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Why are Spanish companies implementing downsizing?

Executive Summary

The widespread implementation of downsizing and its repercussions at company level and the national (or even global) economy make it a topic of major relevance for study. The question researchers normally ask is "Why do organizations continue to implement downsizing if, on many occasions, it has been shown to have a negative effect on performance?" The main aim of our research is to propose a causal model for the downsizing practised by Spanish manufacturing firms during the 1990s. Our time period is some 15 years after Spain's entry into the European Community (EC) and the tentative introduction of the neo-liberal logic of labor relations. Basically, this model analyzes the institutional determinants of downsizing, but its integral nature also allows the inclusion of different--mainly economic--causal factors. Its main focus is the analysis of how organizations imitate one another in implementing downsizing practices, presumably in a quest for legitimacy and efficacy. We provide new empirical evidence in addition to the rather scarce existing literature that analyzes the causes of downsizing from an institutional point of view.

Our results provide some useful implications for practice. Mainly, the diffusion of some management practices, such as downsizing, follows the pattern of a 'firm fashion.' These fashions spread among the company population without clear evidence about their positive influence on results. Our study shows that the imitation effect is important to explain companies' adoption of downsizing. Firms should cautiously assess the convenience of implementing these practices Managers should be aware of the reasons that lead them to downsize.


The last two decades of the 20th century have seen the emergence of a business phenomenon that is characterized by reducing the permanent workforce, often combined with a restructuring scheme. The most common term used to describe this phenomenon is downsizing.

Downsizing has been directly responsible for major layoffs in the business sector. For example, in the U.S. economy, an estimated ten million jobs have been lost due to this phenomenon between 1979 and 1999 (Budros 1999). Now, as we move into the 21st century, these workforce reductions are of even greater relevance in Western economies (mainly U.S.A. and Europe), and are now developing in countries that are relative newcomers to global competition. These include Russia, Ukraine and Belarus (Filatotchev et al. 2000). Downsizing measures are even becoming commonplace in countries that have a strong tradition of employment protection, like Japan (Ahmadjian and Robinson 2001). Spanish companies are no exception to the downsizing tendency, as staff cutbacks in the last two decades of the 20th century clearly show (Suarez 1999; Requejo 1996; Barroso and Casillas 1998; Suarez and Vicente 2000; Sanchez and Suarez 2003; Vicente y Suarez, 2007). Specifically, in 1989 to 1994, almost 50% of large Spanish companies resorted to downsizing, with an average reduction in personnel of 31% (Suarez 1999). Furthermore, analysis of layoffs announced in the economic journals Expansion and Cinco Dias between 1995 and 2001 shows that such measures were taken by 281 companies (Sanchez and Suarez 2003), 45 of which made cuts to the permanent workforce on more than one occasion (Telefonica, Banesto, Iberia, Endesa, Astilleros Espanoles, BSCH, etc.).

As we can see, the widespread implementation of this phenomenon, and its repercussions on both company level and the national or even global economy, make it a topic of major relevance for study and analysis from different points of view.

Although downsizing has attracted the attention of numerous researchers, the literature on this subject is relatively new, since the majority of existing studies were published in the early days after downsizing started to gain in popularity.

Most definitions of the phenomenon of downsizing assume it is applied as a measure to improve an organization's results (Freeman and Cameron, 1993; Cameron, 1994; McKinley et al. 1998). This assumption has been analyzed widely in relevant literature and has focused on the effects attributed to this practice. Various studies have reported positive effects of downsizing on organizational performance (Espahbodi, John and Vasudevan, 2000; Baumol, Blinder and Wolff, 2003; Wayhan and Werner, 2000).

Other studies have shown that reduced productivity following downsizing may be counterbalanced by savings in personnel costs (Baumol et al., 2003; Cappelli, 2000). In the biggest Spanish companies, there is evidence of a positive effect of downsizing on firm productivity. However, this only seems to be the case in the short term (Barroso and Casillas, 1998). This conclusion is consistent with other studies (Cascio et al., 1997; Morris, Cascio and Young, 1999). However, although some firms could improve their performance during the year or two following the implementation of downsizing, this positive trend changes, and they begin to experience performance reductions thereafter. Porter (1996) offers an explanation to this evidence by considering downsizing as a strategy towards economic efficiency, but one that cannot produce a competitive advantage in the long term, as other companies may follow suit, thereby maintaining a status quo.

After more than a decade attracting the attention of academics, and despite greater knowledge now available on the subject, published studies on the question are inconclusive as to the relationship between downsizing and variations in organizational performance (Guthrie and Datta, 2008). Nevertheless, the majority of the studies seem to suggest that the impact of downsizing is negative in the medium and long term (Palmon, Sun y Tang, 1997, Trevor y Nyberg, 2008).

Given this controversy, the question researchers now ask is: Why do organizations continue to implement downsizing measures if on many occasions they have been shown to have a negative effect on economic performance? Several recent theoretical and empirical works have attempted to answer this question by analyzing the causes of this phenomenon, using different theoretical frameworks (McKinley et al. 2000).

First, they adopted a rational focus, under the premise that organizations downsize in order to improve efficiency (McKinley et al. 1998). Nevertheless, evidence that is inconsistent with the predictions of this approach has led to other research which looks at different theoretical perspectives, of which institutional theory has received the most attention. This focus allows us to consider the social processes present in the organizational field as determiners of downsizing, instead of the organization's economic interests. This research supposes that society considers downsizing a kind of institutional norm, and so organizations are motivated to adopt such practices in order to achieve a kind of legitimacy in their field. This behavior, according to neoinstitutionalist literature, implies the aim of efficacy, as opposed to efficiency. However, new contributions to institutional theory have led researchers to contemplate, among other aspects, the compatibility of both motivations. This implies that organizations make decisions influenced by social pressure, but without neglecting their own interest (Dacin et al. 2002).

In fact, empirical evidence exists that shows the inability of any of these approaches (mainly the economic-rational and the institutional) to explain this phenomenon on their own (Mentzer 1996). This has led to the proposal of integrating causal models, combining different explanatory factors (Budros 1999; Sanchez and Suarez 2002; Vicente and Suarez, 2007). However, they do not put forward a single theoretical framework including all of the explanatory factors.

The main aim of this research work is to propose a causal model for the downsizing practised by Spanish firms (that are not leaders in their industry) during most of the 1990s. Our time period is some 15 years after Spain's entry into the EC and the initial, tentative introduction of the neo-liberal logic of labor relations. Although it would be preferable to track downsizing behavior from the late 1980s--but especially after the 1992 law reform--our study considers the period 1994 to 2000, due to the availability of data. We refer to non-leader firms because we made the supposition that the institutional factors can affect leaders and followers in different ways. For example, the 'followers' can implement downsizing following such measures taken by leaders. However, the leaders use market logic prevailing in an international level in implementing these measures.

Basically, this model analyzes the institutional determinants of downsizing, but its integral nature also allows the inclusion of different types of causal factors, mainly economic ones. Its main contribution, therefore, is the analysis of the way in which the quest for legitimacy and efficacy leads organizations to imitate one another in implementing downsizing. New evidence is provided to add to the scarce empirical literature analyzing the causes of downsizing from an institutional point of view.

The Spanish Setting

The economic crisis of the early 1990s, particularly in 1992-3, saw a greater loss of employment than previous crises. However, it was also shorter, and by mid-1994 employment was starting to recover. This scenario can be explained by several factors.

First, Spain was by then much more integrated into the European economy, which meant that an international recession was transferred to the Spanish economy much faster than before. However, the great loss of employment in the industrial sector registered in 1992-3 implies a process of structural readjustment of the economy. Recio (1999) points out that during the last employment crisis (1991 to 1994) stable jobs suffered more than temporary ones, since this crisis had a greater effect on those activities with predominantly stable employment (e.g. shutdowns, staff adjustments). Loss of employment was particularly high in the agricultural and industrial sectors, which suggests that the adjustment process actually involved the substitution of permanent positions with temporary ones, with a marked increase of the latter in the services sector.

Another reason for the high number of layoffs in Spanish companies, especially in 1993, is the reform introduced in 1992. This reform made it impossible to extend temporary contracts once they had terminated, meaning that these workers either had to become permanent members of staff or be made redundant.

It was the adjustment of the Spanish economy (together with the strong position of the peseta following the fall of the communist regimes of Eastern Europe) that goes some way to explaining this crisis. It meant a second process of industrial reconversion which was more intense but also shorter than the one which took place in the early 1980's (Toharia et al., 1998). The devaluation of the peseta in 1992-3 helped to return competitiveness to the 1985 level, thus facilitating swift economic recovery.

The inefficiency in the labor market led the government to adopt a reform in late 1993 with the basic aim of promoting collective bargaining and avoiding aspects such as redundancy costs. Two of the changes introduced in this reform merit special attention: the reform of contracts and the changes in redundancy procedures. Considering reform, the main change was to eliminate temporary contracts to promote growth of permanent employment except in specific cases of certain groups of workers. Although this measure was intended to encourage permanent employment, in fact companies have found other modes of temporary employment that are even cheaper than the one that was eliminated.

Considering redundancy costs, the new policy attempted to reduce them, mainly by introducing "objective redundancies", a concept that allows companies the right to lay off workers with reduced redundancy payouts. However, this innovation has not changed the overall situation to any great extent. As neither the use of temporary contracts nor redundancy costs had been reduced, a new reform took place in 1997 (after the arrival of a new government in 1996). The most significant innovation introduced in this legislation was the creation of a new type of indefinite contract to encourage employment but that involves lower redundancy costs. In this way, indefinite employment is encouraged in exchange for more flexibility when it comes to terminating contracts. More labor reforms came along in 1998 and 1999, all of which intended to combine flexibility with protection.

Theory and Hypotheses

Institutional theory has been chosen for this research since it is an alternative perspective to the rational focus in the construction of a causal model for downsizing. As it has proved impossible to demonstrate that organizations put downsizing into practice in order to be more efficient, this new theoretical framework considers that the prime motives are to obtain legitimacy in the industry sector and to be accepted irrespective of performance. The institutional perspective provides an explanation for the widespread adoption of downsizing among government bodies and agencies, mainly in the 1990s (McKinley et al. 1998). Its argument is centred on the fact that downsizing has obtained the status of an institutional norm, and as such it provides legitimacy to those organizations that practise it. This legitimization is based on the reconceptualisation of the term downsizing, i.e. as being no longer (necessarily) linked to the idea of decline. The empirical evidence provided by the literature indicates the acceptance and spreading of downsizing as a practice, and the fact that it is taken for granted due to the institutional environment (Budros 1997, 2000; Lamertz and Baum 1998; Dahl and Nesheim 1998; Filatotchev et al. 2000; Suarez 1999; Suarez and Vicente 2000; Sanchez and Suarez 2003; Sanchez and Suarez 2005).

Several other theoretical perspectives can be found in the literature analyzing the causes of downsizing, and there is no reason why these should be incompatible with one another. McKinley et al. (2000) also identify the economic-rational and the socio-cognitive ones. Later contributions to the literature approach the study of downsizing from other theoretical points of view, such as the resources and capabilities theory (Fisher and White 2000; Nixon et al. 2004) and the agency theory (Filatotchev et al. 2000).

Some articles in the literature of downsizing (Budros 1999; Love 2000; Sanchez and Suarez 2002) make use of the complementary nature of the different perspectives mentioned above.

For example, in the case of Spanish companies, the theoretical model of Sanchez and Suarez (2002) mainly uses the institutional perspective, although also highlighting its complement with the rational point of view. However, it is Suarez and Vicente (2000) who provide evidence on the complement between economic and institutional causal factors when explaining the downsizing phenomenon in Spanish companies. Sanchez and Suarez (2005) made an exploratory study of the justifications made by companies announcing downsizing measures in the press, although the adoption of a theoretical framework for the causal analysis of this phenomenon is still needed. In this sense, new research in the context of Spanish companies may shed more light on the reasons that lead to downsizing.

According to institutional theory, an organization obtains legitimization in the society in which it acts when it adopts in its structure and procedures certain patterns of action that are specified by said society (Scott 1995). These institutional forces are the reason why organizations that belong to the same organizational field become more and more alike, a process known as isomorphism (DiMaggio and Powell 1983). These institutional theories establish that similar organizations use each other as a framework of social reference. Indeed, the behavior most emulated by organizations is that which has allowed other organizations to be successful. This behavior is a function of 'imitation' or mimetic isomorphism. It follows that certain organizational forms or practices predominate in a given organizational field (Scott 1995).

When a growing number of organizations adopt a programme or policy, it becomes progressively institutionalized, or widely recognised as a necessary component of a rationalized organizational structure. The legitimacy of the procedures acts as an impetus for those who later adopt them (Tolbert and Zucker 1983). This process of organizational diffusion, known as the "contagion" model, considers that when an innovation arises, it is adopted by a small number of organizations, but once a critical threshold has been reached, it is quickly implemented by a wide range of agents (Hoffman 1997).

Fligstein (1985) reached similar conclusions in his study, interpreting the variable "number of organizations which adopt a given structure in the industry" as a measure of the mimetic pressure on the organization which leads it to imitate the practices of their competitors.

Inter-organizational imitation occurs when the use of a given practice by one or more organizations increases the likelihood that it may be adopted by other organizations. The empirical work of Haunschild and Miner (1997) distinguishes between three different types of selective inter-organizational imitation: imitation based on frequency (copying the most common practices), imitation based on characteristics (copying the practices of organizations of certain characteristics), and imitation according to results (imitation based on the impact which a given practice appears to have on others). The first two types are consistent with the theories that emphasize social processes, since the cause does not depend on whether these practices produce benefits. The third type, on the other hand, is more related to theories on technical processes.

Imitation based on frequency explains the behavior of those organizations that implement practices that have previously been used by a wide number of organizations. It is therefore coherent with the neo-institutional perspective, since it is the frequency itself that influences these acts.

This "adoption effect" can be associated with downsizing, supporting the prediction of Budros (1997), according to which the legitimization, or extent to which downsizing is "taken for granted", is positively related to the indexes of downsizing. By "adoption effect" we understand the cumulative percentage of companies that have implemented downsizing practices.

Ahmadjan and Robinson (2001) also described the same relationship in their empirical work, calling it Safety in Numbers. These authors consider that as the number of organizations in a population practising downsizing increases, it seems likely that the social costs for each individual organization will decrease. The concept of "Safety in numbers" leads to the supposition that some organizations would follow the example of others in the population: the more organizations practising downsizing, the more likely any other organization is to follow suit. An alternative explanation to this effect is that the growing index of adoption of downsizing reflects the increasing legitimacy of taking such measures.

From these arguments we derive the first hypothesis here proposed, which considers the number of organizations that have previously applied downsizing as one of the explanatory variables for the implementation of downsizing practices. In this case, downsizing is being imitated using the criterion of frequency (Haunschild and Miner 1997); that is, its widespread adoption in the business environment.
 H1: the implementation of downsizing measures is positively
 related to the number of cases of downsizing that have previously
 taken place in other companies.

A question arises at this juncture: which criteria and processes do organizations use to determine the limits of their field and the identity of their reference group? In response, Scott (1995) makes use of research by Haveman (1993), according to which organizations tend to imitate organizations that belong to their own population, which for the purposes of this work is the same as belonging to the same industry. As for the models chosen to be emulated, Haveman (1993) considers two possibilities: (1) organizations imitate others of a similar size, and (2) organizations imitate others which they consider more successful, in this case the most profitable and the largest ones. This argument states that there are organizational leaders who promote innovation without interacting directly with their followers in the networks.

According to the theory of imitation based on characteristics, organizations use practices that have previously been used by a sub-group of organizations that have certain characteristics in common. Neo-institutional theorists (DiMaggio and Powell 1983) suggested that the characteristics that provided this sub-group with legitimacy were large size and success. These were also characteristics of high-status organizations, and by imitating them other organizations were able to acquire similar status (Fombrun and Shanley 1990).

Budros (1999) continues this logical idea, suggesting that downsizing is taken more for granted as more elite organizations start to put it into practice, producing a mimetic behavior pattern (both economically and socially) in those firms which do not belong to said elite.

This argument considers that those companies that share the common characteristic of being successful, reflected in the possession of a high status, are chosen by other companies as an example to follow. Moreover, this second type of imitation (based on characteristics) is identified by Haunschild and Miner (1997). This argument leads to the second hypothesis, which diagnoses a positive relationship between the implementation of downsizing by leading organizations in a sector, and the proliferation of the use of this practice among the remaining organizations in the sector (the followers).
 H2: the implementation of downsizing measures by a company is
 positively related to the number of downsizings previously
 carried out by the leading companies in the given sector.

Finally, the theory of imitation based on results argues that organizations imitate those practices which seem to have produced better results in the past, while avoiding those which have led to bad results (Haunschild and Miner 1997). In this case, selective imitation comes from the perceived consequences of a given practice.

Its presence has been identified in the processes of diffusion of an innovation, since this adoption will increase if the organizations attribute profitability to an innovation after observing the results obtained by companies who have already adopted it (Haunschild and Miner 1997). As a result, organizations are less likely to imitate innovative practices that are only in their early stages. They prefer to keep observing the new practices until they are proven to be successful.

In the case of the diffusion of corporate downsizing, organizations will be more likely to imitate this practice when they perceive a good result after the first cases observed, since this allows them to attribute a positive effect to downsizing.
 H3: the adoption of downsizing practices by a company is
 positively related to positive results that other companies
 obtained after downsizing.

Empirical Analysis

This section contrasts a causal model in the adoption of downsizing practices carried out by Spanish companies from 1994 to 2000. The model takes into account institutional factors, which represent different types of imitation among organizations. It also considers other determinants, which reflect via control variables the influence of corporate characteristics such as size or age, or of economic factors, on the decision to downsize.

Population and Sample

This study has made use of the Spanish database "Encuesta sobre Estrategias Empresariales" (Survey on Business Strategies, hereafter ESEE), which the SEPI Foundation runs via its Programme of Economic Research (Programa de Investigaciones Economicas).

The ESEE is an annual statistical survey of a panel of companies which represent the manufacturing industries, and whose reference population consists of companies with 10 or more employees in what is usually known as the manufacturing industry. The geographical scope covers the whole of the national territory and the variables have an annual temporary dimension.

One of the most important features of the ESEE is its level of representation. The initial selection of companies was carried out combining criteria of exhaustiveness and random sampling.

The period under study is 1994 to 2000, during which the Spanish labor market underwent considerable flexibility. This fact, together with the consequences of the 1993 crisis, encouraged the diffusion of downsizing in Spanish companies.

The process used to determine the sample used in the empirical analysis consisted of selecting those registers which offered information in each of the years under study (from 1994 to 2000), and which did not undergo any changes. After this selection process the sample consisted of 940 Spanish manufacturing companies (6580 items).


Dependent Variable: Downsizing. This is a dummy variable that codes as one when a company downsizes and as zero otherwise. To construct this variable we calculated the ratio [Change.sub.t] = (No of [Employees.sub.t]-No. of [Employees.sub.t-1])/(No. of [Employees.sub.sub.t-1), where
 No. of [Employees.sub.t] is the number of permanent employees
 (i.e., excluding temporary personnel) in year t, and No. of
 [Employees.sub.t-1], is the number of permanent employees in
 year t-1.

As previous studies showed (Cascio et al., 1997; Ahmadjian and Robinson, 2001), we consider that downsizing occurs when the number of permanent employees is reduced by 5% or more from year t-1 to year t.

We applied three cut-off points to analyze the downsizing activities in the Spanish manufacturing sector during 1995-2000: 2%, 5% and 10%. All three curves displayed a similar pattern. As did Ahmadjian and Robinson (2001), we used sensitivity tests to examine whether our results varied if we changed the cut-off point from 0.05 to 0.10 and 0.02 and the results were broadly consistent.

Independent Variables

Number of previous downsizing events in the sector (DOWNSEC). This variable is constructed by totalling the number of downsizing events that have been carried out by companies in the same sector in the years previous to year t. For this purpose, we have identified the cases in which the downsizing variable appears with value 1 in companies that have the same code in the activity field. The companies' main activity is classified by the ESEE using the NACE-CLIO R44 codes of modified sectorial classification (and the equivalent CNAE-74), which correspond to the eighteen sectors.

Number of previous downsizing events implemented by leaders in the sector (DOWNLEAD). This variable supplies information on the number of times the five leading companies in the sector in question have implemented downsizing in the years prior to year t. In order to obtain this data, first the five companies with the highest turnover (sales volume) were selected in each sector. The cases of downsizing carried out by these companies were then calculated, again grouped by sector. This therefore shows in numerical values the quantity of downsizing events implemented by the leaders in each sector for each year.

Economic success attributed to previous downsizing events (SUCCESSDOWN). This variable has measured by sector the variation in performance in year t-1 of those companies that have practised downsizing in year t-2. When this variation is positive (negative), this success (failure) in year t-1 is attributed to the implementation of downsizing.

Control Variables

Number of previous downsizing events in the company (DOWNCOMP). In each of the years considered (1994-2000) the number of occasions on which downsizing has been implemented previously in the company has been calculated.

Time lapse between consecutive downsizings (TIMELAPSE). The period between consecutive downsizing events in a given company is calculated as the difference in years between said events.

Variation in Performance (VARPERF). As the ESEE does not include questions in its survey about company profits but does include the necessary data to calculate them, the value of gross profit has been calculated. This variable reflects the percentage variation between performance in the previous year (t-1) and the year in course (year t).

Variation in Sales (VARSALES), The percentage variation in sales between two consecutive years is calculated for each company.

Variation in Productivity (VARPROD1 and VARPROD2). Two variables have been used to measure the variation in labor productivity of each company in years t and t-1: (1) VARPROD1 is the ratio of personnel costs against sales figures; (2) VARPROD2 calculates the ratio of sales against personnel.

SIZE. Company size has been measured using the total number of employees, i.e. total permanent personnel. The natural logarithm of the total personnel has been calculated to obtain an indicator of company size.

AGE. This variable is measured taking the difference between the year in question and the year in which the company was set up.

Degree of Diversification (DIVERS). To measure this variable, the Index of Total Entropy has been adapted, considering the proportion of sales of each company in the 5 main markets in which it intervenes. This indicator must be understood as an approximation to customer diversification, as it has not been possible to calculate the diversification in activities. The ESEE database only provides the code of the main business activity of each company, and so we have not been able to use the diversification indicators traditionally employed in the literature. The entropy measure, denoted as Diversification, was used to indicate the firm's degree of diversification:

Divosffication = [5.summation over (k=1)][p.sub.k] In (1/[p.sub.k])

where [p.sub.k] was the percentage of sales of the focal firm in the kth (k = 1, 2, ...,5) main markets in which the firm operated. The ESEE survey identifies a firm's five main markets, defined by product line, client/customer, and geographical market.

Degree of debt (DEBT). This variable has been calculated from the coefficient of debt, using data from year t-1.

Owners in management posts (FAMILY). This variable indicates whether relatives of the owners occupy relevant executive or administrative posts in the company. It is used as a control variable, as the type of owner is expected to influence the decision to adopt downsizing (Suarez and Vicente 2000; Bud ros 1997). This variable takes value 1 when said family members are present, and 0 if not.

Gross Domestic Product (GDP) annual growth rate (vGDP). We used the annual Spanish GDP growth rate in each year, as expressed in 1990 Spanish currency.

Methodology and Results

This study is of a dynamic nature, and so the use of panel data is particularly suitable. This panel contains entries of certain variables for all the companies in the sample (940) in each of the years under study (1994-2000).

The analysis of logistic regression with panel data (log it model) is a suitable model for the study of the likelihood of downsizing in a given company. Using the likelihood or frequency of downsizing as a dependent variable makes it advisable to opt for logistic analysis (Suarez and Vicente 2000).


Table 1 displays descriptive statistics and correlations for the variables used in the analysis. The collinearity diagnostics (variance inflation factors) indicate that multicollinearity was not a problem in the statistical analysis.
Table 1. Descriptive Statistics and Bivariate Correlations

 Mean s.d. 1 2 3 4

1 Downsizing 0.21 0.41

2 Downsec 48.78 35.86 -0.00

3 Downlead 0.75 0.92 0.04 0.15

4 Successdown 1.01 0.25 -0.01 0.18 -0.09

5 Downcomp 0.78 0.88 0.04 0.03 0.00 0.02

6 Timelapse 1.25 1.51 0.05 0.04 -0.06 0.02

7 Varperf 0.35 21.80 0.01 0.00 -0.02 0.05

8 Varsales -0.10 7.31 -0.04 0.02 -0.01 0.00

9 Varprodl 0.32 1.41 0.02 -0.01 -0.03 0.01

10 Varprod2 18589.44 39865.10 -0.04 -0.02 0.05 -0.03

11 Size 4.07 1.46 -0.14 -0.08 -0.04 -0.01

12 Age 25.12 20.62 -0.02 -0.02 0.04 -0.01

13 Divers 0.48 0.44 -0.06 -0.05 -0.03 -0.01

14 Debt 0.55 0.23 0.04 -0,04 -0.06 -0.03

15 Family 0.48 0.50 0.04 0.16 0.03 -0.01

16 vGDP (%) 3.98 1.06 -0.03 0.14 -0.08 0.04

 5 6 7 8 9 10 11 12

1 Downsizing

2 Downsec

3 Downlead

4 Successdown

5 Downcomp

6 Timelapse 0.52

7 Varperf -0.00 0.01

8 Varsales -0.02 0.01 0.00

9 Varprodl 0.03 0.01 -0.00 -0.00

10 Varprod2 -0.01 -0.02 -0.00 0.00 -0.04

11 Size -0.19 -0.13 -0.01 -0.02 0.00 0.15

12 Age 0.02 0.02 -0.01 0.01 -0.03 0.10 0.42

13 Divers -0.09 -0.06 -0.01 0.02 -0.04 0.07 0.23 0.14

14 Debt 0.08 0.03 -0.01 -0.01 0.02 -0.03 -0.10 -0.15

15 Family 0.06 0.00 -0.01 -0.01 0.00 -0.07 -0.31 -0.16

16 vGDP (%) 0.14 0.17 -0.00 -0.02 -0.03 0.02 0.02 0.06

 13 14 15

1 Downsizing

2 Downsec

3 Downlead

4 Successdown

5 Downcomp

6 Timelapse

7 Varperf

8 Varsales

9 Varprodl

10 Varprod2

11 Size

12 Age

13 Divers

14 Debt 0.03

15 Family -0.06 0.08

16 vGDP (%) 0.01 -0.01 0.09

Once the data have been analyzed by means of logistic regression with the two alternative models (fixed effects and random effects), the random effects model has been chosen, since it allows the number of observations used in the estimation to be increased considerably (from 3,686 to 5,472). This reasoning has been used in other works following a similar methodology (e.g. Suarez and Vicente 2000).

Table 2 shows the results obtained after carrying out this logistic regression analysis for the period under study. First of all, it can be observed that the fit is significant, since the chi squared statistic has a high value, and it is significant for a confidence level of 99%. Another interesting fact to bear in mind is the use of 83.2% of the observations from the sample (data from only five companies are lost).
Table 2. Analysis of logistic regression. Random Effects Model


Downsec -0.0006 0.9994 0.0011

Downlead 0.1124 *** 1.1190 0.0412

Successdown -0.0884 0.9154 0.1508

Downcomp -0.2998 *** 0.7410 0.0976

Timelapse 0.1061 *** 1.1119 0.0340

Varperf 0.0024 1.0024 0.0018

Varsales -0.9842 *** 0.3737 0.1712

Varprodl 0.0477 ** 1.0489 0.0213

Varprod2 -0.0000 ** 1.0000 0.0000

Size -0.3246 *** 0.7228 0.0426

Age 0.0089 *** 1.0089 0.0024

Divers -0.1534 0.8578 0.0978

Debt 0.3521 * 1.4221 0.1843

Family 0.0852 1.0889 0.0839

GDP 0.1100 ** 1.1163 0.0435

Rho 0.1173

Rho=0 chibar2(1) (a) 10.34 ***

Number observations 5472

Number of groups 935

Wald chi (2) (g.l.) 150.27 ***
(b) (15)

* p-value < 0.1; ** p-value < 0.05; *** p-value <0.01
(a.) Contrast of significance of individual effects.
(b.) Contrast of goodness of fit

We shall now analyze which variables have proven to be significant to explain the downsizing phenomenon, and the sign of their relationship with the dependent variable. This will allow us to ascertain which of the hypotheses proposed in the causal model have obtained sufficient evidence.

The analysis carried out indicates that the Downsec variable is not significant, and so it proves impossible to verify hypothesis H1. Nevertheless, this is not the case for the Downlead variable, which is significant, and which has a positive influence on downsizing, thus supporting hypothesis H2. As for hypothesis H3, it has proved impossible to verify due to the lack of significance obtained by the Successdown variable.

As regards the control variables, Downcomp is significant with a negative sign, whereas Timelapse is also significant but with a positive sign. The economic effect of performance previous to downsizing is not proven, as is indicated by the lack of significance of the Varperf variable.

On the other hand, Varsales turns out to be significant at 1%, influencing the dependent variable with a negative sign. Evidence is also obtained showing that labor productivity influences the dependent variable, since the Varprod1 variable is significant with a positive sign, and Varprod2 is also significant, but with a negative sign. The variables Debt and GDP are both positively significant.

The results of this analysis also provide evidence to the effect that Size has a significant negative influence on the dependent variable. The Age variable is shown to be significant as an explanatory variable of the downsizing phenomenon, and its sign is positive. However, this analysis has made it clear that the independent variable Divers is not significant in the established relationship, and neither is the control variable Family.

Finally, the logistic analysis reveals the importance of individual effects through the value of rho (i.e. the proportion of total variance due to individual effects). The contrast that is shown at the end of Table 2 leads to the conclusion that unobservable heterogeneity exists with a confidence level of 99%.


The first step of this empirical study has been to analyze the factors that explain the downsizing phenomenon according to the theoretical framework adopted previously. Its basic characteristic is that it allows the co-existence of two types of causal factors: exogenous factors or those of an institutional nature, and endogenous or inter-organizational ones (Greenwood and Hinings 1996).

The three causal relationships that the causal model established aimed to prove the existence of mimetic isomorphism in organizations in order to explain the adoption of downsizing practices. These relationships were proposed thanks to the identification of the three different types of inter-organizational imitation: those depending on frequency, characteristics or results (Haunschild and Miner 1997).

With the data of the Spanish companies in the sample, no evidence has been found for the existence of a relationship between the implementation of downsizing by a company and the number of cases of downsizing that has occurred previously in other companies in the same sector. Thus, unlike other studies (Vicente and Suarez, 2007; Haunschild and Miner 1997; Fligstein 1985), the present one has not been able to prove that downsizing has occurred due to imitation of the behavior of a considerable number of organizations in the same sector, also termed imitation based on frequency.

The second type of imitation analyzed is based on the characteristics of the organizations, and it explains the adoption of downsizing due to companies emulating the behavior of the most important firms in their sector, i.e. the leaders. By selecting the five leading companies in each sector, strong evidence is obtained to the effect that the prior adoption of downsizing practices by these leaders has a positive influence on the likelihood of another company imitating such behavior. This empirical evidence supports that of Haunschild and Miner (1997) to demonstrate the imitation of organizations with certain common characteristics (in their case, size and success). This supports the theory, which argues that organizations carry out certain practices in order to achieve the legitimacy that the most successful organizations (leaders) in their respective sectors enjoy (Scott 1995; Hoffman 1997).

Finally, the third type of interorganizational imitation predicted as an antecedent of the implementation of downsizing by an organization is based on performance. Thus it was expected that companies would be more likely to carry out downsizing when they observed that those companies that had already done so had obtained an improvement in performance. In this case the reason behind the imitation of downsizing is that it perceived to be the only cause of the improvement in the organization's results. However, the statistical analysis has not provided the necessary support to verify such a relationship in the period under study.

In short, it may be stated that the social legitimization obtained by downsizing led Spanish manufacturing companies to imitate this practice between 1994 and 2000 via one of the institutional mechanisms: mimetic isomorphism. On analyzing this imitation process in more detail it has been shown that it is due to the imitation of previously observed behaviors on the part of leading companies in the different sectors. Consequently, of the three kinds of imitation identified, the only one that is verified is that based on characteristics. This result contrasts with that of Haunschild and Miner (1997), since their empirical study corroborated the three types in the case of choosing an investment bank as a consulting agent by those companies that were about to take over others.

The results obtained in the analysis provide sufficient support to verify the explanatory power of another type of factor in the adoption of downsizing in Spanish industrial firms during the period 1994 to 2000. Although it has not been observed that a firm's suffering a loss, or problems in corporate performance, have led to personnel reductions, it has been possible to relate this practice with a previous downturn in corporate productivity or profitability. In other words, it seems clear that this type of practice is both reactive or defensive in the face of a negative corporate scenario, and proactive or anticipated (Cameron 1994; Freeman and Cameron 1993; Lamertz and Baum 1996).

Our analysis shows that a downturn in sales often precedes downsizing practices. This agrees with other empirical studies (DeWitt 1998; Suarez and Vicente 2000; Ahmadlian and Robinson 2001). As in the analysis of Spanish companies carried out by Suarez (1999), in the present analysis it has also been possible to associate the existence of problems of labor productivity with subsequent layoffs. These results are in contrast with other previous empirical works that have been unable to prove such a relationship between labor productivity and downsizing (Ahmadjian and Robinson 2001; Suarez and Vicente 2000).

The present study does not allow us to confirm a positive relationship between size and downsizing, unlike a previous work on Spanish companies (Suarez 1999), which found that larger companies experience a "necessity for change" due to redundancies and inefficiencies (Suarez and Vicente 2000; Budros 1997). Rather, based on our evidence it would be more appropriate to state that it is the smaller firms that are more likely to carry out downsizing. As regards age, the results of the present analysis indicate that the older companies were more likely to downsize in Spain from 1994 to 2000, which contrasts with the findings of Suarez and Vicente (2000).

To date no evidence has been found in the literature between diversification and downsizing, and the present study is no exception. The degree of diversification has not obtained sufficient significance to explain said phenomenon. A possible explanation of these results may be that as in this empirical analysis smaller companies have appeared more likely to carry out downsizing, it stands to reason that such companies are less likely to diversify their activities.

On the other hand, it has been possible to relate a greater likelihood of layoffs with a greater use of outside capital. This result contrasts with the findings of the empirical work of Requejo (1996), which did not consider that the level of debt influenced decisions of downsizing, as it did not obtain sufficient significance.

Finally, whether or not the company is managed by the owners does not appear to affect the decision to implement downsizing measures.


Following the tendency of part of downsizing literature (Budros 1999; Love 2000; Sanchez and Suarez 2002) of proposing integrating models with different theoretical approaches to explain the downsizing phenomenon, this work has developed a causal model from the institutional perspective. This does not mean that those companies that implement downsizing do so only due to exogenous factors (Oliver 1991), that is, factors which represent pressure from the environment to adopt said measures. On the contrary, a modern institutional theory can explain the diversity of responses in the face of institutional pressures by attributing the organization with an active role in the quest to satisfy its own interests (Greenwood and Hinings 1996; Dacin et al. 2002). Consequently, this institutional focus establishes complementarity between explanatory factors that are characteristic of the economic or rational perspective and strictly institutional factors.

The institutional determinants analyzed refer--basically--to the mimetic isomorphism of the cognitive pillar of the institutions (Scott 1995), which is present at an interorganizational level. The results of this empirical analysis only support interorganizational imitation based on characteristics. This indicates diffusion of the practice of downsizing among the Spanish business population, and that this diffusion is fundamentally due to imitation of the leading companies in each sector which have previously carried out downsizing.

One of the contributions of the present work lays in the fact that it is able to show, at least partially, an institutional origin for a corporate management practice. This contribution supports the evidence that Suarez and Vicente (2000) obtained for Spanish companies. Moreover, it seems the implementation of downsizing by the most successful companies influences the adoption of this practice by other organizations. This may provide evidence for studies on business management trends (e.g Abrahamson and Fairchild 1999). These studies use the 'influencing' argument as one of the possible discourses aimed at spreading the trend itself. In this case there is a clear presence of the "jumping on the bandwagon" discourse in the dissemination phase of a popular management practice (Hirsch 1972; Abrahamson 1996). Thus, the explanation of the behavior of those organizations that downsize lies in theft imitation of the behavior of the leading companies in their sector.

One possible explanation of the fact that no evidence has been obtained to support the other institutional factors analyzed may be found in the characteristics of the Spanish labor market. In the European context, and more specifically in the case of Spain, the diffusion of downsizing may be said to be the result of a deinstitutionalization process of the system of permanent employment. In this sense, as has been argued for the case of Japan (Ahmadjian and Robinson 2001), the organizations which practice downsizing first risk losing their legitimacy, but as the institutional context co-evolves (Hoffman 1997) these practices become accepted by the environment and no hostile reaction is produced. A longer time interval would therefore be necessary in order to observe a greater presence of institutional determinants among Spanish companies.

On the other hand, the causal relationships detected between economic factors and downsizing indicate that companies look out for their own interests, despite being subjected to institutional pressures which seek to influence their behaviour (Greenwood and Hinings 1996; Dacin et al. 2002).

Finally, as another conclusion of the present work, we have determined the characteristic profile of the Spanish industrial companies that carried out downsizing in the period under study. In the main these were small companies, established for some time and with little diversification. The fact that these results contrast with those obtained in other studies on downsizing in Spanish companies (Suarez and Vicente 2000) may be due to the use of different databases. This fact highlights the need to carry out further studies of this type in different business populations with a view to determining the profile that best fits their behavior. In this sense, our second contribution consists of offering empirical evidence for a location different from the U.S. As Scott pointed out (2005, 478): "An embarrassingly large proportion of our theoretical conceptions and empirical findings have been constructed by U.S. scholars based on data collected from U.S. organizations."

Our results also provide some useful implications for practice. First, the diffusion of some management practices, such as downsizing, follows the pattern of a firm fashion (Abrahamson, 1996). These fashions spread among the company population without the existence of clear evidence about their positive influence on the results. Our study shows that the imitation effect is important to explain firms' adoption of downsizing. One explanation is that firms should cautiously assess whether or not to implement these practices. Managers have to be aware of the reasons that lead them to downsize. To obtain legitimacy in their industry may not be reason enough if the company has not done another kind of analysis.

Moreover, many studies have found evidence of the negative effects of downsizing on different aspects of firms, which finally drives them to reduction in performance (Cascio et al., 1997; Guthrie and Datta, 2008). Furthermore, evaluation of the available evidence can allow managers to understand the way in which downsizing must be implemented in order to produce less prejudicial effects. For example, Cameron (1994) and Casco et al. (1997), among other authors, found that only a downsizing strategy that involves a wider restructuring and systematic strategy (not a reactive strategy) could provide results that are less prejudicial to the company.


The present research work presents a series of limitations that may serve as a basis for future research.

Firstly, the central topic of this study is downsizing, and there are many processes and techniques by which this concept may be implemented (Freeman and Cameron 1993; Cameron 1994). However, the statistical information available in the ESEE database used does not allow us to differentiate between downsizing modes (layoffs, early retirement, outplacement, attrition or freezing new contracts, etc.). This limitation has meant that the empirical analysis was limited to reductions in the number of full-time employees, a choice which was supported by its representivity of total personnel, without being able to distinguish the particular downsizing strategy used. Therefore, although the data allow certain conclusions to be reached on the magnitude of downsizing in Spain, it may be supposed that it would be even greater if the study took into account the other measures used in Spanish companies to reduce the workforce.

In the empirical analysis carried out, the choice of database is another limitation, since Spanish industrial companies have been chosen. This choice may mean that the conclusions reached from the results obtained are not valid for any other context. For this to be possible, the context would have to have several similarities from the institutional point of view related to downsizing i.e. a different geographical area in which the regulations and the normative/cognitive aspects have fomented the legitimization of downsizing in society. This would be the case of most western countries and contrasts with others, such as Japan (Ahmadjian and Robinson 2001).

Since the database is limited to Spanish industrial companies, this creates another limitation, which is the impossibility to generate conclusions that can then be extrapolated to other areas of activity, such as services. In these areas the literature predicts less impact of downsizing due to the employee-oriented culture (Budros 1997).

There is no doubt that the time interval studied in the empirical analysis constitutes another limitation of this work. Information is available from the ESEE surveys from 1990, but the period of study had to be restricted to 1994-2000, since in the previous years the sample of companies was not sufficient to validate the analysis. This makes it impossible to study the whole decade. Furthermore, information is lost for 1992 and 1993, which were particularly important years for downsizing as a result of the incidence of the world economic crisis. Although it would have been desirable to extend the period under study, this has not prevented significant evidence from being obtained to support the causal model proposed.


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The authors acknowledge the financial support from the Spanish Ministry of Science and Innovation, and FEDER (Project EC02011-24921).

Amalia Magan-Diaz, Universidad de Almeria

Jose Cespedes-Lorente, Universidad de Almeria
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Author:Magan-Diaz, Amalia; Cespedes-Lorente, Jose
Publication:Review of Business
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Date:Jun 22, 2012
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