevertheless, with North Sea developments now in a mature phase, the ability of Aberdeen to construct new forms of advantage, which are not dependent upon its natural resource base and that allow it to compete in global markets, has become a critical issue. Given the dominance of oil in the local economy, new developments are still likely to be connected with the oil industry and the way it is connected to wider global networks. The remainder of the paper is divided into seven parts. The ® rst part outlines the way globalization aVects the conditions within which economic development takes place and the implications for branch plant regions. The second part provides some background on the evolution of the Aberdeen oil complex placing it within the context of wider oil industry restructuring. Parts three, four, ® ve and six report on a recent survey of oil-related ® rms operating in Aberdeen. The underlying theme explored here is whether Aberdeen has made some kind of transition from a dependent branch plant economy towards the kind of re¯ exive learning region that is able to adapt and compete in a global economy. The paper then concludes with a discussion of the longer term development prospects of the Aberdeen economy and the wider implications for LE D in branch plant regions. G L O B A L I Z AT I O N, L O C A L E C O NO M I C D E V E L O P M E N T A N D T H E P RO S P E C T S F O R B RA N C H P L A N T RE G I O NS Globalization is fundamentally transforming the environment within which LE D takes place. For one set of commentators it represents a `clear development towards a purposive functional integration of the world economy’ (A S H EI M and D U N FO R D , 1997, p. 447). While many processes are at work propelling the drive

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Globalization, Local Economic Development and the Branch Plant Region towards a global economy, pre-eminence is usually given to: the global hegemony of neo-liberal macroeconomic policy among both nation states and powerful supra-national organizations (such as the European Union (EU) and the International Monetary Fund (IMF)) and the resulting elimination of barriers to `free trade’; the growing importance of TNCs in the governance of economic life; the development of new technologies in transport and telecommunications and the subsequent growth of global money and information ¯ ows (see A M I N and T H R I F T , 1994). Implicit in many accounts of contemporary economic restructuring, globalization entails a shift towards a new techno-economic paradigm (L U NDVAL L and J O H NS O N , 1994; C A S T E L L S , 1996). For both ® rms and places the organizational structures that were eVective in the previous eras of national and international Fordism are no longer viewed as adequate in this brave new world, and moreover, serve as an institutional drag in adapting to the new realities. In this sense, there has been a change in the `culture’ of competition (S C H O EN B ER G E R , 1997, pp. 41± 79), which requires a clean break from old habits ± even a degree of `institutional forgetfulness’ ( J O H NS O N , 1992) ± and the development of new and more ¯ exible organizational forms, strategies and practices. A unifying theme is the idea that knowledge, as the key resource, and learning, as the key process, are now more important than the traditional factors of production, allied to the pursuit of cost reductions in the development of sustainable competitive advantages. In the `learning economy’, `incremental innovation has become the key for survival of [all] ® rms’ (L U NDVA L L and J O H NS O N , 1994, p. 24) rather than just those traditionally regarded as cutting edge, and the central problems are capturing and harnessing knowledge ± or put another way, developing innovative capacity. Innovative capacity here goes beyond mere technical innovation, referring to the ability to adjust to rapid changes, i.e. to demonstrate re¯ exivity in the global economy through product development and diversi® cation, seeking out new market opportunities, continually upgrading human and material resources, and ultimately reinventing yourself by switching development paths. There is currently much debate about the implications of globalization for LE D (A M I N and T H R I FT , 1994). For some, globalization represents the decoupling of relationships between ® rms and regions; space becomes increasingly `slippery’ (M A R K U S EN , 1996) as new technologies enable capital to become more footloose, as Schumpeter’s process of creative destruction gathers apace (H A RVEY, 1989). In these circumstances, place-bound advantages appear increasingly fragile and ephemeral, so that the key issue for regions is no longer about `how to achieve economic success’ but `how to sustain it’ (A M IN and T H R I FT , 1994, p. 260). Given these circumstances, some have argued that globalization actually widens the diVeren-

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tials between core and peripheral regions (A M I N and T H R I FT , 1992). Core regions that have both established advantages in the traditional factors of production and the greater ability to harness information will ® nd their position greatly enhanced in the new knowledgebased economy. In comparison, peripheral regions that lack the human and physical resources of core regions will ® nd themselves increasingly at the mercy of the location decisions of all powerful TNCs and forced into low wage competition. An alternative scenario is that global times present new opportunities for `less favoured regions’ (M O R GAN , 1997, p. 495), particularly if they can ® nd ways of learning and disseminating the best practices of more successful regions (F LO R I DA , 1995b). Regions need to engage constructively with newly emerging global networks, to build learning frameworks as the basis for creating local advantages (e.g. H U G G I N S , 1997). For regions dominated by externally owned branch plant developments, the mission is to `bed down’ these activities more ® rmly within the local economy. In this sense, this approach builds upon earlier insights about branch plant development which recognizes its potential for developing material linkages with indigenous suppliers and upgrading the support infrastructure of the local economy (e.g. M U N DAY et al., 1995). But the approach also breaks new ground in highlighting the importance of branch plants to host regions as a means of tapping into global knowledge networks to create innovative capacity and improve economic performance. For example, Japanese branch plant investments in the 1980s are viewed as instrumental in rejuvenating the Great Lakes Industrial Belt in the US, through the transfer of best practice management and production techniques to local ® rms (F LO R I DA , 1995b). This more optimistic scenario hinges around a number of organizational changes taking place in TNCs themselves in response to globalization, characterized as a shift away from centralized bureaucratic hierarchies to ¯ atter and more decentralized structures in which more decision-making powers and higher level operations will be devolved to local branch plants. Such developments re¯ ect the prerogative of TNCs to be `globally eYcient, multinationally ¯ exible, and capable of capturing the bene® ts of worldwide learning at the same time’ (D I C K EN et al., 1994, p. 30). Moreover, S C HO EN B ER G E R , 1994, has gone so far as to suggest that the ¯ ow of knowledge is becoming much less asymmetrical between headquarters and branch plants, as the latter become important `listening posts’ for relaying back important marketing and product development information. Elaborating on this theme, M O R GAN , 1997, notes that knowledge creation is not just the preserve of the R &D laboratory, but is present at all points in the production chain. Key knowledge is also created in the branch plants of TNCs through processes of `learningby-doing’ and learning-by-using’, which can be an

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important source of competitive advantage: `To the extent that branch plants are allowed to treat the factory as a laboratory, or to interact with sophisticated users, they may constitute an important laboratory for knowledge acquisition and the headquarters will ignore this at its peril’ (ibid., p. 495). The point here is that branch plant regions also have innovative potential, even if they lack the original advantages of core regions. Morgan argues that the problems facing branch plant regions are not necessarily due to an over-reliance on particular industries or a dependent set of economic relations, but are as much to do with a collective failure in the past to innovate and more especially to develop a process of interactive learning ± which avoids lockin to particular development trajectories (G R A B H ER , 1993). In other words, the root of the problem is the `social architecture’ (S T O R PE R , 1995) of peripheral regions; the on-going set of relations `between ® rms, between diVerent types of production process and between ® rms and their wider institutional milieu’ (M O R GAN , 1995, p. 4). Using empirical evidence from Wales, Morgan argues that in recent years TNCs own strategies ± of making new demands of their branch plant environment (through their labour and material requirements) ± have had a positive eVect in building `innovative capacity’ . The `learning region’ perspective is not without its critics (e.g. H U DS O N , 1998). Perhaps the most salient criticism within the context of this paper is that there is a lack of evidence that the shift towards a knowledge based economy alters in any meaningful way the underlying relationships between core and peripheral regions. The issue of who controls and bene® ts from the process of knowledge creation and how the mechanisms behind it operate have so far been neglected. While important `local’ knowledge may be developed within branch plant regions, the reorganization of global TNCs is in part at least geared to `dis-embedding local learning from the contexts in which they were initially produced [and] the repatriation of the varied results of diVerent localised learning experiences and their integration within a collective body of knowledge to serve strategic corporate interests’ (ibid., p. 6). In this regard, there is some doubt about whether branch plant developments can be used to pursue high road LED trajectories, even in regions with well developed institutional support infrastructure (A M I N and T OM A NEY, 1995). Despite such caveats, Morgan’s analysis reminds us that relationships between the TNC branch plants and their host regions are socially embedded (G R A NOVET T E R , 1985) and in a state of evolution rather than set in stone. While still subject to power relations, such relationships are far more ¯ uid and open-ended than a classical dependency model allows. As such we need to explore the possibility that branch plant regions can be upgraded over time in ways that lead to the development of place-based advantages.

A B E RD E E N A S A C A S E S T UDY RE G I O N Beyond the branch plant economy? Previously, studies of the Aberdeen oil complex have regarded it as the archetypal branch plant economy (H A L LWOO D , 1986; H A R R I S et al., 1988). Usually when regional development theorists talk of branch plant regions, they have in mind regional clusters of branch plants (often in declining industrial regions) attracted by locational advantages such as regional aid incentives or low wage costs rather than a natural resource base. Nevertheless the regional development issues of external control and dependency are the same, if not even more pressing in relation to Aberdeen. Oil development has been dominated by externally owned oil TNCs. Local ® rms have been restricted to supplying basic goods and services and have been unable to penetrate the more technically sophisticated parts of the industry such as engineering design, drilling services and downhole equipment manufacture. In these areas, oil companies have maintained long established relationships with foreign contractors and suppliers (C A I R NS and H A R R I S , 1988). In addition, Aberdeen has become increasingly oil dependent; with as much as 60% of employment now either directly or indirectly oil-related (C U M B ER S and M A RTI N , 1997), so that for the foreseeable future its economic development prospects are `locked-in’ to oil developments. Events in the mid 1980s appeared to con® rm this branch plant image, as a slump in oil prices led to a decline in North Sea activity and the withdrawal of many foreign companies (Fig. 1).1 By the early 1990s however the situation had improved as activity levels and oil-related employment climbed to a new peak,

Fig. 1. Oil-related employment (Grampian) and oil production from the UK sector of the North Sea, 1976± 96 Sources: G R AMPIA N R EG I O NAL C O U N CI L , various years; D EPA RT M EN T O F T R ADE A ND I N DU S TRY /D EPART M EN T O F T H E E NVI R ONMEN T , various years.

Globalization, Local Economic Development and the Branch Plant Region Table 1. Key economic development indicators: Grampian region compared to the UK Grampian Population growth 1981± 95 Employment growth 1981± 95

1 9´8%

1 0´1%

1 9´7

1 30´0%

1 0´6%

1 29´4

GDP per head at factor cost 1993

£13,037

£9,768

133´5

Average full-time weekly earnings 1995

£362´2

£351´5

103´0

13´5

12´5

1 1´0

2´5 3´9

5´6

New ® rm formation rate per 1,000 population 1991± 95 Unemployment rate July 19971: Aberdeen City Aberdeenshire

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UK DiVerential average ratio

} 2

2

3´1 1´7

Note: 1. Grampian Regional Council data unavailable after 1996 following its abolition. Source: G R A M PI AN R E G IO N AL C O UN C I L various years; ACC/ AC, 1996.

above 50,000.2 While oil-related employment has declined again in recent years, the region continues to enjoy levels of growth and prosperity well above the UK average (Table 1). In addition, recent surveys highlight a growing share of exports in oil-related turnover, from 5% to around 20% between 1985± 95 (A B E R DE EN C I T Y C O U NC I L /A B ER D E EN SH I R E C O UN C I L (ACC/AC), 1997). Such developments indicate the possibility of a changing relationship between the Aberdeen oil complex and the global oil industry as a whole. Oil industry restructuring and the changing place of Aberdeen For the oil industry the oil price collapse in 1986 ushered in a new era of cost-cutting, rationalization and restructuring which fundamentally altered the way oVshore activities are organized (P O R TA S , 1997). Previously, oil companies had been heavily involved in the management of all aspects of oVshore activity. Subsequently, there has been an attempt to streamline

375

operations, geared towards the contracting out of lower value added activities (such as maintenance and servicing operations) and the retrenchment to core activities, particularly exploration. This has resulted in dramatic job losses; BP, for example, halved its global workforce from 120,000 to 60,000 between 1992 and 1996 (W O O L FS O N et al., 1997). Oil companies have also developed new contractual arrangements with their suppliers, in an attempt to free up resources for exploration. This has resulted in a shift away from multiple sourcing strategies managed by the oil companies themselves towards the award of integrated turnkey projects to single contractors. In the UK this restructuring led to a decline in oil company employment, from 35,000 to 24,000 between 1991 and 1995 (NOMIS database). While job losses occurred in Aberdeen, the process of restructuring also led to a number of key oil TNCs and their major contractors consolidating UK operations in the city (see Table 2). It could be argued that such developments re¯ ect short term priorities without any deeper signi® cance. However, set against this, Aberdeen has been at the heart of developments in the North Sea which in turn have `been at the leading edge of oVshore technology for many years’ (S M I T H , 1997, p.18).3 An important point here is that the North Sea has been a frontier province for the oil industry in the sense that oil production has been taken into deeper and more hostile marine environments here than ever before. Innovation has therefore been incremental in the development of oil and gas resources and many of the solutions pioneered in the North Sea have found wider applications both in other oil regions and in non-oil markets.4 In this sense the North Sea has been an important `laboratory’ for the global oil industry as a whole.

A S URV E Y O F O I L - RE L AT E D F I RM S To explore the signi® cance of these developments, a research programme was initiated in September 1996.

Table 2. Examples of recent ® rm relocations to Aberdeen Firm

Nationality

Activity

Details of relocation to Aberdeen

Date

BP Exploration (Europe) Conoco Texaco

UK

Oil production

1993

US US

Oil production Oil production

Foster Wheeler

UK

Engineering

Baker Perkins Aker Engineering

US Norwegian

Rotortech

UK

Oil services Engineering and project management Helicopter engineering

Transfer of European exploration decision-making functions from London and Glasgow UK HQ moved from London Relocation of project management team for Strathspey ® eld development from London Transferring oVshore design activities from London to joint venture with Wood Group Establishment of `eastern hemisphere’ HQ Rundown of London activities, redeployment of staV to Aberdeen and Newcastle oYces Investing £lm in new HQ. Relocating from Cambridge5 30 jobs

Sources: Press reports in Financial Times, Aberdeen Press and Journal; company interviews.

June 1993 1994 1994 1995 Spring 1995 1995

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Andrew Cumbers

The empirical results reported here are from the ® rst stage of this programme, which involved a survey of oil-related ® rms (a de® nition based on self-reporting) operating in Aberdeen, compiled from Grampian Regional Council’s local business directory, and undertaken between September and December 1996. The survey consisted of two stages:

?

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?

a telephone questionnaire of 250 ® rms which produced 119 usable responses, representing over 10% of the total population of oil-related ® rms semi-structured face-to-face interviews with 20 ® rms selected from the ® rst stage to provide more in-depth analysis. Interviews and informal discussions were also held with local and regional authorities, development agencies, universities and government departments. The results reported here explore three themes: (1) the changing nature of oil activities in Aberdeen; (2) the changing role of Aberdeen operations within the wider global oil network; and (3) the extent to which oil activities have become embedded within the local economy. T H E C H A N G I NG N AT URE O F T H E A B E RD E E N O I L C O M P L E X Using the SIC (1992) classi® cation, the ® rms in our survey were placed into ® ve basic categories (see Table 3). In assessing the changes in the activities undertaken in the oil complex, a comparison can be made with Hallwood’s earlier study (see Table 3) (H A L LWOO D , 1986) which led him to describe the Aberdeen oil complex as: `composed of aYliates of parent companies located elsewhere in the world. The impulses ¯ ow into rather than out of that oil production service-base and its domain is quite clearly restricted to the North Sea province’ (ibid., p. 3). The majority of ® rms were con® ned to lower value added construction, supply and servicing activities with little evidence of manufacturing, while business services were largely restricted to non-specialist functions such as banking, ® nance and insurance. In comparison, our study suggests not only greater evidence of manufacturing activity, but signi® cant evidence (19 out of 32 ® rms) of specialist oil

Table 4. Type of technical innovation in the Aberdeen oil complex Type of innovation

No.

% of total (n 5 119)

New products Newprocesses New services New design concepts New management systems At least one type of innovation Products patented

25 5 8 6 1 35 16

21´0 4´2 6´7 5´0 0´8 29´4 13´4

Source: Author’s survey.

equipment and machinery production. Moreover, the type of production activity taking place in Aberdeen tends to be of a fairly high level with over 40% of ® rms claiming to be involved in new product development and testing. Our evidence suggests that business service activities have also increased in sophistication over time. Of the 35 ® rms recorded in our survey, 10 were engineering consultants, 7 were involved in technical testing and analysis, 9 were labour recruitment specialists and 6 were engaged in software consultancy, typically in the development of specialist packages for the oil industry. While overall, oil activity in Aberdeen has been signi® cantly upgraded, the level of technical sophistication taking place remains low given the strategic importance of the North Sea in the development of new oVshore technologies, with less than a third of ® rms undertaking `innovations’ locally (see Table 4). Much of the `leading edge’ research and development activity takes place outside the area with the South East of England remaining the most important location within the UK. In this sense, the pure research component in Aberdeen’s oil complex is low; 17 ® rms in our survey employed a total of 51 full-time R &D staV, less than 1% of total employment. There was little evidence either of diversi® cation away from oil-related activities, with only three ® rms recording an expansion of nonoil markets from Aberdeen-based operations. Few ® rms had investigated the possibility of developing new nonoil related applications for their products and services;

Table 3. Structure of the oil industry in Aberdeen, 1986 and 1996 1986 Activity Oil exploration and production Manufacturing Supply/rental of equipment, etc Business services Construction Other Total

1996 No. of ® rms

%

26 30 51 34 13 14 168

15´5 17´9 29´8 20´2 7´7 8´3 100

Source: H ALL WOO D , 1986; author’s survey.

Activity Oil exploration and production Manufacturing Supply/rental of materials/equipment Business services Other Total

No. of ® rms 18 32 27 35 7 119

% 15´1 26´9 22´9 29´4 5´9 100

Globalization, Local Economic Development and the Branch Plant Region

377

Table 5. Size structure by nationality of ownership in Aberdeen’s oil complex Scottish

Other UK

US

Other

Total

Size of ® rm (no. of employees)

No.

%

No.

%

No.

%

No.

%

No.

%

1± 9 10-99 100-499 500± 999

20 36 5 3

31 56 8 5

±

0 44 33 22

± 3 7 13

0 13 30 57

±

8 6 4

3 5 6

0 21 36 43

20 50 22 27

17 42 18 23

Total

64

100

18

100

23

100

14

100

119

100

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Source: Author’s survey.

local ® rms in the medium size and large ® rm categories, with foreign ® rms continuing to dominate the latter. The absence of a strong indigenous category of medium size ® rms could be viewed as a potential weakness, given their role as intermediaries in connecting up small locally based ® rms to global networks. At the same time, the only local ® rm that has become a TNC in its own right is the Wood Group, an engineering services company that has grown from a small family business supplying equipment to the ® shing industry, to employing 5,000 people in 20 countries. The Wood Group is also signi® cant because, unlike many other local ® rms, it has successfully diversi® ed into new markets outside oil ± in this case the overhaul of jet engines. However, it remains very much the exception to the rule and there has been a tendency for many of the faster growing and more dynamic local ® rms to be acquired by foreign parents.

Fig. 2. Date of establishment by ® rm nationality in the Aberdeen oil complex Source: Author’s survey, 1996.

only seven ® rms (5´8%) were undertaking non-oil related R &D in Aberdeen. A key theme highlighted in Hallwood’s study was the high level of foreign ownership (accounting for 56% of ® rms). In our survey, we found that the proportion of indigenous (Scottish owned) ® rms has increased (Table 5) with the oil complex also displaying a healthy rate of new ® rm formation, with over 70% of `Scottish’ ® rms established since 1980 (Fig. 2). Further investigation revealed that many of these ® rms represent spin-oVs from larger companies by former managers and employees who have settled in Aberdeen. In this sense, there does appear to be a considerable incubator eVect. At the same time, there were few

T H E CHA NGING P OS IT ION OF A B E RD E E N W I T H I N T H E G L O B A L O I L I N D US T RY Our survey results con® rm the earlier evidence that Aberdeen-based oil activities have developed a signi® cant export base and are no longer dedicated to the North Sea market (see Table 6). Over two-thirds of ® rms were engaged in some form of export activity, whilst almost half could be considered as active exporters (de® ned as over 10% of turnover). Norway is the most important overseas market for most ® rms operating out of Aberdeen, though, signi® cantly, in only six cases did it represent the sole destination for

Table 6. Level of exporting of Aberdeen based activities: Scottish, other U K and foreign ® rms Scottish

Other UK

Foreign

All ® rms

Exports as % of turnover

No.

%

No.

%

No.

%

No.

%

UK only 1± 10% exports 11± 50% exports > 50% exports

16 15 23 6

26´7 25´0 38´3 10´0

3 4 8 1

18´7 24´0 48´0 6´3

11 8 13 3

31´4 22´9 37´1 8´6

30 27 43 10

27´8 25´0 39´8 9´3

Total responses

60

Source: Author’s survey.

100

16

100

35

100

109

100

378

Andrew Cumbers

Table 7. Geographical market orientation of Scottish exporters No. of ® rms supplying each market

% of total

Europe CIS North America South America Asia-Paci® c Africa Middle East

23 5 10 5 16 15 7

35.9 7.8 15.6 7.8 25.0 23.4 10.9

No. of ® rms

64

100.0

Market

ized and designed elsewhere. The city has been home to some important learning-by-doing and learning-byusing processes, which have resulted in the accumulation of specialist skills and knowledge. As one of our interviewees put it: Aberdeen has become a centre for `functional excellence’ where technologies from the rest of the U K and Europe become concentrated. Aberdeen is not developing the technology but it is using it and the more you use it, the more local people get more familiar with it than anywhere else, and the more you establish a niche.’ (Manager, US oil company, 13 December 1996)

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Source: Author’s survey.

Second, the accumulation of oil related experience does appear to have resulted in some place-based advantages that make Aberdeen a viable operations centre for some TNC activities beyond the North Sea. The nature of this role varies between ® rms, re¯ ecting the diVerent rationale underpinning ® rm strategies. For some US ® rms, Aberdeen acts as a base for operations in Europe and west Africa, leading some of our respondents to label it their `eastern hemisphere’ headquarters. For others, whose operations have previously been con® ned to the Americas, Aberdeen plays the kind of `listening post’ role identi® ed by S C H O EN B ER G E R , 1994, for plugging into North Sea technology. Both motivations were captured in remarks made by James Woods, chairman of US oVshore contracting ® rm Baker Hughes, when announcing the transfer of a `top engineer’ and design team from Houston to Aberdeen:

exports. Over half of the ® rms surveyed were exporting to more than one overseas market. Our results also indicate a strong export performance by Scottish ® rms, while an analysis of export market orientation also shows they have a growing `global’ presence with a signi® cant number selling to the Asia-Paci® c and African markets (see Table 7). While recognizing this shift towards a more international market orientation, the North Sea remains the dominant source of turnover for most ® rms. It is also the case that most export activity is either opportunistic ± one-oV contracts in response to customer enquiries ± or the result of ® rms `piggybacking’ into new markets through supply relationships established in the North Sea. While the latter is obviously important in allowing small ® rms to break into wider global contractor networks, few of the smaller local ® rms in our survey have been able to establish the kind of longer term collaborative trust-based relationships that have been found in other industries and regions. The global reach of locally-based ® rms should not be overstated either; in over 70% of cases the geographical extent of ® rm operations is limited to Scotland, with only three ® rms operating on a `global’ basis (see Table 8). Nevertheless Aberdeen’s role has clearly transcended that of a branch plant economy. In particular two interrelated themes stand out. First, with regard to the development of new technologies, it is clear that Aberdeen has been at the heart of an important localized learning process in the North Sea, even though many of the core technologies have been conceptual-

It is important that we place more of this kind of work [R &D] in Aberdeen as the North Sea is the birthplace of much new technology . . . In addition, we need to have a stronger Scottish presence as an increasing proportion of our business is in markets outside the U S, especially the North Sea, West Africa and the U SSR. (quoted in Aberdeen Press and Journal, 12 June 1991, p. 3)

In contrast, some of the larger European ® rms are consolidating global level operations in Aberdeen. For example a Norwegian TNC was making the city its world-wide centre for oVshore control and management systems as part of a strategy of developing global capabilities in each of its spheres of operation. For other European companies, the UK sector of the

Table 8. Extent of geographical operations by nationality of ® rm Scottish

Other UK

Location of permanent oYces/bases

No.

%

Scotland only UK European Inter-continental (i.e. 2 continents) Global (i.e. > 2 continents)

47 2 1 11 3

73´4 3´1 1´6 17´2 11´3

Total

64

Source: Author’s survey.

100

No. 2 6 3 5 5 18

Foreign

% 11´1 33´3 16´7 27´8 27´8 100

No. 5 6 ± 10 16 37

All ® rms %

No.

%

13´5 16´2 0 27´0 43´2

54 14 4 26 24

45´4 11´8 3´4 21´8 20´2

100

119

100

Globalization, Local Economic Development and the Branch Plant Region

379

Table 9. Local sourcing of basic and specialist materials % of materials sourced in Grampian region < 25

26± 50

51± 75

75± 100

Total ® rms

Type

No.

%

No.

%

No.

%

No.

%

No.

%

Basic Specialist

20 42

16´7 76´3

6 ±

5´6 0

8 6

7´5 10´9

79 7

73´1 12´7

108 55

100 100

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Source: Author’s survey.

North Sea is eVectively their home market, so that much of the new product development and market testing takes place in Aberdeen. The growing importance of Aberdeen-based operations led one company in our survey, a recent merger of French and Norwegian interests, to relocate its corporate headquarters from Marseilles to Aberdeen. Our survey evidence also indicates a tendency for some medium-sized `other’ UK ® rms to relocate core activities to Aberdeen, partly for cost reasons, but also because of perceived locational advantages as the following remarks indicate: Until `x’ , our chairman, took over the company in 1993, our head oYce had been in London. But, 1993 was a hard time, when the oil price was low. You had to cut costs to survive. If you want to survive in the oil industry and control costs, you just have the one oYce. So `x’ decided that Aberdeen was going to be the place for our company. We closed the London oYce and everyone moved up. We are now committed to Aberdeen and the infrastructure is here for us to manage international operations. (Manager, UK drilling services company, 4 December 1996) If you are serious about being in the UK oil and gas industry, you should have a presence in Aberdeen . . . It’s very good to do business up here, because everybody’s in the same business . . . it’s a hothouse atmosphere . . . The networking is much better than in London. (Manager, U K oVshore consultancy ® rm, 6 December 1996)

T H E L OCA L E MB E D D E D NE S S OF T H E A B E RD E E N O I L C O M P L E X While the above evidence suggests Aberdeen has made the transition from a disconnected cluster of oil activity to a more cohesive and integrated economic agglomeration, it is still not clear whether this will result in a more sustainable pattern of economic growth than earlier analysts have predicted. In this respect, the degree of embeddedness of the oil complex within Aberdeen is clearly a critical issue. With this in mind, our survey investigated some of the relationships between ® rms and their `local milieu’, examining the extent of local sourcing strategies; the nature of relationships with local business support agencies; and levels of interaction with the local labour market. While the majority of ® rms source their basic materials (e.g. stationery, standard oYce equipment and

furniture) locally within the Grampian region, of those ® rms able to provide an answer (55 ® rms responded) more than three-quarters sourced less than 25% of their specialist materials locally (Table 9) and one-third did not use UK suppliers for specialist materials at all. Thus, we cannot talk of a local cluster of material linkages even in the wider geographical sense. There is also a lack of local embeddedness with regard to more specialist business support services, with the exception of oVshore-related information technology, where our own survey evidence suggests the emergence of some local expertise (Table 10). Relationships with business support agencies were dominated by export marketing activities (see Table 11), an area that has been the focus of major policy initiatives by Scottish Enterprise and the Department of Trade and Industry in recent years. Support has included the provision of market reports, trade missions and the formation of Scottish Caspian Trade, an umbrella organization which essentially provides oYce space and a local advice service for ® rms at the cost of a minimal registration fee in Baku. It is doubtful however whether this type of policy support will strengthen local linkages within Aberdeen’s oil complex. If anything, in a footloose industry like oil, the reverse may be the case; an export based policy may actually loosen the ties that bind the local cluster. Our evidence suggests that it is often the larger and less localized ® rms that are best placed to take advantage of the export initiative, because they have the internal Table 10. Use of local business support services in ® rm operations Local support Type of support

No.

%

Financial advice Technical assistance Management consultancy Marketing R&D support Product development Production problem solving Information technology StaV recruitment Training Total no. of ® rms

44 23 10 22 11 3 3 33 42 54 119

37´0 19´3 8´4 18´5 9´2 2´5 2´5 27´7 35´3 45´4 100

Source: Author’s survey.

380

Andrew Cumbers Table 11. Use of local and national institutions by oil-related ® rms

Agency

(n 5

No. 119)

%

Comments

DTI Energy Division OVshore Supplies OYce

29 26

24.4 21.8

Grampian/Scottish Enterprise Grampian Regional Council Unversity of Aberdeen Robert Gordon University Other

49

41.2

Predominantly export marketing Role evolved from monitoring local content to providing information on export opportunities Export marketing, training

26

21.8

Export marketing, data and information service

29 33 19

24.4 27.7 16.0

Masters courses in engineering and petroleum geology Degree and masters courses in drilling engineering, oil-related business courses

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Source: Author’s survey.

resources to follow up market opportunities once initial contact has been made. In contrast to the export initiative, there is little evidence of ® rms using the various local or regional `institutional’ agencies for more innovative activities such as new product development or product diversi® cation, although both Scottish Enterprise and Grampian Enterprise have been active in these areas. While there is much inter-® rm networking and interaction occurring locally, this occurs within industry networks, which largely by-pass public sector agencies. In this sense, there is little evidence (as yet) that the oil network is `localized’ or `bedded’ down in any deeper sense. If anything, networks operate through rather than within the local economy with little evidence, for example, of the local informal social networks revolving around business clubs, dining houses, etc. that S AXE NI A N , 1994, has identi® ed as being at the heart of Silicon Valley’s business culture. Indeed, it is signi® cant that there is no local industry association representing small firms. The key social networks within the industry operate at a global level and their relationship with place is highly ephemeral. Their locus is within established corporate or inter-corporate networks, and whilst these may be active in Aberdeen at present, in a super® cial sense, it would be stretching a point to say that they are locally embedded. There is some evidence, however, that the industry is becoming more embedded through interaction with the local labour market, particularly in regard to training and education. A number of ® rms, prompted by growing skill shortages in key areas, are developing stronger links with the two local universities: the University of Aberdeen and Robert Gordon University. An important development has been the recent establishment of a postgraduate masters course in Process Engineering, set up at the University of Aberdeen with support from the OVshore Contractors Association (OCA) which has guaranteed 15 students per year. This initiative re¯ ects a growing awareness among the more enlightened locally-based ® rms of the importance of the local socio-economic environment in contributing to their own competitive position.

C O NC L US I O NS This paper has examined the development prospects of the Aberdeen oil region within the context of recent debates about globalization, LED and branch plant regions. The evidence presented here suggests that Aberdeen has transcended its earlier role as a glori® ed supply base and branch plant economy to become an important centre of expertise and knowledge ± of `interactive learning’ (L U NDVAL L and J O H N S O N , 1994) ± within the international oil industry. It has in particular been a centre for `learning-by-doing’ and `learning-by-using’ in the sense that products, services and processes ® rst developed and tested in the North Sea have found new markets overseas. A positive aspect of this is the high number of indigenous ® rms that have become successful exporters. Alongside this role as a learning centre, there is evidence that the oil industry has, to a limited extent, become locally embedded within Aberdeen as the industry has evolved. The city has become a place to do oil business where, for certain aspects of oVshore work, it is important to have a presence. Of potentially even greater longer term signi® cance is the fact that the industry has become embedded in another sense, as a base for `oil industry people’ to operate from. In particular, a new professional and managerial class has made Aberdeen their home with a considerable degree of commitment to the place. There is already some tentative evidence from our survey that this is resulting in bene® cial spin-oV eVects, particularly through new ® rm start-ups, although more research is needed on the nature of such developments and their connections with wider economic activities. There are nevertheless aspects of Aberdeen’s oil development that give considerable cause for concern, raising questions about the nature and depth of oil industry embeddedness, the degree of innovative capacity in the local economy and, as a result, the real longer term prospects for the city. The evidence from our research suggests that connections between foreign oil capital and the local economy may prove to be loose and transient and could fray apart as the focus of

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Globalization, Local Economic Development and the Branch Plant Region oil activity shifts away from the North Sea. It is important to note in this respect that no oil company or major contractor of any size has yet made Aberdeen its main headquarters and only 14 out of the 38 oil companies registered as operators on the UK Continental Shelf have oYces in the city. While there is some evidence of indigenous ® rms being involved in niche areas of oVshore technology developments, the scope of these activities remain limited, in both a functional and geographical sense. In some of the fastest growing new oVshore markets, the UK industry as a whole has so far made little impact; of the 20 oVshore projects started in Brazil since 1991, not a single contract has been won by a UK ® rm (C A M A R G O , 1997). It is clear then that, while key oVshore knowledge is being developed in their backyard, UK firms have so far been unable to translate this into global advantage. Of particular concern is the absence of larger oVshore contractors that are able to compete for the integrated turnkey contracts that are becoming commonplace in the industry. At another level there is little evidence of diversi® cation into nonoil markets and the marked absence in our study of ® rms that have tried to ® nd new markets for their products and services. While Aberdeen is a hotbed of innovation in the narrow sense of the term, there is a distinct lack of innovative capacity in the wider sense of the kind of learning and re¯ exivity needed in a global economy (M O R GAN , 1997). Aberdeen can no longer be regarded as a branch plant economy, but it is also a long way from developing a sustainable future beyond the North Sea. Our evidence suggests that achieving this requires decisive policy intervention, which will have to be far wider in its scope than a business-led export marketing strategy. At a wider conceptual level the case study of Aberdeen reminds us that the relationships between TNCs and branch plant regions are more ¯ uid and openended than traditional dependency models allow for. These relationships do evolve over time and, if nothing else, the need for TNCs to capitalize upon place-based advantages does present space for peripheral regions to upgrade and even develop limited global niches.

381

Whether such niches can lead on to more sustainable local advantages is another matter and will depend upon the kind of relationships that are being established as a result of the restructuring processes taking place both within TNCs themselves and with their wider supply networks. In this respect there is a need to ground current theoretical developments within more detailed and extensive empirical work. Whilst there may be a growing tendency for TNCs to use their branch plants as `listening posts’ , the example of Aberdeen suggests that in practice peripheral regions face an uphill struggle in competing in global markets against more powerful actors and established regions. Acknowledgem ents ± I would like to thank Suzanne Martin for her research assistance, the University of Aberdeen and Carnegie Trust for their ® nancial support in the research behind this paper, and Diane Perrons and two anonymous referees for their constructive comments.

NOT E S 1. As Fig. 1 shows, prior to 1984 both employment and production increased at a dramatic rate with the build-up of oil activity associated with the initial boom and the exploitation of the larger and more pro® table oil ® elds. In 1984 with most of the `easy wins’ under development, oil activity reached a peak and in the ensuing period has ¯ uctuated dramatically with oil price changes. One consequence is that the relationship between oil production and employment appears less synchronized, because of the time lag between capital investment decisions (which create or shed jobs) and the resulting changes in oil production levels. 2. The ® gures for `oil-related’ employment are taken from the annual survey of ® rms by Grampian Regional Council (which includes oil companies and their suppliers and contractors). 3. Innovations developed for the North Sea include: new geophysical exploration techniques, sub-sea production systems, multilateral drilling techniques, high resistance construction materials and satellite data management systems. 4. For example, the early development of the oVshore oil and gas resources oV Brazil’s continental shelf was achieved using North Sea technology (C A M AR GO, 1997).

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