Chapter 4The Interdependent Global Economy

• Introduction

• The Historic Atlantic Alliance

• The Pacific Rim

• Core and Periphery Relations

• The Role of Multinational Corporations

• The Changing Geography of Global Finances

• Global Communications and World Cities

Gottman’s Quotation

“Modern cities are the pillar’s of the developing global system.It is a poetic illusion to assume that the world is shrinking because communication improves. In reality the world of each of us constantly expands because, as we carry on, we find it necessary to deal with more and more people, in more places,with a greater number and diversity of problems. This is sofor individuals and also for cities.”

• Could be seen as another expression of Vance’s mercantilist model, or of Alonso’s bell-shaped development model• Historical characterization of European colonial empires

to supply commodities needed in the industrial revolution

Evolution of Global Trade• The Historic Atlantic Alliance

- Domination of Atlantic trade in global trade• Post WW-II Pacific Rim Development

Japan, 4 Tigers (S. Korea, Hong Kong, Taiwan, Singapore), Indonesia, Malaysia,

China, Thailand (Table 4.2)• Figure 4.1 (U.S. Exports), Figure 4.2 (Japan

exports), the Changing Position of China• New big trends: Movement of Mexican

Maquiladora production to China; Outsourcing to India (English), Africa (French), E. Europe (German)

Core and Periphery Relations (again)with more of a geopolitical spin

• Wallerstein’s core-periphery hierarchy– Figure 4.3– World Cities as the set of core focal points– His 4 epochs: (a) transitional period 1450-1640

(b) colonial capitalism (1640-1815) (c) British hegemony (1815-1917) (d) U.S. hegemony (1917- present)

Marked by: U.S. Military superiority; socialist experiments, decolonialization of the periphery, rise of multinational corporations

Dependency Theory

• Core growth only possible by exploitation of the periphery

• High levels of competition in primary producers, w/labor willing to work for low wages, in industries with depressed product prices, and a lack of internal investment to develop other industry in the internal economy.

The Brain Drain

• International Perspective in the text– (Japan vs. China)– The dramatically altered landscape since 9/11

• Could make the same arguments internally in countries, like the U.S.

• Regional differences in education system capacity & consequences for income earning possibilities for residents.

Location Quotients: S&E Graduate Students

.66

Washington State Employers Import Educated Labor to a greater extent than expected due to the small local higher ed system

The Role of Multinational Corporations

• The rise of large corporations and increase in concentration of power

• Types of market organization

• Evolution of multi-establishment corporations

• The ICI example in the text

Alternative Models of Competition

One Buyer A Few Buyers Many BuyersOne Seller Monopsony MonopolyA Few Sellers Oligopsony OligopolyLimited Quantityof Sellers

MonopolisticCompetition

Many Sellers PerfectCompetition

Barriers to Entry - High

Barriers to Entry - Low

Attributes of Alternative Market Types

Perfect Competition Monopoly OligopolyHomogeneoous products Unique Product Similar ProductsEach producer makes asmall share of output

One producer makes all ofthe product

Several sellers divide themarket

No one seller influencesPrices

Prices set to maximizeprofit

Prices set through pricingstrategies

Entry to market is easy High Barriers to Entry High Barriers to EntryFlow of information isPerfect, eliminating excessprofit

Monopolist is able tocontrol the market

Oligopolists engage instrategic behavior—competitive or collusive

Markets are fluid Market is rigid Market may be unstable,competitive strategies tocreate stability: productdifferentiation,advertising, industryagreements

“Pure” Monopoly

Trends in Business Concentration

•“Concentration ratios” as indicators of market structure

•Rising concentration in manufacturing in U.S. and U.K. over time

•Similar trend in other sectors

•Most industries are not monopolies, or perfectly competitive. The tendency is towards oligopoly AND often are part of

multi-establishment firms, often conglomerates

Size Distribution of Business Enterprises, U.S., 1997

0.09% of the businesses in the U.S. account for60% of total receipts

0 5000 10000 15000 20000

Non-Farm Proprietorships

Partnerships

Corporations less than $1 million

Corporations $1 - $4.9 million

Corporations $5 - $9.9 million

Corporations $10-$49.9 million

Corporations Over $50 million

Net Income

Receipts

Number of Businesses

0.1% of Enterprises account for 61% of Receipts

Examples of Concentration Ratios

50 Largest 24%100 Largest 32%150 Largest 38%200 Largest 42%

Share in 1992 of Value Added accounted for by thelargest companies, United States.

Examples of Concentration Ratios

SIC # of Companies

Value of Shipments ($ millions) 4 8 20 50

2421 5302 21065 14 20 31 443334 30 5849 59 82 99+ 1003721 151 62938 79 93 99 99+2011 1296 6959 50 66 79 882013 1128 5478 25 33 46 622015 373 23845 34 45 66 852021 31 1034 49 78 98 1002022 418 18344 42 60 74 862023 153 7541 43 55 76 942024 411 5291 24 40 68 872026 525 21921 22 30 49 68

Share of value of shipments accounted for by the x-largest companies:

Evidence of Mergers and DivestituresUnited States 1985-1999

0

2000

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10000

1985

1989

1990

1991

1992

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1997

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0

1000

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Number ofActions

Value ($Billions)

$#

Acquisitions and Divestitures, U.S., 1985-1999

0

1000

2000

3000

4000

5000

6000

7000

1985

1989

1990

1991

1992

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Acquisitions

Divestitures

#

Consequences of Mergers, Acquisitions & Corporate Expansion

• Most industries exhibit oligopolistic tendencies

• Leading corporations are multiestablishment

• Leading corporations are conglomerates

• Leading corporations are multinationals

• Truly global corporations now dominate international business: Table 4.4

“We live in a world of oligopolies, a world in which hundreds of thousands of small firms still exist but a relatively small number of large enterprises predominate.” P. 262, Lloyd & Dicken

The constant flux in global (and local) corporations

• Downsizing as a strategy

• Outsourcing

• “Re-engineering”

AND

• Simultaneously development of new businesses

• Development of new product lines in existing businesses

• Restructuring production locations

K2 shifts work, cuts half of staff on Vashon (Seattle Times 11/19)

“K2, a maker of skis and other sporting goods, said it will lay off half the workers at its Vashon Island plant as it moves half its ski and snowboard manufacturing to China and California and has suppliers make its bike products to cut costs.”

“The company expects the changes to save $4 million next year.”

“K2 makes skis, snowboards, inline skates and bikes under the K2 brand, as well as Olin skis and Shakespeare fishing tackle. It will move production to plants in Corona CA and China by year’s end.”

“K2 got the Corona plant as part of its recent acquisition of Preston-based snowboard-equipment maker Ride. It will house manufacturing of mid- to high-end snowboards. The rest of the company’s products will be made in China or outsourced.”

The Segmented Economy

• Dynamics in Firm Populations

• Averitt’s dual economy model

Center firms - large, dominant, complex in organization, powerful resources and influence

Peripheral firms - small, simple structures, weak resources, and little influence

David Birch’s Thundercloud

Birth Rates: ~ 10-12% of Existing PopulationDeath Rate: ~ 8-10% of Opening Stock of Businesses

Size

Big

SmallMost Firmsstay small forever

A few grow huge

Most fall backafter a short period

A small cohortbecome globalcorporations

Many voluntary startups andcessation's each year

A Model of the Segmented Economy by Taylor and Thrift

BUSINESSORGANIZATIONS

SmallerFirms

LargeFirms

Leaders

Intermediates

Laggards

Craftsman SatisfiedSatellites

Subcontractors Franchises

LoyalOpposition

Multidivisonal Global

Supports Laggards Intermediates Leaders

Lindahl & Beyers test in the producer services

Beyers & Lindahl Test of Segmented Industry In Producer Services

Leaders

Intermediates

Laggards

Declining Strugglers

High Fliers Still Growing, Exporters

Still Growing, Local

Right Industry

Satellites & Spin-Offs

Field Offices

Stabilizing

Craftsman Proprietor

Satisfied Small Business

Steady Cruisers