Low-skilled labor markets as a constraint on business strategy choices: a theoretical approach

Abstract

The characteristics of the environment in which a firm operates may be constraining a firm's choice of strategy in order to create and sustain a competitive advantage. In particular, we focus on the fact that the level of development of local human capital may be an important factor constraining the set of strategies that the firm may actually choose. Next, certain feasible strategies in a high-skilled labor market may become unfeasible in a low-skilled labor market. To illustrate this point, we propose a theoretical model in which the level of quality of a firm's product depends on effort exerted by local high-productivity workers. We show that the firm may choose to produce a low-quality product for sufficiently high costs of finding high-productivity workers and inducing them to exert effort to increase the quality of the product.