SUBCONTRACTING RELATIONSHIPS IN THE MANUFACTURING INDUSTRY: THE DUTCH CASE Denise M .J. Exterkate Thesis submitted in fulfilment of the requirements of the degree of Doctor of Philosophy in the Faculty of Economics of the University of London London School of Economics and Political Science June 1995 UMI Number: U084732 All rights reserved INFORMATION TO ALL USERS The quality of this reproduction is dependent upon the quality of the copy submitted. In the unlikely event that the author did not send a complete manuscript and there are missing pages, these will be noted. Also, if material had to be removed, a note will indicate the deletion. Dissertation Publishing UMI U084732 Published by ProQuest LLC 2014. Copyright in the Dissertation held by the Author. Microform Edition © ProQuest LLC. All rights reserved. This work is protected against unauthorized copying under Title 17, United States Code. ProQuest LLC 789 East Eisenhower Parkway P.O. Box 1346 Ann Arbor, Ml 48106-1346 Abstract The major changes that have taken place in the Western hemisphere in the last couple of decades have not only resulted in a rapid expansion in the number of SMEs but also in an improvement of their position in the production chain. The oil crisis of 1973 and the subsequent years of recession marked a turning point for SMEs because although large enterprises were particularly hard-hit, SMEs fared much better and in fact acted as an important stabilizing influence. SMEs were given another spur as a result of the development in technology and logistics in the early 1980s. The latest development that affects SMEs is the opening up of the Internal Market (‘1992’) of the European Union which is particularly significant for the Dutch economy because of its highly open character. This thesis will focus on subcontracting relationships in the Dutch manufacturing industry, which is characterized by a predominance of SMEs. The research stresses the small and medium-sized suppliers’ position but large contractors are also a critical component of the research. The objectives of the thesis are to develop an insight into the background of subcontracting, to identify the various types of subcontracting relationships and to analyze the shifts in subcontracting relationships and their causes. Acknowledgements There are many people that have made this thesis possible and whom I would like to thank. First and foremost, there is my supervisor Dr. Ian Hamilton who encouraged me to start and finish the PhD and was an inspiration throughout. Special thanks also to Dr. Ricardo Pinto for his recommendations on the final draft of the thesis. Many thanks to the Nevat and all suppliers and contractors which took part in this research and without whose participation this research would not have been possible. I would also like to thank the Foreign and Commonwealth Office for their financial support, and the British Council and Trudy Kragtwijk in particular. Thanks are also due to my family, friends and colleagues in S504. Finally, I especially want to thank my parents who taught me that you can achieve anything that you set your mind on. Contents Abstract Acknowledgements Contents List of figures List of maps List of tables Introduction Part 1 SMEs and subcontracting Chapter 1 Dutch manufacturing: the context 1 1.1 Introduction 1 1.2 The late industrialization of the Netherlands 2 1.3 The post-war period: recovery, growth and recession 9 1.3.1 Recovery 9 1.3.2 Growth 10 1.3.3 Recession 18 1.4 Dutch manufacturing: an international comparison 23 1.5 Conclusions 28 Chapter 2 Small and medium-sized enterprises: a review 29 2.1 Introduction 29 2.2 SMEs in the manufacturing industry 31 2.3 SMEs: a definition 34 2.4 The characteristics of SMEs 37 2.4.1 The positive characteristics of small and medium-sized enterprises 4 0 2.4.2 The negative characteristics of small and medium-sized enterprises 42 2.4.3 Big versus small 47 2.5 SMEs in the Dutch manufacturing industry A 8 2.5.1 Firm-size distribution 53 2.5.2 Decreasing economies of scale 57 2.6 Conclusions 60 Chapter 3 Subcontracting and co-makership 63 3.1 Introduction 63 3.2 Background od subcontracting 65 3.3 Subcontracting: a definition 67 3.3.1 From Fordism to Flexible Accumulation 72 3.3.2 Globalization, specialization and cooperation 78 3.3.3 Flexibility for contractors 81 3.4 Subcontracting: from industrial linkages to complex networks 85 3.4.1 Linkages 86 3.4.2 Complex networks 93 3.5 The tiers of production 97 3.5.1 The Principal Firm 100 3.5.2 The Main-supplier 101 3.5.3 The Supplier 106 3.5.3.1 The Specialist Supplier 107 3.5.3.2 The jobber 108 3.6 The conditions for, and the results of, subcontracting 109 3.7 Make-or-buy 110 3.7.1 Make 111 3.7.2 Buy 112 3.8 Demand pull versus technology push 113 3.9 Trends in subcontracting 114 3.10 Western versus Japanese subcontracting 115 3.11 JIT and TQC 122 3.12 Conclusions 127 Chapter 4 The European and Dutch regional policy context 129 4.1 Introduction 129 4.2 The European Union and the Single European Market 132 4.2.1 Regional trading blocs 137 4.2.2 Key issues behind regional policy 141 4.2.3 Regional policy in the European Union 143 4.2.4 The impact of the Single European Market on the regions 146 4.2.5 The European Union and SMEs 148 4.2.6 EU regional policy and subcontracting 150 4.3 Regional policy in the Netherlands 152 4.3.1 The aims of regional policy 152 4.3.2 The objectives of regional policy 152 4.3.3 The evolution of Dutch regional policy 152 4.3.4 Dutch policy and SMEs 157 4.3.5 Dutch policy and subcontracting 159 4.4 Subcontracting policies in other major industrialized countries 165 4.5 Conclusions 168 Part 2 Methodology and empirical evidence Chapter 5 Methodology and areas of inquiiy 170 5.1 Introduction 170 5.2 Research questions and hypotheses 171 5.3 Areas of inquiiy 174 5.4 The research methodology 175 5.4.1 Definitions 176 5.4.1.1 Definition of SMEs 176 5.4.1.2 Definition of subcontracting 177 5.4.1.3 Selection of the business groups 177 5.4.2 The empirical research 179 5.4.2.1 The survey 179 5.4.2.2 Case studies 180 5.5 The mailing and the interview 181 5.6 Conclusions 183 Chapter 6 Background and production process 185 6.1 Introduction 185 6.2 Background 186 6.3 Production system 192 6.4 Product design 200 6.5 Quality control in the production process 208 6.6 Case studies -213 6.6.1 The main-supplier 214 6.6.2 The specialist supplier 218 6.6.3 The jobber 221 6.6.4 The contractor 223 6.7 Conclusions 226 Suppliers and contractors 231 Introduction 231 Type of supplier 231 Type of contractor 237 Case studies 248 7.4.1 The main-supplier 249 7.4.2 The specialist supplier 251 7.4.3 The jobber 253 7.4.4 The contractor 254 Conclusions 256 Subcontracting: Government and European Union policy support 260 Introduction 260 The support of the Dutch government and other organizations 261 1992: The Internal Market and the European Union 265 Conclusions 275 Summary and conclusions Summary and conclusions 278 Introduction 278 The empirical research 280 9.2.1 Background and production process 281 9.2.2 Type of suppliers and contractors 285 9.2.3 The external environment 286 Conclusions and policy suggestions 289 Appendix A Bibliography List of figures Figure 2.1 The contribution of SMEs in the manufacturing industry with respect to the number of enterprises (%), employment (%) and GDP (%), 1992 55 Figure 2.2 The contribution of SMEs in the total number of enterprises, employment and GDP in the manufacturing industry 5 6 Figure 3.1 The subcontracting pyramid 95 Figure 3.2 The tiers in the subcontracting pyramid 98 Figure 3.3 Network structures in Japan and the Netherlands 117 List of maps Map 1.1 Locational tendencies in manufacturing, 1930 List of tables Table 1.1 Employment by sectors in the Netherlands (1849-1930) {%) 2 Table 1.2 Employment structure according to firm sizes (%) 6 Table 1.3 Employment structure in the manufacturing industry according to firm size class (%) 12 Table 1.4 Economically active population of the Netherlands (%) 14 Table 1.5 Distribution of employment in six European countries by sector (%) 16 Table 1.6 Employment in industrial sectors by region, 1950-1970 (in absolute terms (x 1,000 man years) and in %) 17 Table 1.7 Distribution of employment in the manufacturing industry in worked hours (as a % of the total industry) 19 Table 1.8 Employment by sector 20 Table 1.9 Employment and labour supply by level of education (%) 21 Table 1.10 Employment by sector in the Netherlands (%) 22 Table 1.11 The world 'league table' of manufacturing trade 27 Table 2.1 Employment structure in manufacturing industry in the Netherlands according to firm size class (% employees) 32 Table 2.2 Contribution of SMEs to employment in manufacturing in the EU countries (%) 33 Table 2.3 Definition of SMEs in eight EU countries 35 Table 2.4 Share of the number of enterprises, employment and turnover by employment size class in the European Union (%) 51 Table 4.1 Budget for the Subcontracting Programme (T & U) (in Dfl.