Global Shift: Mapping the Changing Contours of the World Economy

GLOBALShift SIXTH EDITION GLOBAL SHIFT 00Dicken4084Prelimsindd i 20102010 85728 PM Mapping the Changing Contours of the World Economy 00Dicken4084Prelimsindd ii 20102010 85728 PM Peter Dicken SIXTH EDITION GLOBAL SHIFT MAPPING THE CHANGING CONTOURS OF THE WORLD ECONOMY PETER DICKEN THE GUILFORD PRESS New York London 00Dicken4084Prelimsindd iii 20102010 85728 PM Copyright 2011 Peter Dicken First published in the United States of America by The Guilford Press A Division of Guilford Publications Inc 72 Spring Street New York NY 10012 wwwguilfordcom All rights reserved No part of this book may be reproduced translated stored in a retrieval system or transmitted in any form or by any means electronic mechanical photocopying microfilming recording or otherwise without written permission from the Publisher Printed in the United States of America This book is printed on acidfree paper Last digit is print number 9 8 7 6 5 4 3 2 1 Library of Congress CataloginginPublication Data Dicken Peter Global shift mapping the changing contours of the world economy by Peter Dicken 6th ed p cm Includes bibliographical references and index ISBN 9781609180065 pbk alk paper 1 Industries History 20th century 2 International economic relations 3 International business enterprises 4 Economic policy 5 Globalization Economic aspects 6 Technological innovations Economic aspects I Title HD2321D53 2011 33809051dc22 2010038275 For Lesley and Roger 00Dicken4084Prelimsindd iv 20102010 85728 PM Contents List of Abbreviations ix Preface to the Sixth Edition xi About the Companion Website xv 1 Introduction Questioning Globalization 1 What in the world is going on 1 Conflicting perspectives on globalization 4 Grounding globalization geography really does matter 6 PART ONE THE SHIFTING CONTOURS OF THE GLOBAL ECONOMY 11 2 Global Shift Changing Geographies of the Global Economy 13 Whats new The imprint of past geographies 14 Rollercoasters and interconnections 16 The changing contours of the global economic map global shifts in production trade and FDI 24 The dynamic global economic map 47 PART TWO PROCESSES OF GLOBAL SHIFT 49 3 Tangled Webs Unravelling Complexity in the Global Economy 51 An analytical point of entry 51 Institutional macrostructures of the global economy 54 Global production networks 56 Even in a globalizing world economic activities are geographically localized 69 Networks of networks 71 4 Technological Change Gales of Creative Destruction 75 Technology and economic transformation 76 Processes of technological change an evolutionary perspective 76 Timespace shrinking technologies 81 00Dicken4084Prelimsindd v 20102010 85728 PM vi Contents Technological innovations in products and processes 97 Geographies of innovation 102 5 Transnational Corporations The Primary Movers and Shapers of the Global Economy 109 Why firms transnationalize 110 How firms transnationalize 116 TNCs as networks within networks 121 Configuring the TNCs internal networks 127 TNCs within networks of externalized relationships 144 Perpetual change reshaping TNCs internal and external networks 158 The myth of the global corporation 162 6 The State Really Does Matter 169 The state is dead oh no it isnt 170 States as containers 172 States as regulators 178 States as competitors 199 States as collaborators 202 7 The Uneasy Relationship between TNCs and States Dynamics of Conflict and Collaboration 221 The ties that bind 221 Bargaining processes between TNCs and states 225 PART THREE THE PICTURE IN DIFFERENT ECONOMIC SECTORS 241 8 Making Holes in the Ground The Extractive Industries 243 Beginning at the beginning 243 Production circuits in the extractive industries 245 Global shifts in the extractive industries 247 Volatile demand 251 Technologies of exploring extracting refining distributing 253 The centrality of state involvement in the extractive industries 255 Corporate strategies in the extractive industries 260 Resources reserves and futures 266 9 We Are What We Eat The AgroFood Industries 270 Transformation of the food economy the local becomes global 270 Agrofood production circuits 272 Global shifts in the agrofood industries 275 Consumer choices and consumer resistances 279 Transforming technologies in agrofood production 282 00Dicken4084Prelimsindd vi 20102010 85728 PM vii Contents The role of the state 285 Corporate strategies in the agrofood industries 288 10 Fabricating Fashion The Clothing Industries 301 Changing rules 302 The clothing production circuit 302 Global shifts in the clothing industries 304 Changing patterns of consumption 306 Production costs and technology 308 The role of the state and the MultiFibre Arrangement 312 Corporate strategies in the clothing industries 314 Regionalizing production networks in the clothing industries 322 11 Wheels of Change The Automobile Industry 331 All change 331 The automobile production circuit 332 Global shifts in automobile production and trade 334 Changing patterns of consumption 337 Technological change in the automobile industry 339 The role of the state 342 Corporate strategies in the automobile industry 344 Regionalizing production networks in the automobile industry 356 12 Making the World Go Round Advanced Business Services Especially Finance 367 The centrality of advanced business services 368 The structure of advanced business services 369 Dynamics of the markets for advanced business services 372 Technological innovation and advanced business services 373 The role of the state regulation deregulation reregulation 377 Corporate strategies in advanced business services 380 Geographies of advanced business services 390 13 Making the Connections Moving the Goods Logistics and Distribution Services 399 Taking distribution for granted 399 The structure of logistics and distribution services 400 The dynamics of the market for logistics services 403 Technological innovation and logistics and distribution services 404 The role of the state regulation and deregulation of logistics and distribution services 410 Corporate strategies in logistics and distribution services 413 Logistics places key geographical nodes on the global logistics map 423 00Dicken4084Prelimsindd vii 20102010 85728 PM viii Contents PART FOUR WINNING AND LOSING IN THE GLOBAL ECONOMY 427 14 Capturing Value within Global Production Networks 429 Placing places in GPNs 429 Creating enhancing and capturing value in GPNs 432 Upgrading or downgrading of local economies within GPNs 433 15 Destroying Value Environmental Impacts of Global Production Networks 454 Productiondistributionconsumption as a system of materials flows and balances 454 Disturbing the delicate balance of life on earth damaging the earths atmosphere 457 Fouling the nest creating and disposing of waste 467 16 Winning and Losing Where You Live Really Matters 475 Location matters 476 Incomes and poverty 479 Where will the jobs come from 492 Populations on the move 511 17 Making the World a Better Place 524 Global shifts pasts and futures 525 The best of all possible worlds 528 TNCs and corporate social responsibility 530 States and issues of global governance 537 A better world 550 Bibliography 562 Index 594 About the Author 607 00Dicken4084Prelimsindd viii 20102010 85728 PM List of Abbreviations ABS Advanced business services AFTA ASEAN Free Trade Agreement APEC AsiaPacific Economic Cooperation Forum ASEAN Association of South East Asian Nations B2B Businesstobusiness B2C Businesstoconsumer BRIC Brazil Russia India China CAFTA Central American Free Trade Agreement CAP Common Agricultural Policy EU CME Coordinated market economy CSO Civil society organization CSR Corporate social responsibility CUSFTA CanadaUS Free Trade Agreement ECB European Central Bank ECE Eastern and Central Europe EDB Economic Development Board Singapore EMU European Monetary Union EOI Exportoriented industrialization EPB Economic Planning Board South Korea EPZ Export processing zone ETDZ Economic and Technological Development Zones China EU European Union FCCC Framework Convention on Climate Change FDI Foreign direct investment FTAA Free Trade Area of the Americas GATS General Agreement on Trade in Services GATT General Agreement on Tariffs and Trade GCC Global commodity chain GCSO Global civil society organization GDP Gross domestic product GHG Greenhouse gas GM Genetic modification GNH Gross national happiness GNI Gross national income GNP Gross national product GPN Global production network GSP Generalized system of preferences 00Dicken4084Prelimsindd ix 20102010 85728 PM x List of Abbreviations GVC Global value chain HVF Highvalue foods ICT Information and communications technology ILO International Labour Organization IMF International Monetary Fund IPCC Intergovernmental Panel on Climate Change ISI Importsubstituting industrialization IT Information technology JIT Justintime LAFTA Latin American Free Trade Area LAIA Latin American Intregation Association LDC Less developed country LME Liberal Market economy MAI Multinational Agreement on Investment METI Ministry for Economy Trade and Industry Japan MFA MultiFibre Arrangement MFN Mostfavoured nation MITI Ministry of International Trade and Industry Japan MNC Multinational corporation MSW Municipal solid waste NAC Newly Agriculturalizing Country NAFTA North American Free Trade Agreement NGO Nongovernmental organization NIE Newly Industrializing Economy NTB Nontariff barrier OECD Organization for Economic Cooperation and Development OFC Offshore financial centre OPEC Organization of the Petroleum Exporting Countries OPT Outward Processing Trade PLC Product life cycle PRC Peoples Republic of China PTA Preferential trading arrangement RD Research and development RIA Regional integration agreement RTA Regional trade agreement SEZ Special Economic Zones China SOE Stateowned enterprise SUV Sports utility vehicle SWF Sovereign wealth fund TCC Transnational capitalist class TEU Treaty on European Union TNC Transnational corporation TNI Transnationality index TRIMS Traderelated investment measures TRIPS Traderelated intellectual property rights UNCTAD United Nations Conference on Trade and Development WTO World Trade Organization 00Dicken4084Prelimsindd x 20102010 85728 PM Preface to the Sixth Edition As this sixth edition is published in 2011 it is exactly 25 years since the publica tion of the first edition in 1986 That in itself is a very sobering thought for all kinds of reasons What began in the early 1980s as a faltering and very naïve oneoff attempt to make sense of the changing geographies of the world economy has developed into an evolving longitudinal project Each subsequent edition in effect constitutes a temporal marker of the empirical changes in the configuration of the global economy and of changing interpretations of and attitudes towards globalization We tend to think of our world as one that is continuously changing That of course is a truism Underlying the surface of change there is a great deal of longerterm continuity Indeed one lesson I have learned from monitoring devel opments in the global economy over these past 25 years is the danger of making hasty judgements about immediate events and extrapolating them into the future Two current examples one macro and one micro illustrate my point Example one will the G20 really come to constitute a new global power structure thus ending the hegemony of the USled Western institutions that have dominated since 1945 Example two will the huge safety scandal that is currently engulfing Toyota result in permanent damage to its position as the worlds biggest automo bile manufacturer and change the competitive playing field in that industry In both cases as in all others only time will tell However our collective predictive track record is not especially good In the late 1990s for example many were predicting the demise of East Asia in the light of the regions 1997 financial crisis How wrong that prediction was At the same time however the nature of East Asia did change primarily although not entirely because of the reemergence of China It is important to keep this methodo logical problem in mind when we are in the midst of a global financial crisis of epic proportions Of course a great deal of attention is devoted throughout the book to the current global financial crisis The world will not be the same as it was we hope it will be better but we cannot clearly see what it will actually be like It will depend upon the choices society makes It is this interplay between the short and the long term that makes a project like Global Shift so challenging The exhortation to watch this space can never have been more apt 00Dicken4084Prelimsindd xi 20102010 85728 PM Shifting the Contours of the Global Community xii Preface to the Sixth Edition With these principles in mind the basic aim of this sixth edition as of its five predecessors is to provide a clear path through the dense thickets of what are large often conflicting often confusing debates and arguments about globalization to show how the global economy works and what its effects are It tries to separate the reality from the hype to provide a balanced grounded but emphatically not an uncritical perspective on a topic often richer in rhetoric than reality It focuses on the longerterm underlying processes of global economic change within which events of the moment can be better understood What is new about the sixth edition It is emphatically not a mere cosmetic exercise As in the previous editions I set out to produce the most uptodate and comprehensive account of economicgeographic globalization Hence all the empirical data have been fully updated using the latest available sources as of early 2010 Because maps and charts are so important to this book there are even more in this edition Although the established fourpart structure of the book remains I make greater use of the concept of the global production network GPN as a major organizing principle throughout the book in order to demonstrate the fun damentally relational nature of the processes involved and to emphasize the powerladen dynamics of the interactions between transnational corporations states consumers labour and civil society organizations Every chapter has been completely revised and extensively rewritten not only to take into account new empirical developments but also to incorporate new ideas on the shaping and reshap ing of production distribution and consumption in the global economy Two entirely new chapters have been written one on the extractive industries Chapter 8 the other on the environmental impacts of GPNs Chapter 15 Part Four in particular has been completely redesigned to produce a much tighter argument about the impacts of globalizing processes on people places and the environment The book is organized into four closely related but distinct parts Part One focuses on the shifting contours of the global economic map the global shifts that are continuously reshaping the global economy Part Two explores the complex and multifarious ways in which the actors institu tions and processes that make up the global economy interact to produce global production networks the gales of creative destruction set in motion by new tech nologies the increasingly complex and extensive production networks created and controlled by transnational corporations the actions of states in their roles as con tainers of distinctive institutions and practices as competitors and as collaborators with other states the uneasy relationships between TNCs and states as each tries to exercise bargaining power over the other Part Three presents six sectoral case studies to illustrate the diverse ways in which these processes actually operate Precisely how such networks are configured and operate precisely how TNCs states labour consumers and CSOs are involved precisely how they are subject to technological pressures vary enormously between different kinds of economic activity The six cases have been carefully chosen to range across the entire spectrum of economic activities from the 00Dicken4084Prelimsindd xii 20102010 85728 PM xiii Preface to the Sixth Edition basicprimary industries of mineral extraction and agrofood production through such key global manufacturing industries as clothing and automobiles to the advanced business financial logistical and distribution services that provide much of the lubrication of the global economy Part Four is concerned with winning and losing in the global economy the problems for national and local economies of capturing value in global production networks the destruction of value through environmental degradation the stag geringly uneven contours of development and finally the questions of how the world might be made a better place for all Global Shift is both a crossdisciplinary and a multilevel book It deliberately spans and draws from a wide range of academic disciplines including business and management development studies economics economic geography political sci ence and sociology amongst others At the same time the book is designed for use at different levels On the one hand my aim has been to make the book accessible to readers without prior specialist knowledge by ensuring that all key terms are clearly defined by avoiding excessive jargon and by making extensive use of graphics On the other hand for the specialist reader each chapter contains end ofchapter notes that connect to the extremely extensive and uptodate research bibliography Through such means the book should be useful to graduate students and researchers as well as to policy makers and to people in business Certainly my experience of the reception of previous editions suggests that this is the case With each successive edition my debt to friends colleagues and users of the book widens and deepens Indeed without a rich network of friends and colleagues from all round the world a book like this simply could not exist To all of them I offer my sincere thanks and I hope they will forgive me for not mentioning them all by name However several people deserve special mention Roger Lee despite the handicap of being a Manchester United supporter has provided the most remarkable support and inspiration over many years and above all with Lesley friendship and sharing of mutual interests and pleasures I hope they are not too embarrassed by the books dedication Nick Scarle Senior Car tographer at the University of Manchester has produced all the illustrations for every edition in a truly creative manner Always superb they have simply got bet ter and better Everybody who uses this book praises the graphics and I only wish I could take the credit for them I am very fortunate to remain part of the community of geographers at the University of Manchester and I much appreciate the friendship of colleagues there especially Gavin Bridge Noel Castree Neil Coe Martin Hess and Kevin Ward Gavin Neil and Martin deserve specific thanks Gavin provided invaluable advice and guidance on the extractive industries without which I could not have produced Chapter 8 of course he bears no responsibility for any weak parts of 00Dicken4084Prelimsindd xiii 20102010 85728 PM xiv Preface to the Sixth Edition that chapter Neil and Martin have been superb collaborators over a number of years most notably along with Henry Yeung in developing the global production network GPN framework for which Manchester has something of a reputation Neil specifically provided the data for Figure 910 I particularly want to thank Henry Yeung for so many things both professional and personal since he first burst into my office in 1992 My life was never the same after that I am immensely grateful to Liu Weidong for introducing me to China providing help with Chinese materials and translating an earlier edition into Chinese and Anders Malmberg for involving me in the vibrant academic community at Uppsala and for suggesting the subtitle or was it Anna as well as many other ways of improving the book over the years Kris Olds and Ray Hud son made detailed evaluations of the various editions that made me think about some ways forward None of these of course bears any responsibility for all the weaknesses that remain but they can certainly claim credit for any strengths and I am enormously grateful to all of them I am extremely grateful to the team at Sage Publications in London Sage is a publisher for whom I am proud to write In particular Robert Rojek is the most caring encouraging and stimulating publisher and friend He has been truly sup portive in every way He is also great to go to galleries with Katie Metzler has done brilliant work in helping to develop this edition in so many ways Katherine Haw has lavished great skill and care on creating a visually stimulating book Fiona Moore of Royal Holloway University of London has done an excellent job with the support materials for business and management users of the book Thanks too to Seymour Weingarten and the staff at The Guilford Press in New York As always of course it all ultimately comes back to the people who matter to me most of all my now dispersed family Sadly they continue to treat me with the disrespect I dont deserve But they are all Christopher and Annika in Ger many Michael Sally Jack and Harry in Switzerland such stimulating people and such great fun to be with And then there is my wife Valerie who makes every thing worthwhile and who still does so with so much love humour and toler ance despite threatening to leave me every time I start a new edition But shes still here And finally there are JSB LvB GM WAM HO DDKB MCO WB and so many many more Peter Dicken Manchester 2010 00Dicken4084Prelimsindd xiv 20102010 85728 PM About the Companion Website Be sure to visit the companion website accompanying the sixth edition at wwwguilfordcompdicken to find a range of teaching and learning materi als for lecturers and students The website has been expanded to offer tailored resources for lecturers and students in Geography International Business Sociology and Politics Online readings from journals have been provided for each discipline in addition to the resources designed for all of Global Shifts diverse users FOR LECTURERS PowerPoint Slides for each chapter containing all of the tables and figures from the book are available to be used in class Lecturers Notes Case Studies and additional pedagogical PowerPoint Slides are available to download from the website for International Business lec turers The slides can be edited by instructors to suit their needs and teaching styles FOR STUDENTS Full text Online Readings compiled from key journals in the field by academics in Geography International Business Sociology and Politics The full text journal articles are linked to the discussion within the book and provide additional coverage of key topics in each chapter A Glossary to check your understanding of key terms Annotated web links which take you to useful websites where you can find further empirical data reports and statistics 00Dicken4084Prelimsindd xv 20102010 85728 PM 00Dicken4084Prelimsindd xvi 20102010 85728 PM One INTRODUCTION QUESTIONING GLOBALIZATION CHAPTER OUTLINE What in the world is going on The end of the world Confusion and uncertainty Confl icting perspectives on globalization Hyperglobalists to the right and to the left Sceptical internationalists Grounding globalization geography really does matter What in the world is going on The end of the world On 15 September 2008 the fourth largest US investment bank Lehman Brothers collapsed It was an unprecedented event in the midst of what was developing into the biggest global economic crisis since the late 1920s Although the sudden demise of Lehman was only one of many casualties in the financial system in 2008 its col lapse was highly symbolic Lehman was one of those institutions that epitomized the neoliberal free market ideology sometimes known as the Washington Consensus that had dominated the global economy for the past half century This was the ide ology of free and efficient markets that the market knew best and all hindrances to its efficient operation were undesirable But in 2008 all this was suddenly thrown into question As one financial institution after another foundered as governments took on the role of firefighters and as several banks became in effect nationalized the entire marketdriven capitalist system seemed to be falling apart Question does the economic turmoil that began in 2008 herald the end of glo balization Well it all depends on what we mean by globalization It helps if we 01Dicken4084Ch01indd 1 19102010 110609 AM Introduction Questioning Globalization 2 distinguish between two broad meanings of globalization1 One refers to the actual structural changes that are occurring in the way the global economy is organized and integrated The other meaning refers to the neoliberal freemarket ideology of the globalization project Of course the two are not separate As a result confusion reigns It is too early to say whether the freemarket ideology has been irrevocably changed by the global financial crisis Many think it has Others believe that once the dust settles it will be business as usual That may or may not be the case But globalization as we shall see has never been the simple allembracing phenome non promulgated by the freemarket ideologists We need to take a much more critical and analytical view of what is actually going on over the longer term to move beyond the rhetoric to seek the reality That is one of the primary purposes of this book Confusion and uncertainty Globalization is a concept though not a term whose roots go back at least to the nineteenth century notably in the ideas of Karl Marx But it has only been in the last 30 years or so that globalization has entered the popular imagination in a really big way Now it seems to be everywhere A Google search reveals millions of entries Hardly a day goes by without its being invoked by politicians by academics by business and trade union leaders by journalists by commentators on radio and TV by consumer and environmental groups as well as by ordinary individuals Unfortunately it has become not only one of the most used but also one of the most misused and one of the most confused terms around today As Susan Strange argued it is too often a term used by a lot of woolly thinkers who lump together all sorts of super ficially converging trends and call it globalization without trying to distinguish what is important from what is trivial either in causes or in consequences2 The current explosion of interest in globalization reflects a pervasive feeling that something fundamental is happening in the world that there are lots of big issues that are somehow interconnected under the broad umbrella term globalization In the words of one contemporary commentator We live in an era in which everything has changed and most things are still changing The ice has melted on the familiar landscape of the second half of the 20th century Power in all its forms is shifting rapidly and unpredictably You might even say that we are at the beginning of history3 Such feelings of uncertainty are intensified by an increased awareness that what is happening in one part of the world is deeply and often very immediately affected by events happening in other parts of the world A crisis in an obscure financial market the US subprime housing market spreads almost instantaneously 01Dicken4084Ch01indd 2 19102010 110609 AM Introduction Questioning Globalization 3 to far distant places Part of this is simply the result of the revolution in electronic communications that has transformed the speed with which information spreads Nowadays we hear about events on the other side of the world virtually as they happen in real time But part of it is also to do with the fact that many of the things we use in our daily lives are derived from an increasingly complex geography of production distribution and consumption whose scale has become if not totally global at least vastly more extensive and whose choreography has become increas ingly intricate Many products indeed have such a complex geography with parts being made in different countries and then assembled somewhere else that labels of origin no longer have meaning To the individual citizen the most obvious indicators of change are those which impinge most directly on herhis daily activities making a living acquiring the necessities of life providing for their children to sustain their future In the industrial ized countries there is fear very much intensified by the current financial crisis that the dual and connected forces of technological change and global shifts in the location of economic activities are adversely transforming employment prospects The current waves of concern about the outsourcing and offshoring of jobs in the IT service industries notably though not exclusively to India or the more general fear that manufacturing jobs are being sucked into a newly emergent China or into other emerging economies suddenly growing at breakneck speed are only the most recent examples of such fears At the same time the spectres of global climate change and energy uncertainties raise even bigger questions over the future But the problems of the industrialized countries pale into insignificance when set against those of the poorest countries in what used to be called the Third World Although there are indeed losers in the developed and affluent countries their magnitude is totally dwarfed by the poverty and deprivation of much of Africa and of many parts of South Asia and of Latin America The development gap continues to widen the disparity between rich and poor continues to grow It is of course totally naïve to explain all such problems in terms of a single causal mechanism called globalization Establishing a link between globalization and inequality is fraught with diffi culty not only because of how globalization is defined and how inequality is measured but also because the entanglements between globalization forces and domestic trends are not that easy to separate out4 Despite or perhaps because of its woolliness globalization generates heated and polarized argument across the entire political and ideological spectrum Most dra matic of all since the turn of the millennium has been the proliferation of global protest movements the explosion of street demonstrations at major international political meetings notably of the WTO the G8 and most recently the G20 These have involved a remarkable mélange of pressure groups ranging from long established civil society organizations CSOs to totally new groups with either very 01Dicken4084Ch01indd 3 19102010 110609 AM Introduction Questioning Globalization 4 specific or very general foci for their protest together with anarchist and revolutionary elements with a broad anticapitalist agenda But beyond these organized movements there is growing evidence in world wide opinion polls of wide divergences of opinion on whether globalization is good or bad whether it is proceeding too quickly or proceeding too slowly A poll of 34500 people in 34 countries commissioned by the BBC World Service in 2008 concluded that in 22 out of 34 countries around the world the weight of opinion is that eco nomic globalization including trade and investment is growing too quickly Related to this unease is an even stronger view that the benefits and burdens of the economic developments of the last few years have not been shared fairly In developed countries those who have this view of unfairness are more likely to say that globalization is growing too quickly In contrast in some developing countries those who perceive such unfairness are more likely to say globalization is proceeding too slowly5 There is in fact a highly differentiated geography of the awareness of and attitudes towards globalization6 Conflicting perspectives on globalization The primary focus of this book is the global economy There are of course other forms of globalization political cultural and social and these are often difficult to separate Indeed the economy itself is not some kind of isolated entity Not only is it deeply embedded in social cultural and political processes and institutions but also these are themselves often substantially imbued with economic values Not surprisingly therefore this is a highly contested topic In this section we identify two of the major positions within the globalization debate7 Hyperglobalists to the right and to the left Probably the largest body of opinion and one that spans the entire politico ideological spectrum consists of what might be called the hyperglobalists who argue that we live in a borderless world in which the national is no longer relevant In such a world globalization is the new economic as well as political and cultural order It is a world where nationstates are no longer significant actors or meaning ful economic units and in which consumer tastes and cultures are homogenized and satisfied through the provision of standardized global products created by global corporations with no allegiance to place or community Thus the global is claimed to be the natural order an inevitable state of affairs in which timespace has been compressed the end of geography has arrived and everywhere is becoming the 01Dicken4084Ch01indd 4 19102010 110609 AM Figure 11 Globalization as inevitable trajectory the hyperglobalist view Introduction Questioning Globalization 6 a malign and destructive force Free markets it is argued inevitably create inequalities By extension the globalization of markets increases the scale and extent of such inequalities Unregulated markets inevitably lead to a reduction in wellbeing for all but a small minority in the world as well as creating massive environmental problems Markets therefore must be regulated in the wider interest To some antiglobalists in fact the only logical solution is a complete rejection of globalization processes and a return to the local Sceptical internationalists Although the notion of a globalized economic world has become widely accepted some adopt a more sceptical position arguing that the newness of the current situa tion has been grossly exaggerated The world economy it is claimed was actually more open and more integrated in the half century prior to the First World War 18701913 than it is today11 The empirical evidence used to justify this position is quantitative and aggregative based on national states as statistical units Such data reveal a world in which trade investment and especially population migration flowed in increasingly large volumes between countries Indeed such levels of international trade and investment were not reached again after the world depression of the 1930s and the Second World War until the later decades of the twentieth century Indeed international population migration has not returned to those earlier levels at least in terms of the proportion of the world population involved in crossborder movement On the basis of such quantitative evidence Hirst and Thompson assert that we do not have a fully globalized economy we do have an international economy12 Grounding globalization geography really does matter Such nationallevel quantitative data need to be taken seriously But they are only part of the story They do not tell us what kinds of qualitative changes have been occurring in the global economy Most important have been the transformations in the where and the how of the material production distribution and consumption of goods and services including in particular finance Old geographies of production distribution and consumption are continuously being disrupted new geographies of production distribution and consumption are continuously being created There has been a huge transformation in the nature and the degree of interconnection in the world economy and especially in the speed with which such connectivity occurs involving both a stretching and an intensification of economic relationships Without doubt the world economy is a qualitatively different place from that of only 60 or 70 years ago although it is not so much more open as increasingly interconnected in rather different ways 01Dicken4084Ch01indd 6 19102010 110609 AM globalization is a supercomplex series of multicentric multiscalar multitemporal multiform and multiscalous processes Globalization therefore is not an inevitable endstate but rather a complex indeterminate set of processes operating very unevenly in both time and space As a result of these processes the nature and the degree of interconnection between different parts of the world is continuously in flux A major task therefore is to challenge some of the more egregious globalization myths The world is not flat contra Friedman The world is not borderless contra Ohmae Global corporations do not rule the world contra Korten Globalization is not always good contra the neoliberal hyperglobalizers Globalization is not always bad contra the antiglobalizers In questioning globalization therefore we need to get real to develop a firmly grounded understanding of both the processes involved and their impacts on peoples lives Of course there will always be differences of diagnosis prognosis and recommended treatment But at least these should be based on sound conceptual and empirical analysis This book represents an attempt to do this Introduction Questioning Globalization 9 NOTES 1 ChaseDunn et al 2000 2 Strange 1995 293 3 Stephens 2005 The reference to the beginning of history seems to be a deliberate contrast to Fukuyamas 1992 prediction of the end of history following the collapse of the Soviet system 4 Amin 2004 218 5 BBC World Service 2008 6 ILO 2004b 1223 7 Held and McGrew 2007 Chapter 1 provide a useful discussion of some of the major strands in the globalization debates See also Cameron and Palan 2004 8 Friedman 2005 9 For an example of this position see Friedman 1999 2005 More nuanced writers within this general framework include Bhagwati 2004 and Wolf 2004 10 See for example Greider 1997 11 Hirst and Thompson 1992 Hirst et al 2009 12 Hirst and Thompson 1992 394 13 See Feenstra 1998 Gereffi 2005 14 Mittelman 2000 4 15 Jessop 2002 11314 16 Thrift 1990 181 01Dicken4084Ch01indd 9 19102010 110610 AM 01Dicken4084Ch01indd 10 19102010 110610 AM PART ONE THE SHIFTING CONTOURS OF THE GLOBAL ECONOMY 02Dicken4084Ch02 Part 1indd 11 19102010 34909 PM 02Dicken4084Ch02 Part 1indd 12 19102010 34909 PM Two GLOBAL SHIFT CHANGING GEOGRAPHIES OF THE GLOBAL ECONOMY CHAPTER OUTLINE Whats new The imprint of past geographies Rollercoasters and interconnections Aggregate trends in global economic activity Growing interconnectedness within the global economy Trade has grown faster than output FDI has grown faster than trade Structural imbalances in the world economy The changing contours of the global economic map global shifts in production trade and FDI Continuing geographical concentration within the global economy the old and the new The BRICs a new phenomenon or a chaotic category The US still dominates the global economy though less so Europe is still a major player but its performance is uneven Emergence of the transitional economies of Eastern Europe and the Russian Federation Back to the future four tigers a dragon and the resurgence of Asia Japans rising sun The four tigers Rebirth of the dragon Indian summer Latin America unfulfi lled potential The persistent peripheries The microscale cities as foci of economic activity The mesoscale transborder clusters and corridors The dynamic global economic map 02Dicken4084Ch02 Part 1indd 13 19102010 34909 PM Part One The Shifting Contours of the Global Economy 14 Whats new The imprint of past geographies The global economic map is always in a state of becoming it is always in one sense new But it is never finished Old geographies of production distribution and consumption are continuously being disrupted and new geographies are con tinuously being created The new does not totally obliterate the old On the con trary there are complex processes of path dependency at work what already exists constitutes the preconditions on which the new develops Todays global eco nomic map therefore is the outcome of a long period of evolution during which the structures and relationships of previous historical periods help to shape the structures and relationships of subsequent periods In that sense we cannot fully understand the present without at least some understanding of the past Indeed traces of earlier economic maps earlier patterns of geographical specialization or divisions of labour continue to influence what is happening today although there are debates amongst economic historians over when we can first identify a world or a global economy To some this appeared during what has been called the long sixteenth century 1450 to 16401 or with the eighteenth century tran sition to an industrial world2 To others the key period was the second half of the nineteenth century3 Whatever by 1914 there was hardly a village or town anywhere on the globe whose prices were not influenced by distant foreign markets whose infrastructure was not financed by foreign capital whose engineering manufacturing and even business skills were not imported from abroad or whose labour markets were not influenced by the absence of those who had emigrated or by the presence of strangers who had immigrated The economic connections were intimate4 Over a period of 300 years or so therefore a global division of labour developed and intensified with industrialization in which the newly industrialized economies of the West led by the Atlantic economies notably Britain some Western European countries and later the US became increasingly dominant in a coreperiphery configuration Figure 21 Of course over time this structure became more com plex in detail and also changed in its geographical composition Some core economies experienced a progressive decline to semiperipheral status during the eighteenth century and new economies emerged especially in the late nineteenth and early twentieth centuries Figure 22 shows some of these dramatic changes notably the steep decline of Asia and the emergence to unrivalled dominance of the US measured in terms of shares of global gross domestic product GDP The broad contours of this coreperiphery global economic map persisted until the outbreak of the Second World War in 1939 Manufacturing production remained strongly concentrated in the core 71 per cent of world manufacturing production was concentrated in just four countries and almost 90 per cent in only 11 countries Japan produced only 35 per cent of the world total The group 02Dicken4084Ch02 Part 1indd 14 19102010 34909 PM Global Shift 15 Production of manufactured goods Source of raw materials and food stuffs Market for manufactured goods Periphery Core M ate ria ls et c M an uf act ur es Figure 21 A simple geographical division of labour core and periphery in the global economy China India Japan Asia excl Japan Africa Latin America France Germany Italy UK Western Europe United States 1700 1820 1870 1913 1950 0 10 20 of world GDP 30 40 Figure 22 Global shifts in GDP 17001950 Source calculated from Maddison 2001 Table B20 of core industrial countries sold twothirds of its manufactured exports to the periphery and absorbed fourfifths of the peripherys primary products5 This longestablished global division of labour was shattered by the Second World War Most of the worlds industrial capacity outside North America was destroyed At the same time new technologies were created and many existing industrial technologies were refined and improved The world economic system that emerged after 1945 reflected the new geopolitical realities of the postwar period particularly the sharp division between East and West as well as the 02Dicken4084Ch02 Part 1indd 15 19102010 34909 PM Part One The Shifting Contours of the Global Economy 16 harsh economic and social experiences of the 1930s The major geopolitical division of the world after 1945 was that between the capitalist West the US and its allies and the communist East the Soviet Union and its allies Outside these two major power blocs was the socalled Third World a highly heterogeneous but generally impoverished group of nations many of them still at that time under colonial domination Both major powers made strenuous efforts to extend their spheres of influence into the Third World The Soviet bloc drew clear boundaries around itself and its Eastern European satellites and created its own economic system quite separate at least initially from the capitalist market economies of the West In the West the economic order built after 1945 reflected the domination of the US Alone of all the major industrial nations the US had emerged from the war strengthened rather than weakened It had both the economic and technological capacity and the political power to lead the way in building a new order As Figure 22 shows by 1950 the US accounted for no less than 27 per cent of global GDP It is from this historical baseline therefore that recent global shifts in economic activity will be examined in this chapter Todays world is far more complex than it was even a few decades ago Since 1950 two highly significant political events have occurred the emergence of China into the global market economy although still under Communist Party control starting in 1979 and the collapse of the prevailing political systems in the Soviet Union and its Eastern European satellites in 1989 More broadly and most significantly we are seeing the reemergence of Asia as the worlds most dynamic economic region6 In 1700 Asia dominated its share of global GDP was 62 per cent compared with the Wests 23 per cent But by 1950 those positions had been almost exactly reversed the combined share of global GDP of Western economies was almost 60 per cent that of Asia including Japan was a mere 19 per cent Much of this was due to the relative economic decline of China and India In 1700 their combined share of global GDP was almost 50 per cent by 1950 it had plummeted to less than 10 per cent They had become totally peripheral Today the picture is very different East Asia is back Rollercoasters and interconnections Two particularly important features have characterized the global economy since 1950 the increased volatility of aggregate economic growth and the growing interconnectedness between different parts of the world Aggregate trends in global economic activity The path of economic growth certainly does not run smooth Its a rollercoaster Sometimes the ride is gentle with just minor ups and downs at other times the 02Dicken4084Ch02 Part 1indd 16 19102010 34910 PM Global Shift 17 ride is truly stomachwrenching with steep upward surges separated by vertiginous descents to what seem like bottomless depths Booms and slumps are endemic Between 1870 and 2006 there were no fewer than 255 recessions in a sample of 17 western economies However twothirds of the downturns were over within a year and only 33 lasted longer than two years Apart from the reces sions associated with the world wars and the Great Depression there was a tendency for economies to show resilience and bounce back quickly7 Figure 23 depicts this rollercoaster pattern for the period since 1960 The years immediately following the Second World War were ones of basic reconstruction of wardamaged economies Rates of economic growth reached unprecedented levels the period between the early 1950s and the early 1970s became known as the golden age In fact it was only partly golden it was more golden in some places than others and for some people than others8 But then in the early 1970s the sky fell in The long boom suddenly went bust the golden age became tarnished Rates of growth again became extremely variable ranging from the negative growth rates of 1982 through to two years 1984 and 1988 when growth of world merchandise trade reached the levels of the 1960s once again But then in the early 1990s recession returned In 1994 and 1995 strong export growth reappeared A similarly volatile pattern characterized the final years of the twentieth century There was spectacular growth in world trade in 1997 followed by far slower growth in 1998 and 1999 partly related to the East Asian financial crisis and to its contagious effects on other parts of the world Then once again there was spectacular 0 2 4 2 Average annual percentage change 1980 1990 1985 1995 2000 2005 6 8 10 12 Output Exports 196069 197079 Figure 23 The rollercoaster of world merchandise production and trade 19602008 Source calculated from GATTWTO International Trade Statistics various issues 02Dicken4084Ch02 Part 1indd 17 19102010 34910 PM Part One The Shifting Contours of the Global Economy 18 acceleration in world trade in 2000 followed by an equally spectacular bursting of the growth bubble a problem certainly exacerbated though not caused by the 911 terrorist attacks on New York City and by the crisis in the IT dotcom sector of the socalled new economy High growth rates returned once again Then in 2008 seemingly without warning the deepest recession since the late 1920s suddenly occurred The roller coaster was back with a vengeance The most recent golden age of the 2000s as it seemed at the time was shortlived However we are too close to events to be able to predict what happens next On the one hand in early 2009 it appeared that global trade was in freefall9 and that the global economy was shrinking much faster than previously thought On the other hand by mid 2009 global trade was rising at its fastest rate in more than five years10 By the time you read this book things will have changed again Whatever the precise situation however there is little doubt that the 2008 recession will have longlasting though very uneven effects In the words of the OECD SecretaryGeneral its not just a case of saying the world will recover its growth in 2010 and then live happily ever after there are wounds and there is scar tissue11 Growing interconnectedness within the global economy One major characteristic of global economic growth therefore is its inherent volatility A second is the increasing interconnectedness of the global economy Such interconnectedness has three major dimensions trade has grown faster than output foreign direct investment has grown faster than trade and serious structural imbalances in the world economy have emerged Lets look at each of these Trade has grown faster than output Figure 23 shows that exports have grown much faster than output in virtually every year since 1960 In the second half of the twentieth century world merchan dise trade increased almost twentyfold while world merchandise production increased just over sixfold More and more production is being traded across national boundaries Countries are becoming more tightly interconnected through trade flows This is reflected in the ratio of trade to GDP The higher the figure the greater is the dependence on external trade There is huge variation between countries in such trade integration For example international trade is bound to be more important for geographically small countries than for large ones the result of a simple size effect contrast say the US with Singapore However in virtually all cases the importance of trade to national GDP has increased significantly as Table 21 shows Figure 24 maps the network of world merchandise trade It shows the strong tendency for countries to trade most with their neighbours 02Dicken4084Ch02 Part 1indd 18 19102010 34910 PM Global Shift 19 Europe North America CIS Middle East Japan Africa Latin America Other Asia and Oceania 6500 2500 1000 500 Total merchandise trade billions Trade flows billions Internal trade External trade 700 350 100 20 20 billion not shown Figure 24 The network of world trade 2008 Source calculated from WTO 2009 Table A2 Table 21 The increasing importance of trade for national economies 19602007 exports imports as GDP 1960 1970 1985 1995 2007 By income group High income 237 271 373 398 491 Middle income 559 559 Uppermiddle income 343 364 418 514 520 Lowermiddle income 587 596 Low income 346 418 605 626 By region East Asia and Pacific 201 186 357 583 753 China 93 52 240 404 678 India 125 82 150 277 308 Latin America and Caribbean 258 234 308 356 412 SubSaharan Africa 474 443 510 561 597 World 245 271 371 425 510 Source based on Kaplinsky 2004 Table 1 World Bank 2009a Table 61 02Dicken4084Ch02 Part 1indd 19 19102010 34910 PM Europe is the worlds major trading region However almost threequarters of that trade is intraregional that is between European countries themselves Around 7 per cent of Europes exports go to North America and 7 per cent to Asia including Japan Asia is the second most significant trade region with a little under onehalf of its trade conducted internally Just under onefifth of Asias external trade goes to North America and a further 18 per cent to Europe North America also conducts around 50 per cent of its trade internally with an especially large increase in trade involving Mexico Asia and Europe each account for almost 20 per cent of North Americas external trade and Latin America for 8 per cent Global Shift 21 90 per cent of US exports and imports flow through a US TNC with roughly 50 per cent of US trade flows occurring between affiliates of the same TNC14 Unlike the kind of trade assumed in international trade theory intrafirm trade does not take place on an armslength basis It is subject not to external market prices but to the internal decisions of TNCs Such trade has become especially important as the production networks of TNCs have become more complex and in particular as production circuits have become more fragmented Such disintegration of production itself leads to more trade as intermediate inputs cross borders several times during the manufacturing process15 These are processes we will examine in some detail in Chapter 5 A further measure of global integration therefore is the relative importance of inward and outward FDI to a countrys economy measured by its GDP Again we might expect there to be some correlation with country size although other factors are significant not least in the case of inward FDI differing national policies see Chapter 6 The relative importance of FDI to national economies has increased virtually across the board a clear indication of increased inter connectedness within the global economy But as in the case of trade the relative 20 40 60 0 20 40 Annual percentage change 1996 2000 2001 2002 2003 2004 2005 2006 2007 2008 Exports FDI 400 300 200 100 1985 1990 1994 Index 1985 100 Exports FDI 300 200 100 1975 1980 1985 Index 1975 100 Exports FDI Figure 25 Growth of foreign direct investment compared with exports 19752008 Source calculated from UNCTAD World Investment Report various issues 02Dicken4084Ch02 Part 1indd 21 19102010 34910 PM Part One The Shifting Contours of the Global Economy 22 importance of FDI to national economies is highly variable Table 22 shows this for a sample of countries In virtually all cases inward FDI has increased greatly in relative importance Structural imbalances in the world economy The flexing and fluxing global economic map is the outcome of the major global shifts that have occurred over the past four decades or so It is made up of complex interconnections most notably those constituted through networks of trade and FDI But such flows have created huge structural imbalances within the global economy Figures 26 to 28 show the pattern of trade balances in manufacturing services and agriculture The accumulated result of these three sets of trade bal ances creates a huge dilemma for the global economy the potential instability created by the fact that some countries have huge trade and current account surpluses whilst others have enormous deficits Countries with trade surpluses accumulated capital beyond their capacity to absorb it Many ran large current account surpluses and accumulated record reserves Countries with trade deficits financed their current account by increased borrowing abroad Chinas current account surplus rose from 2 per cent of GDP in 2000 to an average of 10 per cent during 200507 The largest deficits were in highincome countries with the US accounting for Table 22 Inward foreign direct investment as a share of gross domestic product 1990 and 2008 share of GDP 1990 2008 1990 2008 Japan 03 41 China 58 87 Italy 54 149 Korea 21 98 Germany 66 192 India 05 99 US 69 160 Taiwan 61 116 Australia 237 274 Philippines 74 127 Canada 196 275 Indonesia 77 131 Poland 02 307 Brazil 80 183 France 71 347 Argentina 62 230 UK 206 369 Mexico 85 271 Spain 128 396 Malaysia 234 330 Hungary 17 414 Thailand 97 384 Denmark 69 441 Vietnam 255 536 Czech Republic 39 527 Chile 332 596 Sweden 53 529 Singapore 831 1793 Ireland 889 637 Switzerland 150 761 Netherlands 233 740 Belgium 1029 Source based on data in UNCTAD 2001 2009 02Dicken4084Ch02 Part 1indd 22 19102010 34910 PM Global Shift 23 Figure 26 The pattern of merchandise trade surpluses and deficits 2008 Source calculated from WTO 2009 Tables A6 A7 882 400 20 100 1 Net merchandise trade balance billions Trade surplus Trade deficit 1535 100 10 50 1 Commercial services trade balance billions Trade surplus Trade deficit Figure 27 The pattern of services trade surpluses and deficits 2008 Source calculated from WTO 2009 Tables A8 A9 02Dicken4084Ch02 Part 1indd 23 19102010 34910 PM The changing contours of the global economic map global shifts in production trade and FDI So far we have been concerned with broad trends in economic activity emphasizing the volatility and increasing interconnectedness of the global economy In this section we look specifically at the changing configuration of the global economic map itself focusing on production trade and FDI This is illustrated in the series of figures collected together later in this section pp 3643 Shifting geographies of production in manufacturing services and agriculture are illustrated in Figures 210 to 212 Changing patterns of trade in the same sectors are shown in Figures 213 to 215 Changing patterns of foreign direct investment are shown in Figures 216 to 218 Global Shift 25 The figures are largely selfexplanatory and do not need individual discussion although they do merit close attention In what follows I will simply summarize some of the recent trends focusing on the major geographical components of the global economy The scale of analysis is primarily the nationstate simply because this is the only geographical scale for which comprehensive trade production and direct investment data are collected and published Continuing geographical concentration within the global economy the old and the new Substantial geographical shifts have undoubtedly occurred in the global eco nomic map in the last few decades Although the established developed econo mies continue to dominate their position has undoubtedly changed At the broadest level for example the developing countries share of GDP exports and inward FDI has increased significantly as Table 23 shows A small number of devel oping countries primarily in East Asia together with the Russian Federation and some of the Eastern European economies have emerged through rapid growth Table 23 Developing countries share of world production trade and foreign direct investment 1990 and 2007 1990 2007 Share of world GDP 184 260 Share of world exports 190 303 Share of world inward FDI stocks 206 287 Source calculated from World Bank and UNCTAD data Nevertheless the geographies of production trade and FDI remain highly uneven and strongly concentrated Around threequarters of global manufacturing and services production and almost fourfifths of world agricultural production are concentrated in just 15 countries Figures 210212 Around onefifth of world trade in goods services and agriculture is accounted for by the leading two countries in each sector Figures 213215 The picture is similar in the case of FDI More than 80 per cent of outward FDI stock originates from 15 countries the leading two source countries the US and the UK account for almost 30 per cent of the world total Figure 217 Half of all the inward FDI in developing countries is concentrated in just five host countries almost 30 per cent is concentrated in China and Hong Kong alone Figure 218 The newly industrializing economies NIEs that have become so important in global manufacturing have their agrofood counterparts the newly agriculturalizing countries NACs As in the case of manufacturing a small number of developing countries account for a disproportionate share of highvalue food production and exports Figure 211 For example 02Dicken4084Ch02 Part 1indd 25 19102010 34911 PM Part One The Shifting Contours of the Global Economy 26 Brazil is to agriculture what India is to business offshoring and China to manufacturing a powerhouse whose size and efficiency few competitors can match the country is the worlds largest or second largest exporter of sugar soybeans orange juice coffee tobacco and beef and is rapidly build ing a strong position in products such as cotton chicken and pork Brazil has the largest agricultural trade surplus in the world17 The BRICs a new phenomenon or a chaotic category Acronyms are seductive people are always on the lookout for a catchy label The term BRICs Brazil Russia India China was invented in 2001 by the chief economist of the US investment bank Goldman Sachs with the claim that these would become the major players in a future world economy Maybe they will Certainly they are big and have experienced rapid rates of economic growth in recent years But apart from this it is difficult to make a case for seeing them as a coherent grouping other than in the minds of investment bankers Their differ ences far outweigh their similarities Russia and Brazil are big commodity exporters whereas China is a big com modity importer China is a proponent of the Doha trade round India a scep tic India and China vie for influence in the Indian Ocean Russia and China compete in Central Asia18 China is substantially more important on every measure shown in Table 24 So these four potentially very important countries will be dealt with separately in this chapter in their geographical context rather than as an artificial grouping Table 24 The BRICs some vital statistics Share of world Share of world Av annual production exports world growth GDP 20007 Mfg Serv Agr Mfg Serv Agr Brazil 23 33 24 23 48 12 08 46 Russia 21 66 25 20 39 29 13 19 India 22 78 19 16 129 11 27 16 China 88 102 104 34 215 89 39 32 Total 154 172 93 431 141 87 113 Source calculated from World Bank data The US still dominates the global economy though less so The US has been the preeminent force in the global economy for almost 100 years having displaced the original industrial leader the UK early in the twen tieth century The US accounts for onefifth of the worlds manufacturing 02Dicken4084Ch02 Part 1indd 26 19102010 34911 PM Global Shift 27 production 28 per cent of services production and 8 per cent of agricultural pro duction It is also the worlds biggest foreign direct investor the largest exporter of commercial services and agricultural products and the third largest exporter of manufactured goods But although still the worlds leading economic power its dominance has been much reduced as other competitors have emerged Between 19801990 and 19902003 US GDP grew at an annual average rate of 36 and 33 per cent respectively slightly above the world growth rate of 33 and 28 per cent Between 2000 and 2007 its average annual rate of growth was 27 per cent below the world average of 32 per cent The 2008 recession hit the US especially hard the worst downturn in postwar history19 Over the longer run the deterioration in the US position is most apparent in the trade data although trade is a smaller proportion of GDP in the US than in all its major competitors apart from Japan Nevertheless the US share of world merchandise exports has fallen from 17 per cent in 1963 to less than 10 per cent At the same time its share of merchandise imports has surged from less than 9 per cent to 13 per cent Although US merchandise exports have grown at around 5 per cent a year imports have grown at between 8 and 9 per cent a year As a result as we have seen the US has an enormous trade deficit In effect it has become the importer of last resort for the global economy More pointedly China has become in effect Americas banker through its huge holdings of US Treasury bonds There have been very substantial changes in the US position as a source of and destination for FDI In 1960 the US generated almost 50 per cent of all the worlds FDI compared with less than 20 per cent today The biggest change however has been in the countrys position as a host for FDI Although the US has attracted FDI for many decades such inward investment was always a tiny fraction of the countrys outward FDI However the US has become significantly more important as an FDI destination Inward and outward FDI are now much more equal than in the past Europe is still a major player but its performance is uneven Europe as a region is the worlds biggest trading area and the primary focus of global FDI However despite being the most politically integrated region in the world see Chapter 6 the European economy is actually very diverse experiencing uneven rates of economic growth over the past two decades as well as uneven rates of decline in the 2008 recession Between 2000 and 2007 the average annual rate of GDP growth in the core European countries the EU15 was only 23 per cent significantly lower than the world average of 32 per cent and way behind the rates in East Asia and indeed in Eastern Europe In general prior to 2008 the fastestgrowing Western European countries were the more peripheral 02Dicken4084Ch02 Part 1indd 27 19102010 34911 PM Part One The Shifting Contours of the Global Economy 28 economies of Finland Norway Greece Ireland and Spain However the last three together with Portugal were heavily affected by the 2008 recession and experienced severe contraction Germany is by far the biggest European economy in global terms it is the fourth largest manufacturing producer after the US China and Japan the largest manufacturing exporter just but to be overtaken by China the third largest commercial services exporter and the third most important source of FDI But its growth in GDP has been below the world average for a long period only 11 per cent between 2000 and 2007 and it still faces difficult problems in integrating the former East Germany into the economy as a whole Europes second biggest economy the UK has experienced the greatest long term relative decline in so far as it once dominated the world However it is still the worlds second biggest source of FDI and second biggest exporter of commercial services Indeed its GDP growth rate has been very close to the world average over the past 20 years significantly better than either Germany or France Europes third largest economy Between 2000 and 2007 the UK economy grew by 26 per cent per year However the UK was hit harder by the 2008 recession largely because like the US its property bubble burst and it is also more highly exposed to the collapse in the financial sector than most other European countries There are considerable differences in trade performance between individual European countries Whereas France the UK Spain and Italy have merchandise trade deficits Germany the Netherlands and Sweden have surpluses In contrast in commercial services the UK has a big trade surplus France and Spain modest surpluses while Germany has a substantial deficit Europe remains a major magnet for inward investment as well as the leading source of outward FDI For all the major European countries excluding the UK more than half of their FDI outflows are to other European countries In most cases this regional orientation has actually increased Emergence of the transitional economies of Eastern Europe and the Russian Federation On 9 November 1989 the Berlin Wall came down making possible the reunifica tion of West and East Germany But this unforeseen event was of much broader significance It represented both a concrete and a symbolic indicator of enormous geopolitical and geoeconomic change The political collapse of the Sovietled group of countries and indeed of the Soviet Union itself produced a group of socalled transitional economies former command economies that transformed themselves into capitalist market economies The process of transition from a centrally planned economic system with a heavy emphasis on basic manufactur ing industries to a capitalist market system was painful in many cases The kinds 02Dicken4084Ch02 Part 1indd 28 19102010 34911 PM Global Shift 29 of industries favoured in the centrally planned system were less viable in the context of a highly competitive global economy as were the kinds of industrial organization themselves In 1985 for example the Soviet Union accounted for almost 10 per cent of world manufacturing output by the mid 1990s the share of the Russian Federation was around 1 per cent Despite considerable progress since then its share in 2008 was only 25 per cent Nevertheless as we saw earlier in discussing the BRICs Russia has become an increasingly significant presence in the global economy especially in terms of its wealth of extractive resources including oil and gas There are big differences within the group of economies both in terms of their scale and in terms of their potential for growth within a market as opposed to a centrally planned system The four most significant economies are the Russian Federation Poland the Czech Republic and Hungary although their combined share of global GDP is a mere 4 per cent Together these four account for most of the manufacturing production and exports The latter three became members of the European Union in 2005 and this undoubtedly changed their prospects for economic development These economies achieved impressive export performances during the 1990s Poland Hungary and the Czech Republic each had doubledigit export growth while the Russian Federation and Slovenia grew at around 78 per cent per year Much of this growth was underpinned by inward FDI which grew substantially from the early 1990s especially in the Czech Republic Hungary Poland Slovakia and the Russian Federation Between 2000 and 2007 the annual average growth rate of the leading Eastern European countries was 52 per cent Russia grew at an annual rate of 66 per cent between 2000 and 2007 on a par with or even better than some of the East Asian economies However the 2008 crisis created huge problems for these rather fragile economies and a real fear that Eastern Europe could experience the kind of economic collapse that occurred in East Asia in 1997 Back to the future four tigers a dragon and the resurgence of Asia Without any doubt the most significant global shift in the geography of the world economy during the past 50 years has been the resurgence of Asia especially East Asia As noted earlier this is in fact a real back to the future event although a complex one that is too often overhyped and oversimplified in the media Observers in the early 1980s began to write about the twentyfirst century being the Pacific Century and of the future belonging to Asia rather than to the North Atlantic economies as had been the case for 200 years But commentators are fickle The unexpected East Asian financial crisis of 1997 brought out the doom sayers More than 10 years on the position looks more like it did before 1997 the 02Dicken4084Ch02 Part 1indd 29 19102010 34911 PM Asia boosters are out again in force although now their focus is rather different The future it seems is China and possibly India Empirically the resurgence of Asia can be seen as consisting of four major processes The rise of Japan after the Second World War The rapid growth of what came to be called the four tigers the newly industrializing economies of Hong Kong Korea Singapore and Taiwan This was followed by the emergence of a second tier of East Asian developing economies primarily Indonesia Malaysia and Thailand The re emergence of China the dragon as a major participant in the global market economy The potential economic dynamism of India Japans rising sun We have become so obsessed with China that we tend to forget just how spectacular Japans postwar economic growth really was It is worth restating because it transformed the global economy and laid the foundations for the subsequent development of other parts of East Asia In the early 1960s Japan ranked fifth in the world economy by 1980 it had risen to second place During the 1960s Japans rate of manufacturing growth averaged 136 per cent per year twoandahalf times greater than the US and four times greater than the UK The Japanese economy continued to grow at very high rates throughout the 1970s and most of the 1980s Japans share of world FDI grew from less than 1 per cent in 1960 to almost 12 per cent in 1990 As a result Japan Inc came to be seen as the biggest threat facing both the US and Europe as a deluge of polemical protectionist literature especially in the US at the time demonstrated The four tigers At the same time as Japan was surging up the ranks of industrialized countries a small group of East Asian developing countries also appeared on the scene as foci of manufacturing growth especially in labourintensive industries The pioneers were the socalled four tiger economies of Hong Kong Korea Singapore and Taiwan In terms of manufacturing production for example Koreas manufacturing sector grew at annual average rates of 18 per cent during the 1960s 16 per cent during the 1970s 13 per cent during the 1980s and 7 per cent during the 1990s to 2003 Taiwans manufacturing sector grew at rates of 16 per cent 14 per cent 8 per cent and 6 per cent respectively during the same periods Global Shift 33 Figure 29 Chinas global trade network 2008 Source calculated from WTO 2009 Table A22 CIS CIS Korea Korea Japan Japan United States United States C and S America C and S America Taipei Taipei Hong Kong Hong Kong Asia Asia Africa Africa Middle East Middle East EU 27 EU 27 CHINA CHINA a Manufactures b Fuels and mining products 500 100 150 25 50 10 5 1 Billion dollars Billion dollars 02Dicken4084Ch02 Part 1indd 33 19102010 34911 PM Part One The Shifting Contours of the Global Economy 34 Indian summer Although most of the focus remains on China recently attention has been drawn to the other very large Asian country in population terms India Indeed some commentators envisage a world economy that will increasingly be dominated by Chindia defined by one writer as where the worlds workshop meets its office22 an allusion to Chinas growth as a manufacturer and to Indias growth in IT services But beware the hype India has recently shown spectacular growth in one specific type of economic activity the outsourcing of IT services software data processing call centres and the like As such it has attracted huge publicity and a growing view that India could be the next China given the size of its population and other advantages That may be so But at present the evidence is slender Indias GDP growth rate between 1980 and 2003 though well above the world average at between 5 and 6 per cent was half that of China during the same period Between 2000 and 2007 this difference lessened India grew at almost 8 per cent per year compared with Chinas 102 per cent India is the worlds 14th largest manufacturing economy China is the fourth largest India is not in the top 15 merchandise exporters China is the second largest Of course it might be argued that Indias strength lies in services rather than in manufacturing Certainly it is true that the share of services in Indias GDP is much higher than Chinas 52 per cent compared with 40 per cent Conversely India has only 16 per cent of its GDP in manufacturing compared with Chinas 32 per cent Despite this China generated 40 per cent more commercial services exports than India in 2008 Unlike all the other fastgrowing East Asian NIEs India does not have a strong export base in manufactures Chinas merchandise exports are eight times larger than Indias Indeed if India were ranked along with the nine leading NIEs of East Asia in terms of merchandise exports it would be next to last just ahead of Indonesia None of this is to suggest that India does not have the potential to become a really major economic power but at present the evidence is rather thin The rates of change between China and India are indeed getting closer but the level has remained consistently higher for China implying that in terms of absolute levels of achievement there is little likelihood of India catching up or overtaking China except hypothetically in the Keynesian long term that is when we are all dead India is projected to have a per capita income in 2050 that is still only 55 per cent that for China although Indian GDP per capita growth rates are projected to exceed Chinese rates by 202025 23 Latin America unfulfilled potential The Latin American and Caribbean region is once again facing a crisis of development In 20056 growth rates lagged behind those of emerging economies in Africa Asia and Eastern Europe and except in certain pockets indicators of social and human development were uninspiring and levels of inequality remained the highest in the world24 Latin American countries are among the most resourcerich in the world Several also have a long history of industrialization Some like Brazil and Mexico are in 02Dicken4084Ch02 Part 1indd 34 19102010 34912 PM Global Shift 35 population terms very large indeed And yet most of the Latin American econo mies have not figured very prominently in the redrawing of the global economic map Certainly their modest economic performance contrasts markedly with that of East Asia although annual average growth in GDP between 2000 and 2007 in most Latin American countries was a little above the world average Within Latin America itself there is a clear contrast between relatively fastergrowing econo mies like Chile and Mexico until recently on the one hand and relatively slowergrowing economies like Argentina and Brazil on the other None of these countries punches its weight as exporters over the past 20 years their average export growth has been significantly lower than that of the East Asian economies During the 1990s the major exception was Mexico which does not really regard itself as Latin American anyway Mexicos export growth rate of over 14 per cent undoubtedly reflected its increasing integration with the US through the North American Free Trade Agreement NAFTA see Chapter 6 However Mexicos recent economic performance has been weak Its GDP growth between 2000 and 2007 was the lowest among the regions major economies 26 per cent well below the world average as well More worrying for the Mexican economy is its failure to take advantage of its preferential access including its geographical proximity to the US In particular Mexico is being outcompeted in the US market by China Over half of Mexicos nonoil exports are under partial or direct threat from their Chinese counterparts This threat comprises all but a handful of Mexicos top 15 exports What is more recent changes indicate that Mexicos loss of export competitiveness to China may also be threatening the techno logical sophistication of its exports Since 1994 Mexico has gained ground on China only in primary products Thus Mexico is losing out in sectors abun dant in unskilled labor where valuetotransport costs are cheap but holding steady in assembly sectors where transport costs are more significant and NAFTAs rules of origin serve as local content rules mandating that production stay in North America such as lorries and autos25 Today as we saw earlier the money is on Brazil as one of the BRICs But as Table 24 shows Brazils GDP growth rate between 2000 and 2007 was by far the lowest of the four BRICs half that of Russia onethird that of China and less than half that of India Despite a long history of industrialization and some undoubted successes in automo biles for example see Chapter 11 Brazils involvement in the world economy is mainly in primary commodities agriculture mining products As such it is highly vulnerable to the fluctuations in commodity prices see Chapter 8 When commodity prices are very high as they were in the febrile gold rush conditions of the early to mid 2000s then all is well But in 2007 commodity prices collapsed Like India Brazil has enormous economic potential but such potential is far from being realized The persistent peripheries Alongside the areas of strong though differential economic growth in the global economy the peaks as it were are those parts of the world whose economic growth remains very limited These are the persistent peripheries All of the maps 02Dicken4084Ch02 Part 1indd 35 19102010 34912 PM Part One The Shifting Contours of the Global Economy 36 shown in Figures 210218 tell more or less the same story most of the continent of Africa parts of Asia and parts of Latin America constitute the troughs of the global economic map SubSaharan Africa as is so often noted is the largest single area of economic peripherality These are the parts of the world enmeshed in the deepest poverty and deprivation and whose existence poses one of the biggest social challenges of the twentyfirst century We will return to this issue in Part Four Figure 210 The global map of manufacturing production 2007 Source calculated from World Bank 2009a Table 42 1950 1000 100 500 1 Manufacturing production billions United States China Japan Germany United Kingdom Italy France Korea Russian Federation Brazil Canada Spain Mexico India Turkey 0 10 20 5 15 Percent of world total 02Dicken4084Ch02 Part 1indd 36 19102010 34912 PM Global Shift 37 10600 5000 200 1000 10 Services production billions United States Japan Germany United Kingdom France Italy China Spain Canada Brazil Russian Federation Mexico India Netherlands Australia 0 20 10 30 Percent of world total Figure 211 The global map of services production 2007 Source calculated from World Bank 2009a Table 42 02Dicken4084Ch02 Part 1indd 37 19102010 34913 PM Part One The Shifting Contours of the Global Economy 38 355 100 25 1 Agricultural production billions China India United States Brazil Russian Federation Indonesia Turkey France Japan Spain Italy Mexico Canada Germany Pakistan 0 20 10 Percent of world total Figure 212 The global map of agricultural production 2007 Source calculated from World Bank 2009a Table 42 02Dicken4084Ch02 Part 1indd 38 19102010 34914 PM Global Shift 39 1 or no data 10 Imports Exports 10 100 500 1000 2170 Merchandise trade billions Germany United States France United Kingdom Korea Spain China Germany Japan Japan Italy Netherlands Netherlands France Singapore Mexico United Kingdom Korea Belgium Italy Canada Canada Russian Federation Belgium United States China Hong Kong Hong Kong Saudi Arabia Singapore 0 0 10 10 15 5 5 Percent of world exports Percent of world imports Figure 213 The global map of merchandise trade 2008 Source calculated from WTO 2009 Tables A6 A7 02Dicken4084Ch02 Part 1indd 39 19102010 34915 PM Part One The Shifting Contours of the Global Economy 40 1 or no data 5 Imports Exports 5 50 200 525 Commercial services trade billions United States France Netherlands Germany Japan Italy China Belgium Korea Spain India Ireland United Kingdom Canada Singapore 0 10 5 Percent of world imports United States Spain Hong Kong United Kingdom France China Japan Switzerland Netherlands Italy Ireland India Germany Belgium Korea 0 10 15 5 Percent of world exports Figure 214 The global map of services trade 2008 Source calculated from WTO 2009 Tables A8 A9 02Dicken4084Ch02 Part 1indd 40 19102010 34916 PM Global Shift 41 No data 1 Imports Exports 1 10 50 150 615 Agricultural products trade billions EU 27 EU external Canada Indonesia United States Japan Korea Russian Federation Taipei Saudi Arabia Mexico Malaysia Hong Kong China Turkey Switzerland 0 10 5 Percent of world imports United States Argentina Mexico EU external Canada Indonesia China Chile Australia Thailand Russian Federation Malaysia Brazil New Zealand Vietnam 0 10 15 5 Percent of world exports Figure 215 The global map of agricultural trade 2008 Source calculated from WTO 2009 Tables II16 II17 02Dicken4084Ch02 Part 1indd 41 19102010 34916 PM Part One The Shifting Contours of the Global Economy 42 United States Hong Kong Belgium United Kingdom France Switzerland Netherlands Australia Spain Japan Italy Canada Germany Sweden Russian Federation 0 0 0 30 40 50 1960 1990 2008 10 10 10 20 20 20 Percent of world total of outward direct investment stock Figure 217 Changing shares of leading source countries in outward foreign direct investment 19602008 Source calculated from UNCTAD World Investment Report various issues 2 or no data 10 Inward Outward 10 100 500 1000 3162 FDI stocks billions Figure 216 The global map of inward and outward foreign direct investment 2008 Source calculated from UNCTAD 2009 Annex Table B2 02Dicken4084Ch02 Part 1indd 42 19102010 34916 PM Global Shift 43 The microscale cities as foci of economic activity If we could observe the earth from a very high altitude we certainly would not see the kinds of national economic boxes we have had to use as the basis of our analysis of the global economic map Particularly if we were making the observation at night what we would see are distinctive clusters picked out by the lights of localized agglomerations of activity This is the image used on the cover of this book To use a different metaphor the world is spiky26 Unfortunately data disaggregated in this way showing details of production trade and investment are simply not available We have to resort to surrogate measures or individual case studies But it is vital to stress this most fundamental fact of economic life the placespecific and clustered nature of most economic activity see Chapter 3 The most widely available microscale indicator of the localized clustering of economic activity is the map of the worlds cities Figure 219 Virtually all manufacturing and business service activity is located in urban places It is these cities and their associated local regions which generate a countrys economic activity not some national statistical box Within any individual country there is considerable diversity between cities and local regions not only in terms of their particular economic specializations but also in terms of their growth rates In most cases this reflects their specific historical trajectory In others however such differentials may be the outcome of very specific political decisions to develop one particular part of a country rather than another In some countries just one or perhaps two major cities dominate in other countries there is a flatter urban hierarchy and a wider spread of activity among more evenly sized cities Hong Kong Korea India China Singapore Chile Brazil Malaysia Argentina Nigeria Thailand Mexico 0 0 1990 2008 5 10 5 10 15 15 20 Percent of developing country total Figure 218 Concentration of inward foreign direct investment in developing countries 19902008 Source calculated from UNCTAD World Investment Report various issues 02Dicken4084Ch02 Part 1indd 43 19102010 34917 PM Part One The Shifting Contours of the Global Economy 44 Tokyo Tokyo Seoul Seoul Mexico City Mexico City Delhi Delhi Mumbai Mumbai New York New York São Paulo São Paulo Manila Manila Los Angeles Los Angeles Shanghai Shanghai Osaka Osaka Kolkata Kolkata Karachi Karachi Guangzhou Guangzhou Jakarta Jakarta Cairo Cairo Buenos Aires Buenos Aires Moscow Moscow Beijing Beijing Dhaka Dhaka Istanbul Istanbul Rio de Janeiro Rio de Janeiro Tehran Tehran London London 15299 3599 61199 named 12 or over Population millions Figure 219 The worlds major cities by size of population Source httpwwwcitypopulationdeworldAgglomerationshtml Increasingly however it is necessary to think of cities as being involved in networks that transcend national boundaries In one sense therefore the city is embedded in a global economy All cities today are world cities27 Cities differ in importance not only in terms of their population size Figure 219 but also and more importantly in terms of the functions they perform and the influence they exert In particular observers of world cities emphasize the role of highlevel service functions financial and business services corporate control and coordination functions and their uneven concentration in certain cities creating a global hierarchical network see Chapters 5 and 12 But it is extraordinarily difficult to produce a single map of the world city network28 One illustrative example is shown in Figure 220 based upon Taylors analysis of business advertisements in The Economist It shows the clear dominance of a relatively small number of cities Although different criteria would yield a rather different map in detail the dominant cities in the network recur again and again The inset table within Figure 220 shows the top 10 cities ranked in terms of their global network connectivity The mesoscale transborder clusters and corridors Cutting across both nationally bounded economic spaces and the highly localized con centrations of economic activity in cities lies a mesoscale of economicgeographic 02Dicken4084Ch02 Part 1indd 44 19102010 34917 PM London 100 New York 098 Hong Kong 071 Paris 070 Tokyo 069 Singapore 065 Chicago 062 Milan 060 Los Angeles 059 Madrid 059 Part One The Shifting Contours of the Global Economy 46 existence of a border between countries Where there is a very marked dif ferential between two adjacent countries for example in taxation rates or production costs there is often a strong incentive for development to occur on one side of the border to take advantages of benefits on the other side One of the best examples of this is the USMexico border the sharpest geographical interface between an extremely wealthy economy and a much poorer developing economy Far from being just a line on the map the US Mexican border is defined in the starkest of physical terms by a whole string of towns and concentrations of manufacturing activity along its entire length Figure 222 These simply would not exist at least in their present scale and form were it not for the border and the special legislation that created the maquiladora Lisbon Lisbon Madrid Madrid Valencia Valencia Barcelona Barcelona Toulouse Toulouse Lyon Lyon Marseille Marseille Paris Paris Dublin Dublin Glasgow Glasgow Manchester Manchester London London Amsterdam Amsterdam Rotterdam Rotterdam Brussels Brussels Hamburg Hamburg Copenhagen Copenhagen Oslo Oslo Stockholm Stockholm Berlin Berlin Prague Prague Vienna Vienna Frankfurt Frankfurt Düsseldorf Düsseldorf Stuttgart Stuttgart Munich Munich Zürich Zürich Milan Milan Genoa Genoa Rome Rome Naples Naples Athens Athens Nordic orbit Central and East European orbit Ottoman orbit Mediterranean orbit Atlantic arc Orbits of underdevelopment Europes vital axis Figure 221 Europes major growth axis Source based on Dunford 2007 Figure 1 02Dicken4084Ch02 Part 1indd 46 19102010 34918 PM Global Shift 47 The dynamic global economic map Todays global economic map is vastly more complicated than that of only a few decades ago Although there are clear elements of continuity dramatic changes have indeed occurred The overall trajectory of world economic growth has become increasingly volatile shortlived surges in economic growth are punctu ated by periods of downturn or even deep recession Within this uneven trajectory there has been major geographical reconfiguration Although a handful of older core economies still dominates although less so than in the past the most important single global shift of recent times has been the emergence of East Asia including the truly potential giant China as the dynamic growth region This together with the political events of 1989 in Eastern Europe and the former Soviet Union represents the most significant influence on the changing geography of the global economy However the fact remains that the actual extent of global shifts in economic activity is rather limited Only a small number of developing countries have experienced substantial economic growth a good many are in deep financial difficulty whilst others are at or even beyond the margins of survival Thus although we can indeed think in terms of a new global division of labour its extent is far more limited than is sometimes claimed A relatively simple global geographical division of San Diego Calexico El Paso Laredo McAllen Nogales Brownsville U N I T E D S TAT E S M E X I C O Mexicali Agua Prieta Nogales Chihuahua Ciudad Juárez Ciudad Acuña Nuevo Laredo Reynosa Monterrey Guadalupe Torreón Piedras Negras Tijuana Tecate Matamoros 100 240 Employees thousands 50 10 1 Figure 222 USMexico the border defines the pattern of economic activity Source calculated from data in Instituto Nacional de Estadístíca Geografía e Informática 2007 Industria Maquiladora de Exportación 02Dicken4084Ch02 Part 1indd 47 19102010 34918 PM Part One The Shifting Contours of the Global Economy 48 labour has been replaced by a far more complex multiscalar structure a mosaic of unevenness in a continuous state of flux30 NOTES 1 Wallerstein 1979 2 KozulWright 1995 137 3 See Bayly 2004 ORourke and Williamson 1999 4 ORourke and Williamson 1999 2 5 League of Nations 1945 6 Frank 1998 7 Paul Ormerod cited in The Guardian 15 December 2008 8 Webber and Rigby 1996 6 9 OECD figures cited in The Guardian 1 April 2009 10 Financial Times 26 September 2009 11 Cited in the Financial Times 25 June 2009 12 Historical trends in FDI are discussed by Dunning and Lundan 2008 KozulWright 1995 13 UNCTAD 2009 17 14 Blonigen 2006 1 15 Feenstra 1998 34 16 World Bank 2009a 3 17 Beattie 2005 17 18 The Economist 18 June 2009 19 Financial Times 1 March 2009 20 The Economist 20 July 2005 21 Wolf 2008a 22 Ramesh 2005 23 Saith 2008 748 24 Phillips 2009 231 25 Gallagher et al 2008 1376 26 Florida 2005 48 27 King 1983 7 15 28 Taylor 2004 provides a huge variety of mappings of world city networks based on different criteria 29 Dunford and Kafkalas 1992 25 27 30 Storper and Walker 1984 37 02Dicken4084Ch02 Part 1indd 48 19102010 34918 PM PART TWO PROCESSES OF GLOBAL SHIFT 03Dicken4084Ch03 Part 2indd 49 19102010 34939 PM 03Dicken4084Ch03 Part 2indd 50 19102010 34939 PM Three TANGLED WEBS UNRAVELLING COMPLEXITY IN THE GLOBAL ECONOMY CHAPTER OUTLINE An analytical point of entry Institutional macrostructures of the global economy Global production networks The core of a GPN transforming inputs into outputs The key role of services Financialization GPNs as arenas of contested relationships Transnational corporations Territorial embeddedness of production networks states as regulators in GPNs Labour Consumers Global civil society organizations The unevenness of power relations within GPNs Even in a globalizing world economic activities are geographically localized The bases of geographical clusters Why do clusters develop in the fi rst place Networks of networks An analytical point of entry In the previous chapter we explored the changing contours of the global economic map noting its immense geographical unevenness and temporal volatility We now 03Dicken4084Ch03 Part 2indd 51 19102010 34939 PM Part Two Processes of Global Shift 52 turn in the chapters of Part Two to the processes of globalization to an explanation of how these global shifts are brought about But this is far easier said than done Notwithstanding the hype of much of the globalization literature referred to in Chapter 1 there are emphatically no simple explanations of what are extremely complex and interrelated processes So how do we start What is a suitable analytical point of entry The conventional unit of analysis of the global economy is the individual country Its not difficult to see why this should be so Virtually all the statistical data on production trade FDI and the like are aggregated into national boxes Indeed the word statistics itself originally denoted facts collected about the state stateistics However such a level of statistical aggregation is less and less useful in light of the changes occurring in the organization of economic activity Unfortunately as in Chapter 2 we have to rely heavily on nationallevel data to explore the changing maps of production trade and FDI But because national boundaries no longer contain production processes in the way they once did we need to find ways of getting below the national scale to break out of the constraints of the national boxes in order to understand what is really going on in the world The clue to how we might proceed lies in the notion of connectivity As we saw in Chapter 1 a diagnostic characteristic of contemporary globalization is that the component parts of the world economy are increasingly interconnected in qualitatively different ways from the past Another way of saying this is that the world economy consists of tangled webs of production circuits and networks that cut through and across all geographical scales including the bounded territory of the state It is through an analysis of such networks their participants their interconnections their power relationships that we can begin to understand what is going on The critical point about networks is that they involve relational thinking What links people together across time and space How are things and people connected and embedded economically politically and culturally In what ways do goods and information and capital flow and why are they chan nelled down particular vertices and nodes Thinking in terms of networks forces us to theorize socioeconomic processes as intertwined and mutually constitutive1 Figure 31 is based on such a network perspective We need to bear in mind that it is an idealized representation of a world that is in reality infinitely more com plex Its purpose is to provide both a structural perspective on globalization pro cesses and outcomes and also a sense of how the key actors behave In particular it emphasizes the complex ways in which they are interconnected and governed through highly unequal power relationships Of course such a simplified diagram attempts the impossible to capture and represent the multidimensionality of the global economy in just two dimensions Inevitably it both grossly oversimplifies and also distorts relationships and causalities In particular it is difficult not to 03Dicken4084Ch03 Part 2indd 52 19102010 34939 PM Tangled Webs 53 imply a topdown set of processes whereas in fact we are dealing with a world of very complex dynamically interconnected and simultaneous processes So the three layers in Figure 31 are not hierarchical topdown levels but rather should be seen as three mutually interconnected slices Chapter 2 was concerned with the bottom slice it mapped some of the outcomes of globalizing processes Others will be examined in Parts Three and Four We can choose to cut into the highly interconnected system of Figure 31 at many different points according to our specific interest But that necessitates understanding the relationships between the chosen slice and the others For Macrostructures institutions conventions etc of capitalist market system Macrostructures institutions conventions etc of capitalist market system Circuits and networks of interaction mediated through differential power relationships in global production networks and through transnational social networks Circuits and networks of interaction mediated through differential power relationships in global production networks and through transnational social networks Uneven geographical distribution of goods and bads winners and losers Uneven geographical distribution of goods and bads winners and losers Firms Firms Labour Labour States States Consumers Consumers CSOs CSOs PROCESSES SPACETIME PROCESSES Evolutionary trajectories path dependencycontingency Space as relational topologicalmultiscalar Processes of embeddedness Processes of embeddedness Variegated capitalisms geographicallyspecific configurations of sociocultural practices and institutions OUTCOMES Figure 31 A simplified analytical framework of the global economy Source based on Dicken 2004 Figure 2 03Dicken4084Ch03 Part 2indd 53 19102010 34939 PM Part Two Processes of Global Shift 54 example the networks in the central slice of Figure 31 do not exist in isolation They are simultaneously both deeply embedded in the broader institutional macrostructures of the global economy the upper slice and grounded in the prevailing geographical structures of the material world the lower slice Both history and geography matter Previous structures and trajectories exert a powerful influence on present and future patterns and processes As we saw in Chapter 2 the precise geographical configuration of the global economy at any one point in time constrains though does not necessarily determine subsequent developments It constitutes the context within which subsequent processes operate The whole process is circuitous and highly path dependent In a similar vein we must think of geographical scale in rather more nuanced ways than the conventional globallocal dichotomy allows Figure 12 hinted at this However although terms like global local national or regional may be helpful a network perspective forces us to think of scale as a continuum rather than as a series of discrete boxes Instead of being thought of solely in territorial terms scale can also be conceived in topological that is relational terms2 Networks therefore may be seen as being more or less long and more or less connected3 But this sharp distinction between a territorial and a topological view of geographical scale should not be pushed too far A topological perspective is not in itself in conflict with the fact that in terms of jurisdictional and regulatory practices territorial scales of governance remain fundamental to the organization and operation of the global political economy and its constituent parts Bounded political spaces matter Some like the nationstate matter more than others Chapter 6 In this sense therefore we have a very complex situation in which topologically defined networks for example of TNCs see Chapter 5 both interrupt and are interrupted by politicalterritorial boundaries What matters however is to think of territories not simply as bounded spaces but more importantly as interrelated with a whole variety of other socially constructed scales of activity Globalizing processes therefore can be thought of as an increasing multiplication of scales local national regional global that overlap and interpenetrate in increasingly complex ways as the relationships between such scales change4 Institutional macrostructures of the global economy In this book I choose to focus primarily though not exclusively on the central slice of Figure 31 the major actors in the global economy and the webs of net worked relationships between them However adopting such an actorcentred approach runs the risk of underestimating even ignoring the broader social cul tural political and economic macrostructures in which such network processes 03Dicken4084Ch03 Part 2indd 54 19102010 34940 PM Tangled Webs 55 operate There is a real danger of focusing only on atomistic decisionmaking rather than understanding such decisions as being socially and institutionally situated enmeshed in wider structures of social economic and political rules procedures and conventions5 Institutions broadly defined therefore play a vital role in how network actors behave whether or not they are aware of this Such institutional influences are subtle but pervasive indeed often so subtle that firms and individuals are not even conscious of the impact they exert over their own choices practices attitudes values and expectations6 The macrostructures of the global economy are essentially the institutions conventions and rules of the capitalist market system These are not naturally given but socially constructed in their present form predominantly as a neo liberal politicaleconomic ideology Virtually the entire world economy has become a market economy Figure 32 maps the thickening web of multilateral agreements global and regional institutions and regimes and transgovernmen tal policy networks and summits7 that has developed during the past half century or so The International Monetary Fund IMF the World Trade Organization WTO and the World Bank together with the various G meet ings such as the G7 and more recently the G20 and the many international standardsetting organizations are the most obvious manifestations of such global institutions whose activities will be addressed at various points throughout the following chapters These global governance institutions are themselves only a part of the broader sociocultural matrix of practices rules and conventions that shape how the Figure 32 Major governance institutions in the global economy Source based in part on Cable 1999 Figure 31 Australia Argentina Brazil China India Indonesia Saudi Arabia South Africa South Korea Turkey Mexico Russia Germany Italy UK US France Canada Japan WTO Other regional blocs International standards organizations UN IMF World Bank EU G8 G20 G7 APEC ASEAN NAFTA OECD 03Dicken4084Ch03 Part 2indd 55 19102010 34940 PM The core of a GPN transforming inputs into outputs The core of a GPN is the circuit of interconnected functions operations and transactions through which a specific commodity good or service is produced distributed and consumed Note that services like any other item of consumption have to be produced Figure 33 identifies the major elements of a GPN the four basic operations connected by a series of transactions between one element and the next Inputs are transformed into products that are distributed and consumed But note that the processes are twoway It is a circuit rather than a chain in which materials semifinished goods and final products flow in one direction information the demands of customers tastes preferences etc and money payments for goods and services flow in the other direction technology inputs energy inputs service inputs logistical movement systems financial systems regulation coordination and control systems Part Two Processes of Global Shift 58 The key role of services Each of the individual elements in a production circuit depends upon many other kinds of input both those directly related to production and also those related to circulation In particular what are often called advanced business services ABS have become especially important Service functions are assuming a more pivotal role in the production pro cess At one level this is a reflection of a continuing escalation in the complexity of the division of labour At another profitability increasingly depends not just on the manufacturing part of the production process but on the knowledge aspects and service functions within which products are embedded RD design brand creation advertising finance pack ages service package or upgrade packages are now the sources of profitability10 Service activities not only provide linkages between the segments of pro duction within a production circuit and linkages between overlapping pro duction circuits but they also bind together the spheres of production and circulation Services have come to play a critical role because they not only provide geographical and transactional connections but they integrate and coordinate the atomized and globalized production process11 Chapters 12 and 13 examine these advanced business services in some detail At this point however we need to emphasize the dominant position of finance in contemporary economies Financialization Of all the advanced business services financial systems play the central role The decisions of financiers exert an extraordinarily powerful influence not only in lubricating production circuits but also in shaping them through their evaluative decisions on what and where to invest in order to gain the highest and sometimes the quickest return But there is more to finance than this One of the most significant developments of recent years has been the pervasive financialization of virtually all aspects of production distribution and consumption12 Financialization can be defined as the increasing role of financial motives financial markets financial actors and financial institutions in the operation of the domestic and international economies13 Financialization therefore consists of much more than just the increased importance of financial services firms More and more nonfinancial eg manufacturing firms are now driven by motives of financialization and this connects closely into the growing incidence of geographically dispersed tightly integrated GPNs controlled and coordinated by lead firms primarily TNCs 03Dicken4084Ch03 Part 2indd 58 19102010 34941 PM Tangled Webs 59 The shareholder value revolution beginning in the 1980s shifted power in corporate governance from managers to shareholders This resulted in a change in corporate strategy from the concern with firm growth through retaining profits and reinvesting them to an emphasis on shareholder value and shortrun return on investment through downsizing the firm and distribut ing a greater share of profits back to shareholders traditionally nonfinan cial firms became more like financial holding companies with a spectrum of financial services and financial investments swamping production in terms of their contribution to company revenues Largely coincidental with financialization in the 1980s was a growing tendency by firms to break up the process of producing goods and services and locate different parts in different locations depending on costs markets logistics or politics Financialization has encouraged a restructuring of production And the rising ability of firms to disintegrate production vertically and internationally has allowed these firms to maintain cost markups and thus profits and shareholder value even in a context of slower economic growth global production strategies have helped to sustain financialization14 In other words financialization is an allpervasive system of values based on the overriding prioritization of an equity culture in which shareholder value and profitability have become central to all aspects of economic activ ity to the virtual exclusion of all other interests It is a freemarket ideology in which regulation of financial markets is regarded with suspicion because it is seen to reduce market efficiency It is the market that is regarded as the most appropriate allocator of resources The 2008 global financial crisis made nonsense of this claim But what kind of future system will or should emerge is still unclear this is an issue we will address in the final chapter GPNs as arenas of contested relationships Individual production circuits are themselves enmeshed in broader production networks of inter and intrafirm relationships Such networks are in reality extremely complex structures with intricate links horizontal vertical diagonal forming multidimensional multilayered lattices of economic activity They vary considerably both within and between different economic sectors as we shall see in the case study chapters of Part Three In particular GPNs are not simply technicaleconomic mechanisms through which the production distribution and consumption of commodities goods and services occur They are simultaneously economic and political phenomena organizational fields in which actors struggle over the construction of economic relationships gover nance structures institutional rules and norms and discursive frames GPNs thus exist within the transnational space that is constituted and struc tured by transnational elites institutions ideologies15 03Dicken4084Ch03 Part 2indd 59 19102010 34941 PM Part Two Processes of Global Shift 60 In fact it is primarily the actions of and the interactions between the five actor centred networks shown in Figure 34 transnational corporations states labour consumers civil society organizations that shape the changing geographical configuration of the global economy through their differential involvement in production circuits and networks Let us look briefly at each of these five actors Much more will be said about each of them in subsequent chapters Transnational corporations In capitalist market economies production networks are coordinated and regulated primarily by business firms through the multifarious forms of intra and inter organizational relationships that constitute an economic system As Figure 35 shows economies are made up of many different types of business organization transnational and domestic large and small public and private in varying com binations and interrelationships The firms in each of the segments shown in Figure 35 operate over widely varying geographical ranges and perform rather different roles in the economic system A major theme of this book however is that it is the transnational corporation TNC that plays the key role in coordinating global production networks and therefore in shaping the geoeconomy Transnational corporations TNCs are firms that have the power to coordinate and control operations in more than one country even if they do not own them In fact TNCs generally do own such assets but they are also as we will see in Chapter 5 typically involved in intricate and multiple spiders webs of collaborative relationships with other legally independent firms across the globe Figure 34 Major actorcentred networks in the global economy Inputs Transformation Distribution Consumption Civil Society Organizations Transnational Corporations States Consumers Labour 03Dicken4084Ch03 Part 2indd 60 19102010 34941 PM The significance of the TNC lies in three basic characteristics its ability to coordinate and control various processes and transactions within transnational production networks both within and between different countries its potential ability to take advantage of geographical differences in the distribution of factors of production for example natural resources capital labour and in state policies for example taxes trade barriers subsidies its potential geographical flexibility an ability to switch and to reshift its resources and operations between locations at an international or even a global scale Hence much of the changing geography of the global economy is shaped by the TNC through its decisions to invest or not to invest in particular geographical locations It is shaped too by the resulting flows of materials components finished products technological and organizational expertise finance between its geographically dispersed operations Although the relative importance of TNCs varies considerably from sector to sector from country to country and between different parts of the same country there are now very few parts of the world in which TNC influence whether direct or indirect is not important In some cases indeed TNC influence on an areas economic fortunes can be overwhelming The nature of the coordination process within a TNCs production network depends in part on where the firm draws the boundary between those functions it internalizes ie performs inhouse and those it externalizes ie outsources to other firms Theoretically at one extreme the whole TNC production network may be internalized within the firm as a vertically integrated system crossing national boundaries In this case the links consist of a series of internalized transactions organized hierarchically through the firms internal organizational structure At the other extreme each function may be performed by separate firms In this case the links consist of a series of externalized transactions organized either through the market or in collaboration with other firms in a kind of virtual network Part Two Processes of Global Shift 62 This dichotomy between externalized marketgoverned transactions and internalized hierarchically governed transactions grossly simplifies the richness and diversity of the governance mechanisms in the contemporary economy In fact there is a spectrum of different forms of coordination consisting of networks of interrelationships within and between firms Such networks increasingly consist of a mix of intrafirm and interfirm structures These networks are dynamic and in a continuous state of flux the boundary between internalization and externalization is continually shifting They are also affected by the shifting power relationships between firms within a GPN In some cases one dominant actor calls all the shots in other cases power may be more widely dispersed with a greater degree of collaboration involved Territorial embeddedness of production networks states as regulators in GPNs Capital it is often argued has become hypermobile freed from the tyranny of distance and no longer tied to place In other words economic activity is becoming deterritorialized or disembedded The sociologist Manuel Castells argues that the forces of globalization especially those driven by the new informa tion technologies are replacing this space of places with a space of flows16 Anything can be located anywhere and if that does not work out can be moved somewhere else with ease But such seductive ideas are highly misleading The world is both a space of places and a space of flows GPNs dont just float freely in a spacelessplaceless world Although transportation and communications tech nologies have indeed been revolutionized see Chapter 4 both geographical distance and especially place are fundamental Every component in a GPN every firm every economic function is quite literally grounded in specific locations Such grounding is both physical in the form of the built environment and also less tangible in the form of localized social relationships and in distinctive institutions and cultural practices Hence the precise nature and articulation of firmcentred production networks are deeply influenced by the concrete sociopolitical institutional and cultural contexts within which they are embedded produced and reproduced17 The national state continues to be the most important bounded territorial form in which production networks are embedded Chapter 6 All the elements in a GPN are regulated within some kind of political structure whose basic unit is the national state but which also includes such supranational institutions as the IMF and the WTO regional economic groupings such as the EU or the NAFTA and local states at the subnational scale The international institutions themselves exist only because they are sanctioned by national states subnational institutions are commonly subservient to the national level although the situation is more complex in federal political systems As we shall see the number of national states has grown markedly in the past 20 years 03Dicken4084Ch03 Part 2indd 62 19102010 34942 PM Tangled Webs 63 All global production networks by definition have to operate within multiscalar regulatory systems They are therefore subject to a multiplicity of geographically variable political social and cultural influences On the one hand TNCs attempt to take advantage of national differences in regulatory regimes whilst on the other hand states attempt to minimize such regulatory arbitrage The result is a very complex situation in which firms and states are engaged in various kinds of power play Chapter 7 a triangular nexus of interactions comprising firmfirm state state and firmstate relationships Figure 3618 In other words the geoeconomy is essentially being structured and restructured not by the actions of either firms or states alone but by complex dynamic interactions between the two sets of institutions Of course TNCs and states are not the only actors involved in the operation of GPNs As Figure 31 suggests TNCs and states are continuously engaged in relationships with other major actors labour consumers civil society organizations some of which also have strong territorial bases Labour In most economic analyses labour tends to be treated as a commodity as a mere factor of production But such a dehumanized view overlooks the many and varied ways in which labour whether organized in labour unions or acting as individuals influences how production networks operate19 Indeed labour is absolutely central to production networks because it embodies the knowledge and skills necessary for production to be carried out All production of goods and ser vices needs labour either directly in the form of workers or indirectly in the labour that is embodied in machinery and equipment However there are significant Figure 36 The triangular nexus of relationships between firms and states Source based on Stopford and Strange 1991 Figure 16 StateState StateFirm FirmFirm 03Dicken4084Ch03 Part 2indd 63 19102010 34942 PM Part Two Processes of Global Shift 64 asymmetries in the relative power of labour and capital and these asymmetries have profound implications for how global production networks operate One of the most fundamental differences between labour and especially transnational capital in the form of TNCs is that on balance labour is more place bound and generally far less geographically mobile than capital Of course the strength of labours tie to place varies a great deal between different types of labour On average male workers are more mobile than female workers skilled workers are more mobile than unskilled workers professional whitecollar workers are more mobile than bluecollar workers Clearly there are exceptions to such generalizations as shown by the substantial waves of labour migration at different periods of history Such flows do not however contradict the basic point that labour is strongly differentiated spatially and deeply embedded in local communities in distinctive ways As Harvey has observed unlike other commodities labour power has to go home every night20 This spatial asymmetry between capital and labour though not the only issue is fundamental in the context of global production networks The dispersed nature of TNC operations and the tendency towards remoteness in corporate decision making have made it very difficult for labour unions which tend to be nationally based to organize effectively to counter such issues as plant closure or retrenchment In order to counteract the geographically extensive operations of TNCs therefore labour has to find ways of organizing across national boundaries Although there have been some successful international labour union initiatives their impact has been relatively limited21 Indeed the proportion of the labour force organized into labour unions has been falling for a long time For example in the US the unionization rate fell from 20 per cent of the labour force in 1983 to 12 per cent in 2006 in the EU there was a reduction in union membership of 15 per cent between 1993 and 2003 At the same time the effective global labour supply quadrupled between 1980 and 2005 as countries like China in particular became more integrated into the global economy Consumers Production networks involve more than just production they are driven ulti mately by the necessity the willingness and the ability of customers to acquire and consume the products themselves and to continue doing so see Figure 33 Each of the case study chapters of Part Three shows how the nature of consumption varies according to the specific sector involved Here we need simply to empha size some basic aspects of consumption processes First we need to distinguish between the consumption of producer goods or services sometimes called intermediate products because they are purchased by firms within a production circuit for further transformation and consumer goods final demand goods those purchased by individuals and households In fact the boundary between these two types of consumption is often blurred Second 03Dicken4084Ch03 Part 2indd 64 19102010 34942 PM Tangled Webs 65 consumption is very much more than merely the economic process of demand Obviously it is greatly influenced by levels of income But it is also a complex set of social and cultural processes in which all kinds of personal motivations are involved People buy or aspire to buy particular goods for a bewildering variety of reasons ranging from the satisfaction of basic needs to ensure survival food shelter clothing through to ever more sophisticated wants discretionary goods such as fashionable clothing particular kinds of car exotic or organic foods and the like Consumption therefore may be driven by the desire to acquire particular kinds of products even specific varieties or brands either because they are regarded as desirable in themselves or because they send out social messages signifying the particular lifestyles attitudes social positions or selfevaluations of the consumer Positional goods have become increasingly important However they lose their value as more and more people have access to them New positional goods have to be sought22 The material object being sold is never enough Commodities meet both the functional and symbolic needs of consumers Even commodities providing for the most mundane necessities of daily life must be imbued with symbolic qualities and culturally endowed meanings23 It is of course precisely these symbolic qualities of consumption that the advertising retailing and media industries attempt to manipulate How far consumption is or can be manipulated in such ways is open to question Some argue that consumption and consumers is becoming increasingly more important in the global economy than production and producers In Millers view the consumer has become the global dictator and he describes consumption as the vanguard of history24 The bewildering proliferation of choice within many product areas is a direct reflection of producers perceived need to meet the increasingly fragmented demands of consumers The days when Henry Ford could dictate to his potential customers by telling them that they could have any colour Model T as long as it was black are long gone Of course in many cases the variety on offer is more apparent than real heavily advertised newness often being little more than superficial modification But in some cases there is no doubt that consumer demands directly drive production circuits It is also clear that the emergence of the Internet Chapter 4 is transforming the abilities of consumers to make informed choices Consumers select what they want from a far greater variety of sources especially with a few clicks of a computer mouse Thanks to the internet the consumer is finally seizing power consumer power has profound implica tions for companies because it is changing the way the world shops Today windowshopping takes place online People can compare products prices and reputations25 03Dicken4084Ch03 Part 2indd 65 19102010 34942 PM Part Two Processes of Global Shift 66 Hence the idea that consumers are becoming more alike that local tastes and preferences are being replaced by global consumer brands needs to be treated with caution The globalization of markets identified by Levitt some 25 years ago is not as clear as he claimed26 Other than in a superficial sense Levitt has been proved wrong Consumer diversity is the norm almost everywhere Although there are some mostly generationrelated mass markets geographical variation in consumption patterns persists Indeed the experiences of many leading consumer product TNCs especially American show that failure to be sensitive to local variations in tastes and preferences can be almost fatal Global civil society organizations In so far as both labour and consumers are often though not always relatively powerless compared with the TNCs that dominate GPNs they need to organize to be effective The problem is that such organization needs to be transnational to operate on the same playing field as TNCs Within the past 25 years as Figures 37 and 38 show there has been phenomenal growth in the number and diversity of global civil society organizations GCSOs ranging from the pre1970 old social movements through the new social movements of the 1970s1980s the NGOs and the transnational civic networks of the late 1980s and 1990s the new 1900 1920 1940 1960 1980 2000 0 5000 10000 15000 20000 25000 Number of organizations Figure 37 The growth of global civil society organizations Source based on Glasius et al 2002 Figure 81 03Dicken4084Ch03 Part 2indd 66 19102010 34942 PM Tangled Webs 67 Capturing state power Changing statesociety relations Influencing civil society the state and international institutions Pressure on states and international institutions Capturing state power Confrontation with states internat ional institutions and transnational corporations Petition demonstration strike lobbying Use of media direct action Service provision advocacy expert knowledge use of media Parallel summits use of media use of local and expert knowledge advocacy Media mass rallies violence Parallel summits direct action use of media mobilization through Internet Vertical hierarchical Loose horizontal coalitions Ranges from bureaucratic and corporate to smallscale and informal Networks of NGOs social movements and grass roots groups Vertical and horizontal charismatic leadership Networks of NGOs social movements and grass roots groups Redistribution employment and welfare self determination and anticolonialism Human rights peace women environment third world solidarity Human rights development and poverty reduction humanitarianism conflict resolution Women dams land mines inter national criminal court global climate change Identity politics Solidarity with victims of global ization abolition or reform of global institutions Old social movements pre1970 Issues Forms of organization Forms of action Relation to power New social movements c 1970s and 1980s NGOs thinktanks commissions c late 1980s and 1990s Transnational civic networks c late 1980s and 1990s New nationalist and fundamentalist movements 1990s New anti capitalist movement c late 1990s and 2000s Figure 38 The diversity of global civil society organizations Source based on Kaldor 2003 Table 41 nationalist movements of the 1990s and the new anticapitalist movements of the late 1990s and 2000s They include the longestablished NGO pressure groups such as Oxfam Greenpeace and Friends of the Earth more recent ones like Jubilee 2000 organized labour unions like the AFLCIO or the TUC labour support organizations like Women Working Worldwide or the Maquila Solidarity Network organizations focused primarily on TNCs and big corporations like Corporate Watch or Global Exchange rightwing nationalistpopulist groups exemplified by such figures as Pat Buchanan in the US or JeanMarie Le Pens extreme right party in France anticapitalist groups like ATTAC or the Socialist Workers Party and various anarchist groups Widespread awareness of such groups dates primarily from the street protests at the Seattle WTO meeting in December 1999 Since then similar protests both peaceful and violent have occurred at virtually every international meeting of government leaders and of bodies such as the IMF the WTO the World Bank the G8 and more recently the Copenhagen global environmental summit Although the influence of GCSOs varies enormously there is no doubt that as important actors in the global system they have to be taken into account in any analysis of global production networks In some GPNs as we shall see in the case studies in Part Three and in Chapter 17 they are particularly prominent and have a significant influence on corporate behaviour 03Dicken4084Ch03 Part 2indd 67 19102010 34942 PM Part Two Processes of Global Shift 68 The unevenness of power relations within GPNs As we observed earlier GPNs are contested fields Each of the actors and institu tions involved has their own agendas The extent to which these can be realized depends on the relative power configuration in specific situations Significant variables in determining relative power are first control over key assets such as capital technology knowledge labour skills natural resources consumer markets and second the spatial and territorial range and flexibility of each of the actors The two are not unconnected Ability to control access to specific assets is a major bargaining strength Where such assets are available virtually everywhere then the power gradient is shallow or even nonexistent But where assets are localized whether geographically organizationally or even personally then the power gradi ent may be very steep However actors able to tap into localized assets across geographical space have a significant advantage over those without such spatial flexibility Power relationships within GPNs are highly asymmetrical But there is a further dimension Each of the major actors in GPNs is involved in both cooperation and collaboration on the one hand and conflict and competition on the other Such apparently paradoxical behaviour warns us against assuming that relationships between certain actors are always of one kind for example that those between TNCs or between TNCs and states or between TNCs and labour or between TNCs and CSOs are always conflictual or competitive Or conversely that relationships between groups of workers or labour organizations are always cooperative in the name of class solidarity Not so These various actor networks are imbued with an everchanging mixture of both conflict and collaboration Thus although power relationships within GPNs are asymmetrical they are not fixed So for example TNCs in the same industry are fierce competitors but also invariably enmeshed in a complex web of collaborative relationships see Chapter 5 States compete in cutthroat fashion with other states to entice internationally mobile investment by TNCs see Chapter 7 or to find ways to keep out certain types of imports whilst at the same time increasingly engaging in preferential trading arrangements including bilateral and multilateral agreements often within broader regional groupings see Chapter 6 Labour unions in one country engage in competition with labour unions in other countries in the scramble for new jobs or to protect existing jobs whilst at the same time unions strive to create international alliances with unions in other countries especially those involved in the geographically dispersed operations of major TNCs They also increasingly attempt to negotiate international framework agreements with TNCs to protect workers rights CSOs likewise are not immune from these conflicting actions In the context of the anti globalization protests for example CSOs have developed collaborations across national boundaries but at the same time the goals and values of individual CSOs are not always compatible to say the least 03Dicken4084Ch03 Part 2indd 68 19102010 34942 PM Tangled Webs 69 Even in a globalizing world economic activities are geographically localized The view of the hyperglobalizers see Chapter 1 is that increasing geographical dispersal at a global scale is now the norm But as we saw in Chapter 2 as soon as we break free of the national statistical boxes in which most economic data are packaged geographical concentrations of economic activity not only still exist but are indeed the normal state of affairs Such concentrations occur at different geo graphical scales though the most prominent is of course the city One of the most striking features of the global economic map therefore is the degree to which cities and localized clusters at smaller geographical scales dominate Why do such sticky places continue to exist in slippery space 27 The bases of geographical clusters Figure 39 identifies two types of geographical cluster generalized and specialized Both are based on the notion of externalities the positive spillovers created when activities in a particular place are connected with one another either directly through specific transactions or indirectly Both are based on the idea that the whole the cluster is greater than the sum of the parts because of the benefits that spatial proximity provides Geographical clusters of economic activity Generalized cluster Specialized cluster Urbanization economies Localization economies Externalities Traded interdependencies Untraded interdependencies Figure 39 The bases of geographical clusters 03Dicken4084Ch03 Part 2indd 69 19102010 34942 PM Generalized clusters simply reflect the fact that human activities tend to agglomerate to form urban areas Hence such benefits have traditionally been labelled urbanization economies General clustering of activities creates the basis for sharing the costs of a whole range of services Larger aggregate demand in say a large city encourages the emergence and growth of a variety of infrastructural economic social and cultural facilities that cannot be provided where their customers are geographically dispersed The larger the city quite obviously the greater the variety of available facilities and vice versa Specialized clusters on the other hand reflect the tendency for firms in the same or closely related industries to locate in the same places to form what are sometimes termed industrial districts or industrial spaces Such benefits have been called localization economies The bases of specialized clusters arise from the geographical proximity of firms performing different but linked functions in particular production networks Clusters generate two types of interdependency Traded interdependencies are direct transactions between firms in the cluster eg the supply of specialized inputs of intermediate products and services In such circumstances spatial proximity is a means of reducing transaction costs either through minimizing transportation costs or by reducing some of the uncertainties of customersupplier relationships Untraded interdependencies are the less tangible benefits ranging from the development of an appropriate pool of labour to particular kinds of institutions such as universities business associations government institutions and the like to broader sociocultural phenomena In particular geographical agglomeration or clustering facilitates three important processes facetoface contact social and cultural interaction and enhancement of knowledge and innovation Once established a cluster tends to grow through a process of cumulative selfreinforcing development involving attraction of linked activities stimulation of entrepreneurship and innovation deepening and widening of the local labour market economic diversification enrichment of the industrial atmosphere thickening of local institutions intensification of the sociocultural milieu enhanced physical infrastructures The cumulative nature of these processes of localized economic development suggests that the process is path dependent In other words an economy becomes locked into a pattern that is strongly influenced by its particular history This may be either a source of continued strength or if it embodies too much organizational or technological rigidity a source of weakness However even for successful clusters such path dependency does not imply the absolute inevitability of continued success Rigidity of local practices may reduce the capacity to adapt to external changes Cities rise and fall and some rise again if a new virtuous circle of development can be initiated Decline like growth can become locked in We can think of the global economy as the linking together of two sets of networks the organizational in the form of production circuits and networks the geographical in the form of localized clusters of economic activity The major advantage of adopting such a grounded network approach to understanding the global economy is that it helps us to appreciate the interconnectedness of economic activities across different geographical scales and within and across territorially bounded spaces The production of any commodity whether it 72 Part Two Processes of Global Shift is a manufactured product or a service involves an intricate articulation of individual activities and transactions across space and time Such production networks the nexus of interconnected functions and operations through which goods and ser vices are produced and distributed have become both organizationally and geographically more complex Global production networks not only integrate firms and parts of firms into structures which blur traditional organizational boundaries for example through the development of diverse forms of equity and nonequity relationships but also integrate national and local economies or parts of such economies in ways which have enormous implications for their economic development and well being At the same time the specific characteristics of national and local economies influence and refract the operation and form of largerscale processes In that sense geography matters a lot The process is especially complex because while states and local economies are essentially territorially specific production networks themselves are not29 Production networks slice through boundaries in highly differentiated ways influenced in part by regulatory and nonregulatory barriers and in part by local sociocultural conditions to create structures that are discontinuously territorial This has major implications for the relative bargaining powers of the actors involved including labour consumers and CSOs The geoeconomy therefore can be pictured as a geographically uneven highly complex and dynamic web of production networks economic spaces and places connected together through threads of flows Figure 310 captures the major dimensions of these relationships Individual production networks can be regarded as vertically organized structures configured Figure 310 Interconnecting dimensions in a globalizing economy Source based in part on Humbert 1994 Figure 1 a The vertical dimension Global production networks Global production networks Territorial systems at different geographical scales Territorial systems b The horizontal dimension c The global system Individual manufacturing and service sectors Region Nation Local community 03Dicken4084Ch03 Part 2indd 72 19102010 34942 PM 73 Tangled Webs across increasingly extensive geographical scales Cutting across these vertical structures are the territorially defined politicaleconomic systems which again are manifested at different geographical scales It is at the points of intersection of these dimensions in real geographical space where specific outcomes occur where the problems of existing within a globalizing economy whether as a business firm a government a local community or an individual have to be resolved NOTES 1 Mitchell 2000 392 2 Amin 2002 3 Latour quoted in Thrift 1996 5 4 See Swyngedouw 2000 5 Martin 2000 79 See also Berndt and Boeckler 2009 Lee 2006 2009 6 Gertler 2003 93 7 Held and McGrew 2007 137 8 Peck and Theodore 2007 9 The GPN concept is explored in detail in a theme issue of Journal of Economic Geography vol 8 2008 See in particular Coe et al 2008a Henderson et al 2002 The GPN perspective is closely related to but broader than that of global commod ity chains GCCs initially pioneered by Gary Gereffi 1994 2005 and global value chains GVCs developed by Gereffi et al 2005 See also Neilson and Pritchard 2009 10 Daniels and Bryson 2002 978 11 Rabach and Kim 1994 123 12 Dore 2008 Epstein 2005 Lee et al 2009 Milberg 2008 13 Epstein 2005 3 14 Milberg 2008 423 424 445 15 Levy 2008 948 16 Castells 1996 17 Granovetter 1985 pioneered the concept of embeddedness within the field of eco nomic sociology It has become a ubiquitous though contested term since then See Hess 2004 for a recent discussion of the concept in a spatialterritorial context Neilson and Pritchard 2009 stress the need to reinsert place and institutions in these analyses 18 Stopford and Strange 1991 19 See for example Castree et al 2004 Cumbers et al 2008 Herod 2001 Hudson 2001 Jones 2008 Peck 1996 20 Cited in Peck 2000 141 21 Some examples are provided by Cumbers et al 2008 Herod 2001 Wills 1998 2002 22 Hirsch 1977 03Dicken4084Ch03 Part 2indd 73 19102010 34943 PM Part Two Processes of Global Shift 74 23 Hudson 2005 65 24 Miller 1995 1 25 The Economist 2 April 2005 9 26 Levitt 1983 27 Markusen 1996 Clustering has become a hot topic in policy debates in virtually all parts of the world Martin and Sunley 2003 Porter 1990 1998 2000 However the concept itself as opposed to its policy connotations has a very long history See for example Amin and Thrift 1992 Bathelt et al 2004 Dicken and Lloyd 1990 Krugman 1998 Malmberg 1999 Scott 1998 2008 Storper 1995 1997 Storper and Venables 2004 28 Myrdal 1958 26 29 Dicken and Malmberg 2001 03Dicken4084Ch03 Part 2indd 74 19102010 34943 PM Four TECHNOLOGICAL CHANGE GALES OF CREATIVE DESTRUCTION CHAPTER OUTLINE Technology and economic transformation Processes of technological change an evolutionary perspective Types of technological change Long waves Information and communications technologies ICTs entering a digital world Timespace shrinking technologies Accelerating geographical mobility innovations in transportation technologies A shrinking world Takeoff the introduction of jet aircraft Moving in bulk containerization The unevenness of timespace convergence Everywhere is at the same place innovations in communications technologies Transmission channels satellites and optical fi bre cables The Internet the skeleton of cyberspace The electronic mass media Communications on the move towards a wireless world Digital divides an uneven world of communications Technological innovations in products and processes Product and process innovation Changes in production systems towards greater fl exibility and leanness Geographies of innovation National innovation systems Localized knowledge clusters 04Dicken4084Ch04indd 75 19102010 110650 AM Part Two Processes of Global Shift 76 Technology and economic transformation The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers goods the new methods of production or transportation the new markets the new forces of industrial organization that capitalist enterprise creates1 In writing these words Joseph Schumpeter set technological change specifically innovation the creation and diffusion of new ways of doing things at the very heart of the processes of economic growth and development2 Technological change is without any doubt a fundamental force in shaping the patterns of transformation of the economy3 Selfevidently therefore it is one of the most important processes underlying the globalization of economic activity However we must not see tech nology as being deterministic as causing a specific set of changes making particu lar structures and arrangements inevitable or creating a linear and predictable path of technological change Innovation is an unruly phenomenon4 Two important points need to be made First technology does not have a life of its own Specific choices within the frontier of technological possibilities are not the product of technological change they are rather the product of those who make the choices within the frontier of possibilities Technology does not drive choice choice drives technology5 Technological change therefore is a socially and institutionally embedded process The ways in which technologies are used even their very creation are conditioned by their social and their economic context In the contemporary world this means primarily the values and motivations of capitalist business enterprises operating within an intensely competitive system Choices and uses of technologies are influenced by the drive for profit capital accumulation and investment increased market share and so on Second technology should be seen as essentially an enabling or a facilitating agent It makes possible new structures new organizational and geographical arrangements of economic activities new products and new processes while not making particular outcomes inevitable It is emphatically not deterministic On the other hand in a highly competitive environment once a particular technology is in use by one firm then its adoption by others may become virtually essential to ensure competitive survival In this chapter we focus primarily on those aspects of technological change that specifically influence the globalization of economic activity Processes of technological change an evolutionary perspective Technological change is a form of learning by observing by doing by using of how to solve specific problems in a highly differentiated and volatile environment 04Dicken4084Ch04indd 76 19102010 110650 AM However it is much more than a narrowly technical process It is also about much more than just the new older technologies persist and often remain useful Technological change not only involves the invention of new things or new ways of doing things but also more importantly depends upon the transformation of inventions into usable innovations and the subsequent adoption and diffusion or spread of such innovations In the economic sphere this is essentially an entrepreneurial process Part Two Processes of Global Shift 78 Long waves The notion that economic growth occurs in a series of cycles or waves goes back almost 100 years One particular type of wave usually known as a Kondratiev wave Kwave is a long wave of more or less 50 years duration10 In Figure 41 four complete Kwaves are identified we are now in the early stages of a fifth Each wave may be divided into four phases prosperity recession depression and recovery Each wave tends to be associated with particularly significant techno logical changes around which other innovations in production distribution and organization swarm or cluster and ultimately spread through the economy Although such diffusion of technology stimulates economic growth and employment demographic social industrial financial and demand conditions also have to be appropriate In other words its the total package that counts At some point however growth slackens demand may become saturated or firms profits become squeezed through intensified competition As a result the level of new investment falls firms strive to rationalize and restructure their operations and unemployment rises Eventually the trough of the wave will be reached and eco nomic activity will turn up again A new sequence will be initiated on the basis of key technologies some of which may be based on innovations that emerged during recession itself and of new investment opportunities Although there is disagreement over the precise mechanisms and timing involved each of the waves is generally associated with changes in the technoeconomic paradigm as one set of technoeconomic practices is displaced by a new set This is not a sudden pro cess but one that occurs gradually and involves the ultimate crystallization of a new paradigm As Figure 41 shows the process of change involves more than just technical change Each phase is also associated with characteristic forms of economic orga nization cooperation and competition Organizational change has followed a path from an early focus on individual entrepreneurs in K1 through small firms but of larger average size in K2 to the monopolistic oligopolistic and cartel structures of K3 the centralized hierarchical TNCs of K4 and it is argued the network and alliance organizational forms of K5 These are issues we will explore in Chapter 5 Each successive Kwave also has a specific geography as technological leadership shifts over time both in terms of lead nations as the bottom row of Figure 41 makes clear and also at the microgeographical scale In effect the locus of the leadingedge innovative industries has switched from region to region from city to city11 a clear reflection of the clustering processes introduced in Chapter 3 Information and communications technologies ICTs entering a digital world The fifth Kondratiev cycle is associated primarily with information and communica tions technologies ICTs and especially with digital technologies 04Dicken4084Ch04indd 78 19102010 110650 AM Technological Change 79 K1 K2 K3 K4 K5 Early mechanization Kondratiev Steam power and railway Kondratiev Electrical and heavy engineering Kondratiev Fordist mass production Kondratiev Digital ITC Kondratiev 1770s80s 1830s40s 1880s90s Late 1940s Late 1990s Main carrier branches Infra structure Limitations of previous techno economic paradigms Solutions offered by new paradigms Organization of firms and forms of cooperation and competition Geographical focus Textiles Textile chemicals Textile machinery Iron working castings Water power Potteries Trunk canals Turnpike roads Britain France Belgium Britain France Belgium Germany USA Germany USA Britain France Belgium Netherlands Switzerland USA Germany other Europe Japan Switzerland Sweden other EFTA Canada Australia Japan USA Germany other Europe Sweden Taiwan Korea Canada Australia Individual entrepreneurs and small firms 100 employees competition Partnership structure facilitates cooperation of technical innovators and financial managers Local capital and individual wealth Limitations of scale process control and mechanization in domestic putting out system of hand operated tools and processes Solutions offering prospects of greater productivity and profitability through mechanization and factory organization in leading industries Railways Shipping Highnoon of smallfirm competition but larger firms now employing thousands rather than hundreds As firms and markets grow limited liability and joint stock company permit new pattern of investment risktaking and ownership Limitations of water power re inflexibility of location scale of production reliability and range of applications restricting development of mechanization and factory production to the economy as a whole Largely overcome by steam engine and new transport system Electricity supply and distribution Emergence of giant firms cartels trusts mergers Monopoly and oligopoly becomes typical Regulation or state ownership of natural monopolies and public utilities Concentration of banking and finance capital Emergence of specialized middle man agement in large firms Limitations of iron as an engineering material strength durability precision etc partly overcome by universal availability of cheap steel and alloys Limitations of inflexible belts pulleys etc driven by one large steam engine overcome by unit and group drive for electrical machinery overhead cranes power tools permitting vastly improved layout and capital saving Standardization facilitating worldwide operations Highways Airports airlines Oligopolistic competition Transnational corporations based on direct foreign investment and multiplant locations Competitive subcontracting on arms length basis or vertical integration Increasing concentration divisional ization and hierarchical control Technostructure in large corporations Limitations of scale of batch production overcome by flow processes and assembly line production techniques full standardization of components and materials and abundant cheap energy New patterns of industrial location and urban development through speed and flexibility of automobile and air transport Further cheapening of mass consumption products Digital networks Satellites Networks of large and small firms based increasingly on computer networks and close cooperation in technology quality control training investment planning and production planning justintime etc Diseconomies of scale and inflexibility of dedicated assemblyline and process plant partly overcome by flexible manufacturing systems networking and economies of scope Limitations of energy and materials intensity partly overcome by electronic control systems and components Limitations of hierarchical depart mentalization overcome by systemation networking and integration of design production and marketing Steam engines Steamships Machine tools Iron and steel Railway equipment Automobiles Trucks Tractors Tanks Aircraft Consumer durables Process plant Synthetic materials Petrochemicals Computers Digital info technology Internet Software Telecommunications Optical fibres Robotics Ceramics Biotechnology Electrical engineering Electrical machinery Cable and wire Heavy engineering armaments Steel ships Heavy chemicals Synthetic dyestuffs Prosperity Recession Recovery Depression Indices of economic activity Figure 41 Kondratiev long waves Source based in part on Freeman and Perez 1988 Table 31 For the first time in history information generation processing and transmission have become the main commodities and sources of productivity and power and not only a means of achieving better ways of doing things in the produc tion process New information technologies are not simply tools to be applied but processes to be developed12 04Dicken4084Ch04indd 79 19102010 110650 AM Part Two Processes of Global Shift 80 Information technologies in themselves are nothing new13 But the current generation of information technologies has one very special characteristic as Figure 42 shows It is based upon the convergence of two initially distinct technolo gies communications technologies concerned with the transmission of information and computer technologies concerned with the processing of information Both are now based on digital rather than analogue technologies Digitization is without doubt the most pervasive and influential technological development of recent years All kinds of information can now be stored in numerical binary form as electronic digits This means they can then be processed manipulated and stored by computers and transmitted anywhere in the world almost instantly In particular the remarkable and very recent growth of the Internet and of mobile telephony together with big changes in the electronic mass media are generating major global effects at all levels including individuals households local communities nation states and of course business organizations especially transnational corporations As the power and sophistication of computer technology have increased and as it has become increasingly widely available through networked systems it is 1940 1950 1960 1970 1980 1990 2000 1940 1950 1960 1970 1980 1990 2000 Singlefunction computers Generalpurpose computers Commercial computers Programming languages Transistor Integrated circuits Minicomputers Structured programming Database management systems dbms LSI Applications generators Microprocessors Relational dbms Spreadsheets VLSI Portable computers Logic languages Optical disk storage Expert systems Voice recognition Dataflow processors Wafer scale integration Gallium arsenide chips Parallel processing Learning capability Natural language recognition Optical chips Biochips Ultraintelligent machines Radio Military mobile radio Tape recording Cable TV Microwave links Crossbar switching Direct distance calling Video tape recording Communications satellites Digital communications Electronic switching Facsimile transmission Mobile radio Packet switching Videotext Teletext Optical fibre Videodisks Teleconferencing Local area networks Cellular radio Wide area networks Private satellites Integrated service digital networks Personal telephones Switched wideband services Internet Personal mobile communications Online enquiry Remote sensing devices Computeraided design Computeraided manufacture Computeraided diagnostics Electronic mail and teleconferencing Materials planning stock control scheduling Professional databases Management information systems Integrated text and data processing Transaction clearing systems Professional problemsolving Communications Technology Information Technologies Computer Technology Convergent IT Shift from analogue to digital systems Shift from analogue to digital systems Figure 42 Information technologies the convergence of communications technologies and computer technologies Source based on Freeman 1987 Figure 2 04Dicken4084Ch04indd 80 19102010 110650 AM Designed to house tens of thousands of PCs all wired together to work as a single supercomputer these are the informationprocessing equivalent of a nuclear power station able to pump data and software into millions of homes and businesses No corporate computing system not even those operated by big companies can match the efficiency speed and flexibility of plants such as Googles One analyst estimates that Google can carry out a computing task for onetenth of what it costs a typical company Cheap and plentiful electricity shaped the world we live in today The transformation in the supply of computing promises to have equally sweeping consequences Part Two Processes of Global Shift 82 have transformed societies in all kinds of ways From a specifically economic and business perspective two points are especially important First technologies of communications and transport shape and reshape systems of market access across and within geographical space Second communications revolutions are in effect control revolutions They change the environment of profit opportunities by providing firms with different and more intensified types of control over space and time in economic activity Such control in turn enables firms to create new routes to efficiency in the form of more innovative routines As firms discover these routes to more efficient routines they are compelled to assume new and different capabilities in order to capture the profit from doing things differently In recasting business practices and assuming new capabilities the innovative firm reorganizes the structure of its enterprise and in the process reshapes the territory in which it assumes control over newly crafted routines17 Through their influence on how and where business organizations are able to operate therefore these technologies have helped progressively to transform the economicgeographical landscape at increasing geographical scales and over shorter periods of time Figure 43 summarizes this process We will focus on how such transformations in firms activities and their geographies are actually being worked out later in this chapter and in Chapter 5 Before that we need to identify some of the major innovations in transportation and communications which have been so important in helping to transform the economic landscape Accelerating geographical mobility innovations in transportation technologies A shrinking world In terms of the time it takes to get from one part of the world to another there is no doubt that the world has shrunk dramatically Figure 44 Throughout most of human history the speed and efficiency of transportation were staggeringly low and the costs of overcoming the friction of distance prohibitively high Movement over land was especially slow and difficult before the development of the railways Indeed even as late as the early nineteenth century the means of transportation were not really very different from those prevailing 2000 years ago The major breakthrough came with two closely associated innovations steam power as a means of propulsion and the use of iron and steel for trains railway tracks and oceangoing vessels These coupled with the linking together of over land and oceanic transportation for example with the cutting of the canals at Suez and Panama greatly telescoped geographical distance at a global scale The railway and the steamship introduced a new and much enlarged scale of human activity The decline in global transportation cost was truly amazing18 For example 04Dicken4084Ch04indd 82 19102010 110651 AM Technological Change 83 the trade costs for grain the main internationally traded good fell by 40 per cent between 1880 and 1914 within Europe and between the US and Europe19 Flows of materials and products were enormously enhanced and the possibilities for geographical specialization greatly stimulated Such innovations were a major factor in the massive expansion in the global economic system during the nine teenth century The past few decades have seen an acceleration of this process of global shrinkage For example transportation costs fell from an average of 8 per cent of total import costs in 1970 to about 3 per cent in 200220 Two developments have been particularly important both of them appearing for the first time during the 1950s Profitmaking environment Transportation and communications revolution Transportation and communications revolution Transportation and communications infrastructure buildout Experimentation and innovation users Changes in business organization Territorial transformation Profitmaking environment Changes in technology Changes in market rules Changes in business strategies and routines Changes in flows of products information Changes in geography of economic activity Figure 43 Transportationcommunications revolutions and economic transformation Source based on Fields 2004 Figure 21 04Dicken4084Ch04indd 83 19102010 110651 AM Part Two Processes of Global Shift 84 15001840 18501930 1940s 1960s Best average speed of horsedrawn coaches and sailing ships was 10 mph Steam locomotives averaged 65 mph Steam ships averaged 36 mph Propeller aircraft 200300 mph Jet passenger aircraft 500600 mph Figure 44 Global shrinkage the effects of transportation innovations on real distance Source based on McHale 1969 Figure 1 04Dicken4084Ch04indd 84 19102010 110651 AM Technological Change 85 Takeoff the introduction of jet aircraft One was the introduction of commercial jet aircraft This had two major effects First it enabled unprecedentedly rapid individual travel over vast distances allowing facetoface meetings at times and in places hitherto unrealistic For TNCs in par ticular jet transport made possible the coordination and control of geographically dispersed operations Direct control at a distance became a reality It is no coinci dence that the takeoff of TNC growth and the more literal takeoff of commer cial jets both occurred during the 1950s One estimate is that 320 million people meet annually at professional and corporate events after travelling by air21 The second significant effect of jet transport was in the movement of certain kinds of freight Most heavy and bulky freight moves by sea but for certain kinds of good and certain kinds of activity air transport is crucial Between 1950 and 2004 air freight prices fell from 387 per tonkilometer to less than 030 in 2000 US dollars Of the worlds 12 trillion of merchan dise trade 35 per cent by value was shipped by air in 2006 for example air transport fills an important niche in justintime production systems While shipments by sea are routine firms use air cargo to finetune intermediate input flows and to ship goods with high valuetoweight ratios air transport also enables exports of perishable goods over long distances22 Moving in bulk containerization The other major development was the introduction of containerization for the move ment of heavy and bulky ocean and land freight an innovation that vastly simplified transhipment of freight from one mode of transportation to another increased the security of shipments and greatly reduced the cost and time involved in moving freight over long distances23 The first container ship launched in 1956 to move goods from Newark New Jersey to Houston Texas through the Gulf of Mexico was merely a conventional oil tanker strengthened to take 58 boxes each 9 metres long Today around 90 per cent of all nonbulk cargo is moved in containers Container shipping certainly is the great hidden wonder of the world a vastly underrated business It has shrunk the planet and brought about a revolution because the cost of shipping boxes is so cheap People talk about the contribu tion made by the likes of Microsoft But container shipping has got to be among the 10 most influential industries over the past 30 years Before container shipping seaborne trade was slow and unreliable In the early Sixties unload ing a ship at say Liverpool docks could take weeks even months And during that time a substantial proportion of the goods could fall prey to thieves or the weather Today the goods are protected in a container during passage and in port With cranes specially built to lift the containers a ship can be in and out of a port in 10 hours saving thousands in port charges and speeding trade24 However the very success of containerization in a world in which trade has grown very rapidly especially on certain routes like those from China to North America and to Europe has created immense problems especially in port bottlenecks In 2004 a new generation of container ships more than 300 metres long more 04Dicken4084Ch04indd 85 19102010 110651 AM Part Two Processes of Global Shift 86 than 40 metres wide and capable of carrying 8000 containers each 6 metres long entered service with even larger ones expected in the near future25 Relatively few ports have the capacity to take such huge vessels and this will inevitably enhance their dominance over smaller ports In any case there are already massive problems of delays at most major world ports because of the sheer volume of freight traffic and the physical and human problems of handling it quickly However the shrink age of world trade created by the 2008 financial crisis has at least for now created huge overcapacity in the container shipping industry The unevenness of timespace convergence Although the world has indeed shrunk in relative terms we need to be aware that such shrinkage has been and continues to be highly uneven This is contrary to the impression given by Figure 44 In fact technological developments in trans portation have a very strong tendency to be geographically concentrated The big investments needed to build transportation infrastructures tend to go where demand is greatest and financial returns are highest Consequently timespace con vergence affects some places more than others While the worlds leading national economies and the worlds major cities are being pulled closer together in relative time or cost terms others less industrialized countries or smaller towns and rural areas are in effect being left behind The timespace surface is highly plastic some parts shrink whilst other parts become in effect extended By no means everywhere benefits from technological innovations in transportation Everywhere is at the same place innovations in communications technologies We know that telecommunication tends to push the meaning of space towards zero nevertheless the earth still has simultaneous night and day and depending on ones location an inconsiderate phone call can still get people out of bed26 Both the time and the relative cost of transporting materials products and people have fallen dramatically as the result of technological innovations in the transpor tation media However such developments would have been impossible without parallel developments in communications technologies the key technologies transforming relationships at the global scale The new telecommunications technologies are the electronic highways of the informational age equivalent to the role played by railway systems in the process of industrialization27 As Figure 42 shows global communications systems have been transformed radically during the past 20 or 30 years through a whole cluster of significant inno vations in information technologies In terms of communications infrastructure the 04Dicken4084Ch04indd 86 19102010 110651 AM Technological Change 87 transmission channels through which information flows two innovations have been especially significant satellite communications and optical fibre technologies Transmission channels satellites and optical fibre cables Satellite technology began to revolutionize global communications from the mid 1960s when the Early Bird or Intelsat I satellite was launched28 This was capable of carrying 240 telephone conversations or two television channels simultaneously Since then the carrying capacity of communications satellites has grown exponen tially Satellite technology made possible remarkable levels of global communication of both conventional messages and the transmission of data A message could be transmitted in one location and received in another on the other side of the world almost simultaneously Today there are more than 100 geostationary satellites in orbit Satellites appear in a variety of sizes and capacities Large satellites capable of handling international traffic sit 35700 km 22300 miles high in geosta tionary orbits A broadbeam geostationary satellite can transmit to ie leave a footprint over roughly 40 per cent of the earths surface so that only three or four are sufficient to provide global coverage Because the cost of satellite transmission is not related to distance the technology is commer cially competitive in rural or low density areas eg remote islands where high marginal costs dissuade other types of providers such as fibre optics29 However for most parts of the world satellite communications have been increasingly challenged by optical fibre technology carried within submarine cables Satellites were ideal for broadcasting as well as providing a larger number of telephone circuits than the combined capacity of all submarine cables The life of satellites however is much shorter than that of cables and the number of parking spots available in geosynchronous orbit is limited Satellites also forced a shift from analogue to digital transmission and digital signals are optimally carried by fibreoptic cables which appeared in the 1980s making both old telephone cables and even most satellites themselves obsolete30 The first commercially viable optical fibre system was developed in the US in the early 1970s Since then the speed carrying capacity and cost of optical fibre trans mission cables have changed dramatically Optical fibre systems have a huge car rying capacity and transmit information at very high speed and most importantly with a high signal strength By the end of the 1990s for example a single pair of optical fibres each the thickness of a human hair could carry North Americas entire longdistance communications traffic Gemini a transatlantic undersea cable completed in 1998 had more capacity than all existing transatlantic cables combined31 Since then technological developments in optical fibres have continued to accelerate vastly increasing the speed and capacity of communications networks At the same time the geographical spread of optical fibre systems has increased 04Dicken4084Ch04indd 87 19102010 110652 AM Part Two Processes of Global Shift 88 Only 35 countries were connected by submarine cables in 1979 with a total bandwidth of 3214 megabits per second less than that connecting a mid size US city today The most connected country the USA accounted for 196 of total world bandwidth By 1989 the first fibreoptic cables were being installed within Europe During the 1990s 209 new submarine cables were installed tripling the world total in 1989 The new cables pro vided cable links to a total of 92 countries and increased total submarine bandwidth 100fold Cables installed during the 1990s focused on the North Atlantic market The newest cables installed between 2000 and 2005 linked 28 countries previously unconnected by cable Perhaps the most important shift is the most recent one despite a fibre glut in developed countries new cables have continued to be installed in Asia and the Middle East32 Figure 45 shows the enormous increase in the carrying capacity of submarine oceanic cable systems created by developments in optical fibre technologies As a consequence more than 90 per cent of all international telecommunications is now transmitted using optical fibre cables Figure 46 maps the worlds submarine cable system The system continues to expand as a response to rapidly increasing demands especially from the growth of Internet traffic In particular video and data 1 10 100 1 000 10 000 EuropeAsia USAsia USLatin America USEurope TOTAL 1995 1996 1997 1998 1999 2000 2001 2002 Submarine cable capacity Gbps Figure 45 The growth in the information carrying capacity of submarine cable systems Source based on material in the Financial Times 15 November 2000 04Dicken4084Ch04indd 88 19102010 110652 AM 1050 50500 500 Cable capacity gigabytessecond Estimated bandwidth usage by country gigabytessecond international 1 149 50199 200999 1000 Figure 46 The worlds submarine cable system Source based on material in The Guardian 1 February 2008 18 August 2008 04Dicken4084Ch04indd 89 19102010 110652 AM Part Two Processes of Global Shift 90 0 500 Number of users millions 750 250 1000 1250 1500 1996 1998 2000 2002 2004 2006 2008 0 10 15 Percentage of world population 5 20 25 Number of Internet users Percentage of world population Figure 47 Exponential growth of the Internet 19952008 Source based on material in wwwworldinternetstatscom transmissions require much higher bandwidth than speech There is also a need to build in extra capacity to cope with cable failure as happened in mid 2008 when three submarine cables serving the Middle East and South Asia were damaged The Internet the skeleton of cyberspace The Internet has revolutionized the way the world communicates In less than a decade it was transformed from a relatively obscure computer network into a global system of hundreds of millions of networked computers hosts and tens of millions of formal sites for interaction and commerce domains33 The phenomenally rapid spread of the Internet has been one of the most remark able developments of recent decades34 Its origins go back to the early 1970s and are to be found within the US Department of Defense It spread initially through the linking of more specialized academic computer networks and for some time it seemed that it would remain a niche technology Not so As Figure 47 shows the growth of the Internet has been dramatic Most important of all have been the development of the World Wide Web invented by Tim BernersLee in the mid 1990s and the rapid increase in access to broadband and wireless transmission Internet communication has replaced in whole or in part a huge swathe of con ventional communications methods A large proportion of business communication both within and between firms is now through the Internet Similarly for 04Dicken4084Ch04indd 90 19102010 110653 AM Technological Change 91 millions of individuals email has become the preferred means of communication At the same time the Internet gives access to a phenomenal amount of informa tion on virtually everything under the sun through the World Wide Web A few years ago hardly anybody was familiar with the term dotcom its now part of most peoples vocabulary Without doubt the Internet for those with access to it has changed the world and promises to do so even further as mobile access increases and as more and more physical objects are connected to it The electronic mass media The development of electronic media radio TV during the twentieth century provided one of the major ways in which people living in one part of the world learned about what is happening in other parts of the world Such media are especially powerful and influential not only because of their apparent immediacy but also because they do not require the high level of literacy of books or news papers The electronic media therefore are particularly important in making people aware of the wider world This is of course very important politically but it is also very important commercially Large business firms require large markets to sustain them global firms aspire to global markets The existence of such mar kets obviously depends on income levels but it depends too on potential custom ers becoming aware of a firms offerings and being persuaded to purchase them Even where consumer incomes are low the ground may be prepared for possible future ability to purchase by creating an aspirational image The electronic mass media are particularly powerful means both of spreading information and of per suasion hence their vital importance to the advertising industry and in particular to branded products Today TV is the mass medium that has the most dramatic impact on peoples awareness and perception of worlds beyond their own direct experience Although the electronic media transmit messages of all kinds a very large proportion of these messages are commercial messages aimed at the consumer Because commer cial advertising is a feature of most mass media networks throughout the world the communications media open the doors of national markets to the heavily advertised branded products of the transnational producers During the past three decades there has been a major phase shift in the mass media with the appearance of cable and satellite broadcasting and a widespread deregulation of the media As a result the number of TV channels has grown dramatically from a small number in each country to potentially hundreds of channels accessible through cable or satellite This has had major effects on the ways in which TV is used Prior to the media diversification wave of the 1980s there was a high level of standardization in the kinds of TV programme available It was this kind of mutual experience that led Marshall McLuhan to coin the 04Dicken4084Ch04indd 91 19102010 110653 AM Part Two Processes of Global Shift 92 metaphor of the global village in which certain images are shared and in which events take on the immediacy of participation Although in one sense the world may not have shrunk for the rural peasant or the urban slum dweller with no adequate means of personal transportation it had undoubtedly shrunk in an indirect sense It was now possible to be aware of distant places of lifestyles of consumer goods through the vicarious experience of the electronic media But the increasing segmentation of TV messages means that the global village idea is no longer an accurate picture of reality the fact that not everybody watches the same thing at the same time and that each culture and social group has a specific relationship to the media system does make a fundamental difference visàvis the old system of standardized mass media While the media have become indeed globally interconnected and programs and messages circulate in the global network we are not living in a global village but in customized cottages globally produced and locally distributed35 Communications on the move towards a wireless world Communications of course depend on a massive physical infrastructure But within that infrastructure one of the most significant developments of recent years has been the phenomenal growth of mobile communications especially the mobile phone One of the first patents for a radiotelephone system linked to base sta tions was taken out by Motorola in 1973 But development was slow In the early 1980s what was then still a relatively rare and very prestigious instrument the mobile phone was the size of a brick weighed around 800 grams and cost almost 4000 Today the weight is down to 90 grams and the typical cost of a basic handset is less than 100 At the same time the geographical range and sophistica tion of mobile phones and their operating systems have increased dramatically As a consequence there has been an explosion in ownership throughout the world In the early 1990s there were only a few hundred thousand subscribers to mobile systems now there are around 4 billion36 There has been a clear shift from fixed to mobile cellular telephony especially since the turn of the century By the end of 2008 there were over three times more mobile cellular subscriptions than fixed telephone lines37 Not surprisingly the rate of innovation in mobile phone technology has accelerated The 3G system was introduced early in the 2000s to function as a phone a computer a television a pager a videoconferencing centre a newspaper a diary and even a credit card it will support not only voice communication but also realtime video and fullscale multimedia38 The next generation after3G or 4G system aims to enhance and further to extend all of these qualities at higher levels of coverage and access In particular 04Dicken4084Ch04indd 92 19102010 110653 AM Technological Change 93 4G will enable a huge growth in the speed and quality of mobile Internet services of the kind increasingly demanded by businesses The introduction of smart phones like the iPhone is transforming the mobile phone to a multipurpose integrated communications device which can do almost anything Underlying these developments is a broader trend towards an increasingly wireless world in which the kinds of technological convergence between comput ing and communications shown in Figure 42 have entered a new phase The computing revolution was about information digitizing documents pho tographs and records so that they could more easily be manipulated The wirelesscommunications revolution is about making digital information about anything available anywhere at almost no cost No longer tied down by wires and cables39 Such developments have the potential to generate enormous social and economic changes as they free users whether they be businesses or individuals from the physical tie to fixed communications infrastructure Ancient nomads went from place to place and they had to take a lot of stuff with them including their livelihoods and families The emerging class of digital nomads also wander but they take virtually nothing with them wher ever they go they can easily reach people and information40 Digital divides an uneven world of communications Although technological developments in transportation and communications have transformed spacetime relationships between virtually all parts of the world the outcomes are immensely uneven Not all places are equally connected The timespace surface is highly plastic some parts shrink whilst other parts become in effect extended in relative though not of course in absolute terms By no means everywhere benefits from technological innovations in communications The places that tend to benefit most are the already important places New investments in technology are market related they go to where the returns are likely to be high The cumulative effect is both to reinforce certain communica tions routes at the global scale and to enhance the significance of the nodes cities countries on those routes For example when we look at the map of the Internet we find a very uneven geography41 Figure 48 shows that twothirds of all the registered domain names are in just three countries the US Germany the UK The US alone has onethird of the world total although this is less than in the past42 These very strong geo graphical concentrations are further reflected in the pattern of Internet capacity between world regions Figure 49 So the Internet is far from being the placelessspaceless phenomenon so often envisaged In particular as far as provision of its basic infrastructure is concerned it is overwhelmingly an urban especially a big city phenomenon 04Dicken4084Ch04indd 93 19102010 110653 AM Part Two Processes of Global Shift 94 0 10 15 Percentage of total registered domains 5 20 25 30 35 United States Germany United Kingdom Canada China South Korea Netherlands Italy Japan France Argentina Australia Switzerland Brazil Denmark Spain Austria Sweden Belgium Taiwan Figure 48 The uneven geography of the Internet Source based on Zook 2005 Table 21 Latin America Caribbean Latin America Caribbean Asia Pacific Asia Pacific US Canada US Canada Europe Europe Africa Africa 55739 Mbps 488510 Mbps 895808 Mbps 258196 Mbps 85045 Mbps 18918 Mbps Figure 49 Interregional Internet bandwidth Source based on material in Telegeography 2007 04Dicken4084Ch04indd 94 19102010 110653 AM Technological Change 95 This is partly an historical accident the Internets fibreoptic cables often piggyback on old infrastructure where a rightofway has already been estab lished they are laid alongside railways and roads or inside sewers Building the Internet on top of existing infrastructure in this way merely reinforces real world geography Just as cities are often railway and shipping hubs they are also the logical places to put network hubs and servers the powerful comput ers that store and distribute data This has led to the rise of server farms also known as data centres or web hotels vast warehouses that provide floor space power and networks connectivity for large numbers of computers and which are located predominantly in urban areas43 Indeed the network of Google server farms referred to earlier is located as close as possible to the largest concentrations of potential customers because as fast as electrons travel physical distance still affects online response speed Reducing it by even a fraction of a second mattered to users as Google discovered when it ran experiments to see if users noticed a differ ence between a wait of 09 seconds and one of 04 seconds Users were conspicuously more likely to grow bored and leave the Google site after wait ing that interminable 09 seconds44 To a considerable extent therefore the map of the Internet mirrors the network of global cities although the match is not perfect Although the evolving infrastructure of the Internet is reinforcing old patterns of agglomeration At the same time new technolologies cause new distur bances The prominence of Amsterdam and Stockholm in Europe and of Salt Lake City and Atlanta in the US suggests that new clusters can emerge45 The persistent geographical unevenness in the provision of communications infra structure is a major problem at the global scale There is a real and serious digital divide between those places and people with access to communications technolo gies and those without46 Because such access is the key to so much information and knowledge this poses severe developmental problems Figure 410 summa rizes some of these global inequalities in access to the communications media The most promising new development for helping to bridge the digital divide is without doubt the mobile phone and the spread of wireless capabilities One of the biggest obstacles to communications growth and access in poor countries is the lack of fixed line infrastructures and the immense cost of providing them in poor and especially in rural areas Wireless communications have the potential to overcome this Mobile phones do not rely on a permanent electricity supply and can be used by people who cannot read or write Phones are widely shared and rented out by the call for example by the telephone ladies found in Bangladeshi villages Farmers and fishermen use mobile phones to call several markets and work out where they can get the best price for their produce Mobile phones 04Dicken4084Ch04indd 95 19102010 110654 AM Part Two Processes of Global Shift 96 0 0 0 40 40 40 Internet users per 100 inhabitants Mobile telephone subscribers per 100 inhabitants Fixed telephone lines per 100 inhabitants 60 60 60 20 20 20 80 80 80 100 100 100 1997 1997 1997 1999 1999 1999 1998 1998 1998 2000 2000 2000 2001 2001 2001 2002 2002 2002 2003 2003 2003 2004 2004 2004 2005 2005 2005 2006 2006 2006 2007 2007 2007 Developed countries Developing countries Developed countries Developing countries Developed countries Developing countries Figure 410 Digital divides uneven access to communications facilities 19972007 Source based on material in wwwituintITUDictstatistics 04Dicken4084Ch04indd 96 19102010 110654 AM Technological Change 97 are used to make cashless payments in Zambia and several other African countries Even though the number of phones per 100 people in poor coun tries is much lower than in the developed world they can have a dramatic impact The digital divide that really matters then is between those with access to a mobile network and those without47 In fact there have been great strides towards connecting the previously unconnected with growth most significant in developing regions where by the end of 2007 mobile cellular penetration has reached close to 40 per cent By the end of 2007 64 per cent of the worlds mobile subscriptions were from developing countries Five years earlier they represented only 44 per cent Amongst the developing regions Africa continues to have the highest mobile growth rate Since growth rates continue to be strongest in those regions where penetration is relatively low the mobile cellular divide is expected to be reduced further over time48 The digital divide between the global North and the global South is reflected in many ways not least in the immense unevenness in geographical coverage in Wikipedia as an analysis of geotagged articles has shown There is clearly a highly uneven geography of information in Wikipedia The US has the most articles about places or events almost 100000 while some smaller countries such as Tonga have few than 10 But its not just size that is correlated with extremely low levels of wiki representation Almost the entire continent of Africa is geographically poorly represented in Wikipedia Remarkably there are more Wikipedia articles written about Antarctica than all but one of the 53 countries in Africa49 Technological innovations in products and processes Product and process innovation A firms profitability can be enhanced through increased penetration of existing markets or expansion into new geographical markets However there are limits In an intensely competitive environment the introduction of a continuous stream of new products becomes essential to a firms profitability and indeed its very sur vival However all products have a limited life span what is generally referred to as the product life cycle PLC50 Figure 411 shows the major characteristics of an idealized PLC the growth of sales follows a systematic path from initial innovation through a series of stages This kind of development path has very important implications for the growth of firms and for their profit levels Of course the rate at which the cycle proceeds 04Dicken4084Ch04indd 97 19102010 110654 AM will vary from one product to another In some highly ephemeral products the cycle may run its course within a single year or even less In others the cycle may be very long However in general product cycles have been becoming shorter increasing the pressure on firms to develop new products or to acquire them from other firms There are three major ways in which a products sales may be maintained or increased to introduce a new product as the existing one becomes obsolete so that overlapping cycles occur to extend the cycle for the existing product either by making minor modifications in the product itself to update it or by finding new uses or to make changes to the production technology itself to make the product more competitive However product innovation alone is inadequate as a basis for a firms survival and profitability Firms must strive to produce their products as efficiently as possible Recent developments in process technology and especially in ICT are having profound effects upon production processes in all economic sectors There is a close relationship between the progress of a product through its life cycle and the way it is made as Figure 411 shows Each stage has particular production characteristics In general as the cycle proceeds the emphasis shifts from productrelated technologies to process technologies and in particular to ways of minimizing production costs In this respect the relative importance of labour costs especially of semiskilled and unskilled labour increases More generally different types of geographical location are relevant to different stages of the product cycle This view of systematic changes in the production process as a product matures is appealing and has some validity There undoubtedly are important differences in the nature of the production process between a product in its very early stages of development and the same product in its maturity But this linear sequential notion of change is overly simplistic and deterministic At any stage the production process may be rejuvenated by technological innovation There may not necessarily be a simple sequence leading from smallscale production to standardized mass production Most technological developments in production processes are as we observed earlier gradual and incremental the result of learning by doing and learning by using But periods of radical transformation of the production process have occurred throughout history Over the long timescale of industrialization the production process has developed through a series of stages each of which represents increasing efforts to mechanize and to control more closely the nature and speed of work Five stages are generally identified Manufacture the collecting together of labour into workshops and the division of the labour process into specific tasks Machinofacture the application of mechanical processes and power through machinery in factories together with further division of labour Scientific management Taylorism the subjection of the work process to scientific study in the late nineteenth century This enhanced the fineness of the division of labour into specific tasks together with increased control and supervision Fordism the development of assemblyline processes that controlled the pace of production and permitted the mass production of large volumes of standardized products Flexible and lean production the development of new production systems based upon the deep application of information and communication technologies Technological Change 101 Speed of adjustment Competition by quality Volume Fast Slow Price Quality Low High Flexible specialization Flexible mass production Fordist mass production Craft production Diversified quality mass production Figure 412 Idealtypes of production system Source based on Hollingsworth and Boyer 1997 Figure 13 Increasingly wide range of differentiated products Narrow range of standardized designs with only minor product modifications Extremely wide each product customized to specific requirements Product variety Extremely high Extremely high Relatively low Production volume Very close relationships with functionallytiered system of suppliers Use of justin time delivery systems encourages geographical proximity between customers and suppliers Distant relationships with suppliers both functionally and geographically Large inventories held at assembly plant just in case of supply disruption Very close contact between customer and supplier Most suppliers located within single city Supplier relationships Multiskilled polyvalent workers operate in teams Responsible for several manufacturing operations plus simple maintenance and repair Very narrowly skilled workers design products but production itself performed by unskilledsemiskilled interchangeable workers Each performs a relatively simple task repetitively and in predefined time sequence Highly skilled in most aspects of professional production Labour force Highly flexible production methods using modular component systems Relatively easy to switch to new products Complex but rigid single purpose machinery using standardized components Heavy time and cost penalties in switching to new products Simple but flexible tools and equipment using non standardized components Technology Flexiblelean production Mass production Craft production Characteristic Figure 413 The major characteristics of craft production Fordist mass production and flexiblelean production Source based in part on material in Womack et al 1990 04Dicken4084Ch04indd 101 19102010 110654 AM Thus we can see a trend towards increasingly fine degrees of specialization in many production processes enabling their fragmentation into a number of individual operations increasing standardization and routinization of these individual operations enabling the use of semiskilled and unskilled labour this is especially apparent during the mature stage of a products life cycle increasing flexibility in the production process that is altering the relationship between the scale and the cost of production permitting smaller production runs increasing product variety and changing the way production and the labour process are organized increasing modularity of production what Berger calls the Lego model of production involving networks of firms as we will see in Chapter 5 Technological Change 103 therefore in technological competence persist Certainly there is a lot of evidence to show that the volume and characteristics of technological innovation vary greatly by country One indicator is the number of patents granted by country Patents are the mechanism by which an individual or a company can protect an invention for a period of years As Figure 414 shows the patent map is highly uneven Patent grants are concentrated in a small number of countries Applicants from Japan the United States of America the Republic of Korea and Germany received 73 of total patent grants worldwide Between 2000 and 2006 the number of patents granted to applicants from China and the Republic of Korea grew by 265 and 232 a year respectively average annual growth rate56 The rapid growth of Chinese patents is matched by the aweinspiring expansion of Chinese science and its emergence as the second largest producer of scientific knowledge as revealed by an analysis of 10500 scientific journals worldwide for the period 1981200857 Number of patent grants 217364 100000 10000 25000 100 100 Figure 414 Number of patents granted by country Source based on data in WIPO 2008 Table A1 Localized knowledge clusters National systems of innovation are not homogeneous entities They consist of aggregations of localized knowledge clusters58 One reason for the significance of 04Dicken4084Ch04indd 103 19102010 110654 AM localness in the creation and diffusion of knowledge lies in a basic distinction in the nature of knowledge itself which is broadly of two kinds codified or explicit knowledge the kinds of knowledge that can be expressed formally in documents blueprints software hardware etc tacit knowledge the deeply personalized knowledge possessed by individuals that is virtually impossible to make explicit and to communicate to others through formal mechanisms This distinction is fundamental to understanding the role of space and place in technological diffusion Codified knowledge can be transmitted relatively easily across distance It is through such means that throughout history political religious and economic organizations for example have been able to act at a distance to exert control over geographically dispersed activities Developments in transportation and communications technologies have enabled such acting or controlling to take place over greater and greater distances Tacit knowledge on the other hand has a very steep distancedecay curve It requires direct experience and interaction it depends to a considerable extent though not completely by any means on geographical proximity It is much more sticky However it is a mistake to take the tacit local codified global contrast too far because both tacit and codified knowledge can be exchanged locally and globally The specific sociotechnological context within which innovative activity is embedded what is sometimes called the innovative milieu is a key factor in knowledge creation This context consists of a mixture of both tangible and intangible elements the economic social and political institutions the knowledge and knowhow which evolve over time in a specific context the something in the air notion identified many decades ago by Alfred Marshall the conventions which are takenforgranted rules and routines between the partners in different kinds of relations defined by uncertainty The basis of localized knowledge clusters therefore lies in several characteristics of the innovation process that are highly sensitive to geographical distance and proximity Localized patterns of communication geographical distance greatly influences the likelihood of individuals within and between organizations sharing knowledge and information links Localized innovation search and scanning patterns geographical proximity influences the nature of a firms search process for technological inputs or possible collaborators Small firms in particular often have a geographically narrower scanning field than larger firms Localized invention and learning patterns innovation often occurs in response to specific local problems Processes of learning by doing and learning by using tend to be closely related to physical proximity in the production process Localized knowledge sharing because the acquisition and communication of tacit knowledge are strongly localized geographically there is a tendency for localized knowledge pools to develop around specific activities Localized patterns of innovation capabilities and performance geographical proximity in enriching the depth of particular knowledge and its use can reduce the risk and uncertainty of innovation Local innovative milieus therefore consist primarily of a nexus of untraded interdependencies set within a temporal context of pathdependent processes of technological change We outlined the major elements of such processes in general terms in Chapter 3 The point of emphasizing the untraded nature of the interdependencies within such milieus is to distinguish the social cement especially facetoface contact which binds this kind of localized agglomeration from that which may be associated with the minimization of transaction costs for example of materials and components transfers through geographical proximity The buzz derived from being there is at the heart of these social processes But that is not the entire story Localized knowledge clusters cannot be sustained and developed entirely through such incestuous relationships A key additional process involves the connections between some of the actors in a given locality with outsiders for example firms with suppliers customers or sources of specific information and knowledge In other words as well as local Part Two Processes of Global Shift 106 buzz there also have to be pipelines channels of communication to other actors in other places The processes of knowledge creation and innovation therefore consist of a complex set of networks and processes operating within and across various spatial scales from the global through the national and the regional to the local Figure 415 provides an idealized picture of this very complex process It is based on the argument that the existence of local buzz of high quality and relevance leads to a more dynamic cluster These actors and their buzz are however of little rele vance if firms are not tuned in It is likely that a milieu where many actors with related yet complementary and heterogeneous knowledge skill and information reside provides a great potential for dynamic interaction A welldeveloped system of pipelines connecting the local cluster to the rest of the world is beneficial for the cluster in two ways First each individual firm can benefit from establishing knowledgeenhancing relations to actors out side the local cluster Even worldclass clusters cannot be permanently self sufficient in terms of stateoftheart knowledge creation New and valuable knowledge will always be created in other parts of the world and firms who can build pipelines to such sites of global excellence gain competitive advantage Second it seems reasonable to assume that the information that one cluster firm can acquire through its pipelines will spill over to other firms in the cluster through local buzz That is why a firm will learn more if its neighbouring firms in the cluster are globally well connected rather than being more inwardlooking and insular in their orientation65 NOTES 1 Schumpeter 1943 83 2 The term creative gales of destruction is borrowed from Schumpeter 1943 3 Freeman 1988 2 4 Mattsson 2007 42 5 Borrus quoted in Cohen and Zysman 1987 183 emphasis added 6 Edgerton 2007 7 This approach is essentially neoSchumpeterian See Dosi et al 1988 Fields 2004 Freeman 1982 1987 Metcalfe and Dilisio 1996 Perez 1985 2010 8 Freeman and Perez 1988 Perez 2010 9 Freeman 1987 130 10 See Freeman et al 1982 Freeman and Perez 1988 Hall and Preston 1988 Rennstich 2002 11 Hall and Preston 1988 6 12 Rennstich 2002 174 13 Hall and Preston 1988 14 Carr 2008b 15 Carr 2008a 2 04Dicken4084Ch04indd 106 19102010 110655 AM Technological Change 107 16 For broadranging discussions of these technologies see Brunn and Leinbach 1991 Castells 1996 Graham and Marvin 1996 Hall and Preston 1988 World Bank 2009b Chapter 6 17 Fields 2004 14 15 18 See ORourke and Williamson 1999 Chapter 3 for a detailed discussion of these developments 19 World Bank 2009b 174 20 Dean and SebastiaBarriel 2004 314 21 World Bank 2009b 177 22 World Bank 2009b 177 23 Levinson 2006 provides a comprehensive and highly readable account of the devel opment of containerization 24 The Independent 30 August 2000 25 The Economist 3 March 2007 74 26 Luhmann 1998 85 Thanks to Roger Lee for this 27 Henderson and Castells 1987 6 28 Malecki and Hu 2006 Warf 2006 2007 provide recent analyses of satellite and cable systems 29 Warf 2007 386 30 Malecki and Hu 2006 7 31 Financial Times 28 July 1998 32 Malecki and Hu 2006 14 15 33 Zook 2005 1 34 Zook 2005 provides an excellent analysis of the development of the Internet See also Castells 1996 Dodge and Kitchin 2001 Malecki 2002 35 Castells 1996 341 36 International Telecommunication Union statistics For a detailed account of the global spread of mobile phones see Comer and Wikle 2008 Castells et al 2007 explore the social implications of mobile communications 37 International Telecommunication Union 2009 3 38 International Telecommunication Union 2000 cited in The Economist 4 September 2004 39 The Economist 28 April 2007 12 40 The Economist 12 April 2008 16 41 Dodge and Kitchin 2001 Malecki 2002 Zook 2001 2005 42 Malecki 2002 405 Zook 2001 Table 1 43 The Economist 11 August 2001 18 44 Stross 2008 quoted in The Guardian 1 November 2008 45 Malecki 2002 419 46 See International Telecommunication Union 2009 47 The Economist 12 March 2005 9 48 International Telecommunication Union 2009 3 4 49 Graham 2009 3 50 OShaughnessy 1995 explores this concept in a marketing context Vernon 1966 1979 pioneered its application to international production and international trade 51 Perez 1985 04Dicken4084Ch04indd 107 19102010 110655 AM Part Two Processes of Global Shift 108 52 Berger 2005 57 See also Sturgeon 2002 53 Metcalfe and Dilisio 1996 58 54 Archibugi and Michie 1997 2 55 See Archibugi and Michie 1997 Archibugi et al 1999 Freeman 1997 Lundvall 2007 Lundvall and Maskell 2000 Patel and Pavitt 1998 56 WIPO 2008 7 57 Financial Times 26 January 2010 58 There is a vast literature on this topic See for example Bathelt et al 2004 Bunnell and Coe 2001 Gertler 1995 2003 Gertler et al 2000 Mattsson 2007 Morgan 2004 Sonn and Storper 2008 Storper 1997 Storper and Venables 2004 59 Gertler 2003 60 Fields 2004 Law 1986 61 Bathelt et al 2004 32 62 Storper 1995 208 63 Howells 2000 589 64 Bathelt et al 2004 Gertler 1995 Storper and Venables 2004 Sturgeon 2003 65 Bathelt et al 2004 456 04Dicken4084Ch04indd 108 19102010 110655 AM Five TRANSNATIONAL CORPORATIONS THE PRIMARY MOVERS AND SHAPERS OF THE GLOBAL ECONOMY CHAPTER OUTLINE Why fi rms transnationalize Market orientation Asset orientation How fi rms transnationalize The traditional view of a sequential development trajectory Diverse trajectories and born globals TNCs as networks within networks The geographical embeddedness of TNCs Homecountry infl uences Convergence or differentiation Confi guring the TNCs internal networks Coping with complexity a diversity of organizational architectures Headquarterssubsidiary relationships Grounding the TNC mapping the fi rms internal geographies Centres of strategic control and coordination Corporate RD facilities Marketing and sales units Production facilities TNCs within networks of externalized relationships Outsourcing relationships Benefi ts and costs of outsourcing Different ways of coordinating transnational production networks Captive production networks 05Dicken4084Ch05indd 109 19102010 35018 PM Part Two Processes of Global Shift 110 Relational production networks Modular production networks Transnational strategic alliances Perpetual change reshaping TNCs internal and external networks Forces underlying reorganization and restructuring The globallocal question an oversimplifi ed view of the TNCs dilemma The geography of reorganization and restructuring The myth of the global corporation How global are the worlds leading TNCs Regionalizing transnational production networks A transnational corporation is a firm that has the power to coordinate and control operations in more than one country even if it does not own them Why firms transnationalize Most TNCs are capitalist enterprises As such they must behave according to the basic rules of capitalism the most fundamental of which is the drive for profit Of course business firms may well have a variety of motives other than profit such as increasing their share of a market becoming the industry leader or simply making the firm bigger But in the long run none of these is more important than the pursuit of profit itself A firms profitability is the key barometer to its business health any firm that fails to make a profit at all over a period of time is likely to go out of business unless rescued by government or acquired by another firm At best therefore firms must attempt to increase their profits at worst they must defend them Of course a capitalist market economy is an intensely competitive economy One firms profit may be another firms loss unless the whole system is growing suffi ciently strongly to permit all firms to make a profit Even so some will make a larger profit than others Two key features of todays world are first competition is increas ingly global in its extent and second such competition is extremely volatile This creates an environment of hypercompetition an environment in which advantages are rapidly created and eroded1 Firms are no longer competing largely with national rivals but with firms from across the world Given these circumstances therefore one way of explaining TNCs is simply as a reflection of the normal expansionary tenden cies of the different circuits of capital 2 In these terms the question of Why transna tionalize might almost be better put as Why not transnationalize Although a firms motivation for engaging in transnational operations may be highly individual we can classify them into two broad categories although the boundary between them is by no means as sharp as this dichotomy suggests 05Dicken4084Ch05indd 110 19102010 35018 PM market orientation asset orientation Market orientation Most foreign direct investment whether it is in production of goods or services or in marketing and sales is designed to serve a specific geographical market by locating inside that market The good or service produced abroad may be virtually identical to that being produced in the firms home country although there may well be modifications to suit the specific tastes or requirements of the local market In effect such specifically marketoriented investment is a form of horizontal expansion across national boundaries Three attributes of markets are especially important The most obvious attraction of a specific market is its size measured for example in terms of per capita income Figure 51 shows the enormous variation in income levels per capita on a global scale The largest geographical markets in terms of incomes although not in terms of population are obviously the US and Western Europe Such variations in per capita income provide a crude indication of how the level of demand will vary from place to place across the world Countries with different income levels will tend to have a different structure of demand As incomes rise so does the aggregate demand for goods and services But such increased demand does not affect all products equally Populations in countries with low income levels tend to spend a larger proportion of their income on basic necessities while conversely people in countries with high income levels tend to spend a higher proportion of their income on higherorder manufactured goods and services Markets vary in their accessibility In the past a major barrier was the cost of transportation Today this is far less significant although not totally unimportant especially for some products However political constraints in the form of various kinds of trade barrier remain highly significant Asset orientation Most of the various assets needed by a firm to produce and sell its specific products and services are unevenly distributed geographically This is most obviously the case in the natural resource industries where firms must of necessity locate their extractive activities at the sources of supply Often such investments form the first element in an organizational sequence of vertically integrated operations whose later stages processing may be located quite separately from the source of United States 13886bn Germany 3197bn UK 2608bn Japan 4813bn Gross national income Countries are proportional in size to gross national income 100bn Low income 936 Lowermiddle income 9363705 Uppermiddle income 370611455 High income 11455 Gross national income per capita Figure 51 Variations in market size gross national income per capita 2007 Source based on World Bank 2009b Table 1 projection supplied by Danny Dorling SASI Group University of Sheffield 05Dicken4084Ch05indd 112 19102010 35018 PM supply itself In many cases final processing of natural resources occurs close to the final market Naturalresourceoriented foreign investments have a very long history and remain highly significant in the global economy see Chapter 8 However there are other assetoriented foreign investments closely related to the developments in product and process technologies discussed in Chapter 4 Technological changes in production processes and in transportation have evened out the significance of location for some of the traditionally important factors of production for example natural resources Many now hold the view that at least at the global scale the two most important locationspecific factors are access to knowledge access to labour The strong tendency for knowledge and technological innovation processes to appear in geographical clusters see Chapter 4 creates a major incentive for firms to locate their relevant operations in such locations Particularly in those activities in which technological change whether in product or process development is especially rapid and unpredictable the incentive to locate where the knowledge and the action are becomes very powerful Such knowledge may be based in specific kinds of institution such as universities research institutes industry associations However much of the attraction exerted by such knowledge clusters derives from the skills and knowledge embodied in labour From a TNCs perspective the locational significance of labour as a production factor is reflected in a number of ways although of course workers are much more than crude abstractions in which they are reduced to the categories of wages skill levels location gender union membership and the like Such characteristics vary of course in their significance according to the specific kind of labour being sought as the cases in Part Three demonstrate For some activities it is cheap unskilled nonunionized labour that is being sought for others it is highly skilled and educated knowledge workers that are the attraction In general terms however four especially important attributes of labour show large geographical variations Knowledge and skills Knowledge and skills depend on such conditions as the breadth and depth of education and the particular history of an areas development As a result there are wide geographical variations in the availability of different types of labour One very approximate indicator at the global scale is the variation in educational levels for example extent of literacy enrolment in various stages of education public expenditure on education etc Figure 52 maps one such indicator the proportion of the relevant population in tertiary education As might be expected there is a very high correlation between these measures and the distribution of per capita income shown in Figure 51 Wage costs International differences in wage levels can be staggeringly wide as Figure 53 shows These figures should be treated with some caution they are averages across the whole of manufacturing industry and are therefore affected by the specific industry mix Some industries have much higher wage levels than others Even so the contrasts are striking Labour productivity Spatial variations in wage costs are only a partial indication of the geographical importance of labour as a production factor What matters from a firm perspective is the scale of output per worker for a given wage or salary The performance capacity of labour varies enormously from place to place a reflection of a number of influences including education training skill and motivation as well as the kind of machinery and equipment in use Simply chasing low wage costs without taking into account differences in productivity is not a good strategy though one that is often pursued Labour controllability Largely because of historical circumstances there are considerable geographical differences in the degree of labour militancy and in the extent to which labour is organized through labour unions The proportion of the workers who are members of labour unions has declined markedly in some countries as we noted in Chapter 3 The fact that most firms are very wary of highly organized labour regions is demonstrated by their tendency to relocate from such regions or to make new investments in places where labour is regarded as being more malleable Transnational Corporations 115 Global variations in production costs are a highly significant element in the trans national investmentlocation decision This is obviously the case for assetoriented investments but it is also a critical consideration for marketoriented investments In that case there is always a tradeoff to be made between the benefits of market proximity on the one hand and geographical variations in production costs on the other But the problem is not merely one of variations in production costs at a single moment in time or even the obvious point that such costs change over time A particularly important consideration is the uncertainty of the level of future pro duction costs in different locations One way of dealing with such uncertainty is Figure 53 Geographical variations in hourly compensation costs in manufacturing 2008 Source based on US Bureau of Labor statistics 2009 Norway Germany Denmark Austria Finland Netherlands Sweden Belgium Switzerland France United Kingdom Ireland Australia Italy Canada United States Spain Japan Korea New Zealand Israel Singapore Hungary Portugal Czech Republic Slovakia Taiwan Argentina Poland Brazil Mexico Philippines 0 5 10 20 40 30 50 15 25 45 35 55 Hourly compensation costs US dollars 05Dicken4084Ch05indd 115 19102010 35023 PM Part Two Processes of Global Shift 116 for the TNC to locate similar plants in a variety of different locations and then to adopt a flexible system of production allocation between plants However this strategy is further complicated by the volatility of currency exchange rates between different countries What appears to be a leastcost source with one set of exchange rates may look very different if there is a major change in these rates At the present time currency exchange rates are highly volatile How firms transnationalize Is there an identifiable evolutionary sequence of TNC development Does the tran sition from a firm producing goods or services entirely for its domestic market to one engaged in foreign production of those goods and services follow a systematic development path The traditional view of a sequential development trajectory The conventional view in the international business literature has been that there is a clear sequential trajectory to a firms development from being domestically oriented to becoming a TNC A vast literature beginning with Hymers pioneer ing work in the 1960s4 and developed most notably by Dunning in his self styled eclectic theory5 emphasized that a prerequisite for a firm to operate beyond its domestic borders other than through trade was the possession of some firmspecific assets developed to a high degree in its domestic market which could then be transferred across borders geographically but inside the firm organizationally to foreign locations Such assets are primarily those of firm size and economies of scale market power and marketing skills for example brand names advertising strength technological expertise product process or both or access to cheaper sources of finance The implicit assumption is that only a firm that has reached a substantial size will have the resources to begin to operate tran snationally The TNC therefore became associated unequivocally with bigness This notion of beginning with a strong domestic position and then expanding geographically was also captured in the concept of the product life cycle already encountered in Chapter 4 The PLC was specifically adopted and adapted as an explanation of the evolution of international production by Raymond Vernon in 19666 Vernons major contribution was to introduce an explicitly locational dimension into the product cycle Figure 54 shows Vernons PLC model based upon the experience of US TNCs especially during the 1960s it should be read in conjunction with Figure 411 Vernon assumed that firms are more likely to be aware of the possibility of introducing new products in their home market than producers located elsewhere 05Dicken4084Ch05indd 116 19102010 35023 PM Transnational Corporations 117 The kinds of new products introduced therefore would reflect the specific char acteristics of the domestic market In the US case high averageincome levels together with high labour costs encouraged the development of new products that catered to highincome consumers and were labour saving for both consumer and producer goods In this first phase of the locational product life cycle as Figure 54 shows all production would be located in the US and overseas demand would be served by exports But this situation would be unlikely to last indefinitely The domestic market might reach saturation and continued profitability would necessitate expansion into new markets Hence US firms would eventually set up production facilities in the overseas market either because they saw an opportunity to reduce production and distribution costs or because of a threat to their market position Such a threat might come from local competitors or from government attempts to reduce imports through tariff and other trade barriers It follows from the nature of the product cycle model that the first overseas production of the product would occur in other highincome markets The newly established foreign plants would come to serve these former export markets and thus displace exports from the US These would be redirected to other areas where production had not yet begun phase II in Figure 54 Eventually the production cost advantages of the newer overseas plants would lead the firm to export from them to other thirdcountry markets phase III and even back to the US itself phase IV Finally as the product became completely standardized production would be shifted to lowcost locations in developing countries phase V It is interesting to note that when Vernon first suggested this possibility he regarded it as a bold projection At that time the mid 1960s there was still little evidence of developing country export platforms in East Asia serving European and US markets How times have changed Figure 54 The product life cycle as an evolutionary sequence of US TNCs development Source based on Wells 1972 Figure 15 US exports to LDCs displaced US exports mostly to LDCs US exports to many countries LDCs exports to US Europe exports to US Europe exports to LDCs Production started in Europe All production in US New product Mature product Time Net importer Net exporter Phase V Phase IV Phase III Phase II Phase I 05Dicken4084Ch05indd 117 19102010 35023 PM Part Two Processes of Global Shift 118 Is the product life cycle still valid as an explanation of the geographical evolution of TNCs7 There is no doubt that a good deal of the initial overseas investment by US firms did fit the product cycle sequence quite well But it can no longer explain the increased diversity of transnational investment by TNCs As these firms have become more complex globally it is unrealistic to assume a simple evolutionary sequence from the home country outwards Even within strongly innovative TNCs the initial source of the innovation and of its produc tion may be from any point in the firms global network In addition as we saw in Chapter 2 much of the worlds FDI is reciprocal or cross investment between the industrialized countries Such investment cannot easily be explained in product cycle terms Diverse trajectories and born globals The traditional developmental sequence is shown in the centre of Figure 55 It is a PLCtype view which begins with the assumption that initially the firm is purely a domestic firm in terms both of production and of markets It is generally assumed that overseas expansion is done initially through exports using the serv ices of overseas sales agents Such agents are independent of the exporting firm However the potential benefits of exerting greater control may eventually stimulate the firm to set up overseas sales outlets of its own This may be achieved in one of two ways by setting up an entirely new facility or by acquiring or merging with Figure 55 Diverse paths of TNC evolution The conventional path Short circuits Parallel paths eg licensing franchising collaboration in RD production marketing sourcing strategic alliances Establish facility overseas production by acquiring local firm a by setting up new facility b Establish outlet in overseas markets sales by acquiring local firm a by setting up new facility b Export to overseas markets through independent channels eg sales agents Serve domestic market only 05Dicken4084Ch05indd 118 19102010 35023 PM Transnational Corporations 119 a local firm possibly the previously used sales agency itself Actual production of goods and services overseas may eventually follow There is a good deal of anecdotal material to support such a sequence of devel opment among firms that actually became TNCs Apart from Vernons US evi dence Japanese firms investing in Europe showed a similar path Actual manufacturing operations came rather late following a long period of develop ment of Japanese service investments in the form of the general trading compa nies banks and other financial institutions and the sales and distribution functions of the manufacturing firms themselves8 However there is nothing inevitable about the progression through each of the stages Our broad definition of the TNC allows for other possibilities Figure 55 shows several possible developmental paths A firm may bypass the intermediate stages and set up overseas production facilities without using intermediaries This has been especially common among firms from small countries such as the Netherlands Switzerland or Sweden Switzerland is a small country Within five months of its creation Nestlé was already manufacturing abroad The mentality here was never to export from the home market but to produce locally9 Increasingly firms engage in a bewildering variety of collaborative arrangements with other firms and these provide further diverse paths of TNC development For example a firm may tap into existing TNC networks as suppliers of specific products functions and services Alternatively a firm may take on various kinds of transnational networking roles and yet remain relatively small One important pathway is through the acquisition of another domestic firm that already has foreign operations Thus a firm may become transnational almost incidentally More generally merger and acquisition is one of the most common methods of entry both to new product markets and to new geographical markets It offers the attraction of an already functioning business compared with the more difficult and possibly more risky method of starting from scratch in an unfamiliar environment Virtually all TNCs have grown at least partially through acquisition and merger although it tends to be a path favoured by TNCs from some countries more than others Certainly it is the way in which a new generation of TNCs from developing countries like China and India are becoming major global play ers For example the Chinese computer firm Lenovo acquired IBMs PC business in 2004 while the Indian Tata Group acquired the luxury car company Jaguar from Ford in 2008 Although these examples illustrate increasing diversity in TNC development they still imply a more or less lengthy temporal sequence However there is grow ing evidence of new entrepreneurial ventures actually starting out as transnational operations from the very beginning In other words they are what have been called born globals10 Such firms 05Dicken4084Ch05indd 119 19102010 35023 PM Part Two Processes of Global Shift 120 started and operate from day one in global markets as global players servicing their customers wherever they are to be found they are all char acterized by their accelerated internationalization and they are thereby changing the dynamics of international competition The new species of TNC are different from traditional multinationals in that they are created by internationally experienced individuals and global in their outlook already from inception seizing the opportunities offered by an increasingly inte grated and interconnected global economy firms identified as born globals or international new ventures have been found to target and pene trate international markets from very early on and in some cases from the outset organize operations around internationally dispersed knowledge and resources11 Two examples can be used to illustrate this new form of TNC First Proteome Systems Ltd PSL was established by academics at Macquarie University in Australia as a biotech company The firm sought to develop its customer base internationally from inception Its pattern of market expansion was rapid and opportunistic and focused on gaining access to resources wherever they might be available In the US it expanded by acquisition of the pieces left after a biotech firm in Boston went out of busi ness In Japan it entered into a strategic alliance with an established trading house Itochu In Malaysia it entered the market through the services of an agent In other words there was a heterogeneous entrepreneurial process of market entry and resource deployments as and when circumstances and opportunities presented themselves but always with a view to sustaining a global market presence from the outset12 Second Momenta Corporation of Mountain View Colorado was a startup in the emerging penbased computer market Its founders were from Cuba Iran Tanzania and the US From its beginning in 1989 the founders wanted the venture to be global in its acquisition of inputs and in its target market Thus software design was conducted in the US hardware design in Germany manufacturing in the Pacific Rim and funding was received from Taiwan Singapore Europe and the US13 Such born global TNCs are very different from traditional TNCs Not only do they inject much greater diversity into the TNC population but also they empha size the importance of social networks and networked knowledge Many of these newstyle firms are in sectors where technology is changing very rapidly where it is vital to get new products or processes to market very quickly The ability to tap into geographically dispersed networks of firms and individuals as well as into knowledge networks using the Internet is vital Clearly therefore it is no longer valid to equate transnationality with firm size Although many TNCs are indeed very large many others are not Size does not always matter TNCs come in all shapes and sizes 05Dicken4084Ch05indd 120 19102010 35023 PM Transnational Corporations 121 TNCs as networks within networks Although TNCs come in all shapes and sizes two basic characteristics apply to all of them whether they are involved in manufacturing services agriculture or resource exploitation First TNCs are networks within networks structured through a myriad of complex relationships transactions exchanges and interactions within their own internal corporate network and between that network and those of the other key actors with whom TNCs must interact see Figures 31 and 34 Second the fact that a TNCs networks are spread across and embedded within different national jurisdictions and contexts means that coordinating and control ling its internal and external networked activities are vastly more complex than is the case for a purely domestic firm Such a relational network view of a TNC raises the question of where its organizational boundaries begin and end14 In a legal sense of course the boundary of a firm is clear companies have to be registered in the jurisdictions in which they operate But for firms that operate across national boundaries there is no interna tional legal framework Nevertheless at a TNCs core is a set of formally organized rules and conventions regulated and institutionalized through the firms own inter nal mechanisms But in a functional sense especially when we see them as net works within networks a TNCs boundaries are much less clear The distinction between what goes on inside and what goes on outside is not only very fuzzy but also continuously in a state of flux In the following sections we explore these complex internal and external relationships of TNCs in order to show how and where their operations are coordinated controlled and configured Figure 56 sets out the basic framework for this analysis It shows that different parts of a TNC have network relationships both inside and outside the firms boundaries The important point to note is that a subsidiary is not solely embed ded within a rigid hierarchical corporate structure but may have networked busi ness relationships outside that structure that are specific to its operations The configuration of a business network is specific to each individual subsid iary First some subsidiaries may be embedded in relationships that are both external and internal visàvis the TNC as in the case of subsidiary A while other subsidiaries like subsidiary B have external business relationships only Thus we can distinguish between external and corporate embeddedness Second individual business relationships can range from armslength exchange to a high degree of mutual adaptation of resources and activities that is to a high degree of embeddedness A subsidiary may be dominated by highly embedded relationships external internal or both Other subsidiaries in con trast may have only relationships consisting of armslength exchanges external internal or both Since every relationship has its own specific characteristics and history we would expect to find a high degree of variation as regards embeddedness both within the individual subsidiary and between the different subsidiaries in a TNC15 05Dicken4084Ch05indd 121 19102010 35023 PM The precise manner therefore in which TNCs organize and configure their networks arises from a number of interrelated influences notably the nature and complexity of the industry environments in which the firm operates including the nature of competition technology regulatory structures etc the firms specific history and geography including its culture and administrative heritage in the form of accepted practices built up over a period of time producing a particular strategic predisposition characteristics derived from its homecountry embeddedness The geographical embeddedness of TNCs Homecountry influences This latter influence merits more attention because it is too often assumed that TNCs are all much the same regardless of their geographical origin This is emphatically not the case TNCs are produced through an intricate process of embedding in which the cognitive cultural social political and economic characteristics of the national home base continue to play a dominant part This is not to claim that TNCs from a particular national origin are identical This is selfevidently not the case Within any national situation there will be distinctive corporate cultures arising from the firms own specific corporate history which predispose it to behave strategically in particular ways But in general the similarities between TNCs from one country will be greater than the differences between them For example a detailed study of US German and Japanese firms found little blurring or convergence at the cores of firms based in Germany Japan or the US Durable national institutions and distinctive ideological traditions still seem to shape and channel crucial corporate decisions the domestic structures within which a firm initially develops leave a permanent imprint on its strategic behavior our findings underline for example the durability of German financial control systems the historical drive behind Japanese technology development through tight corporate networks and the very different time horizons that lie behind American German and Japanese corporate planning Firms from other East Asian countries notably South Korea and Taiwan also have strong and distinctive relational structures Yet despite sharing a common heritage of Confucianbased familialism they have developed different corporate systems In South Korea the dominant type of business group is the chaebol modelled on the preSecond World War Japanese zaibatsu the giant familyowned firms which had been so important in the development of the Japanese economy The chaebol are highly centralized most being owned and controlled by the founding patriarch and his heirs through a central holding company A single person in a single position at the top exercises authority through all the firms in the group Different groups tend to specialize in a vertically integrated set of economic activities Transnational Corporations 125 this but many of these smaller firms are tightly tied into the production networks of the chaebol which have developed into some of the most highly vertically integrated business networks in the world the firms in the chaebol are the principal upstream suppliers for the big down stream chaebol assembly firms in Samsung electronics most of the main component parts for the consumer electronics division are manufactured and assembled in the same compound by Samsung firms26 Taiwanese business networks in contrast have low levels of vertical integration The more horizontal Taiwanese networks consist of two main types family enter prise networks and satellite assembly networks independently owned firms that come together to manufacture specific products primarily for export These contrasts between the South Korean and Taiwanese business groups despite the strong similarities between the two countries have been explained as arising from differences in social structures growing out of the transmission and control of family property In South Korea the kinship system supports a clearly demar cated hierarchically ranked class structure in which core segments of lin eages acquire elite rankings and privileges These are the great families In Taiwan however the Confucian family was situated in a very different social order Unlike Korea the Chinese practiced partible inheritance in which all sons equally split the fathers estate This set of practices pre served the household and made it the key unit of action rather than the lin eage itself In summary although based on similar kinship principles the Korean and the Chinese kinship systems operate in very different ways27 Such differences in sociocultural practices largely explain the contrasts between the ways that business firms are organized in the two neighbouring countries Convergence or differentiation Our argument is that TNCs retain distinctive characteristics derived from their country of origin But this does not imply that nationally embedded TNCs are unchanging On the contrary the very interconnectedness of the contemporary global economy means that influences are rapidly transmitted across boundaries Corporations are learning organizations they strive to tap into appropriate practices wherever they occur This will inevitably affect the way business organizations are configured and behave There is essentially a process of coevolution through which different business systems may converge in certain dimensions and diverge in other attributes28 The very fact that TNCs are transnational that they operate in a diver sity of economic social cultural and political environments means that they will inevitably take on some of the characteristics of their host environments Nonlocal firms invariably have to adapt some of their domestic practices to local conditions It is virtually impossible to transfer the whole package of firm 05Dicken4084Ch05indd 125 19102010 35023 PM Part Two Processes of Global Shift 126 advantages and practices to a different national environment For example Japanese overseas manufacturing plants tend to be hybrid forms rather than the pure organizations found in Japan itself29 The same argument applies to US firms operating abroad Even in the UK where the apparent cultural distance between the US and the UK is less than in many other cases there is a very long history of American firms having to adapt some of their business practices to local conditions We can find plenty of evidence of change within TNCs in response to these various forces For example the keiretsu have been at the centre of Japanese eco nomic development during the postSecond World War period But the financial crisis in Japan that has persisted since the bursting of the bubble economy at the end of the 1980s has put them under considerable pressure to change at least some of their practices In particular the recent influx of foreign capital to acquire significant sometimes controlling shares in some of these companies has had a catalytic effect The most notable example was the acquisition by the French automobile company Renault of 44 per cent of the equity of Nissan see Chapter 11 There are strong pressures particularly from Western notably US finance capital for Japanese business groups to open up to outsiders to reduce or eliminate the intricate crossshareholding arrangements and to become more like Western that is US firms with their emphasis on shareholder value rather than the broader socially based stakeholder interests intrinsic to Japanese com panies However the 2008 financial crisis has greatly reduced the attractiveness of the US model While without doubt some changes are occurring it would be a mistake to assume that Japanese firms will suddenly be transformed into US clones The Japanese have a very long history of adapting to external influences by building structures and practices that remain distinctively Japanese Similarly Korean and other East Asian firms have come under enormous pressure to change some of their business practices in the aftermath of the regions financial crisis of the late 1990s In Korea the chaebol are being drastically restructured and the relationships with the state diluted Among Chinese businesses the strong basis in family own ership and control is being challenged by both internal and external forces Greater involvement in the global economy is forcing these firms to modify some of their practices30 Similar observations apply to firms from other home coun tries In the case of Germany for example while some of the established charac teristics of German business are under threat the evidence suggests that many of the core elements remain in place31 It would be extremely surprising if the distinctive nature of nationally based TNCs were to be replaced by a universal form Continued differentiation would appear to be the most likely scenario although undoubtedly containing elements of change and some degree of convergence A recent comparison of Japanese and American TNCs in the AsiaPacific for example showed precisely that 05Dicken4084Ch05indd 126 19102010 35023 PM Transnational Corporations 127 The results point to a certain degree of inertia among American and Japanese TNCs regarding organizational change in international environments While selection and mimetic convergence may not have been completely absent the reproduction of structures from the home country would seem also to have con tributed to persistent differentiation pressures for convergence appear to have been mediated by some degree of contingency that suggests that TNCs will likely continue to exhibit national characteristics in international environments32 In other words the empirical evidence suggests that distinctive national histories have left legacies that continue to affect the behavior of leading TNCs The scope for corporate interdependencies across national markets has unquestionably expanded in recent decades But history and culture continue to shape both the internal structures of TNCs and the core strategies articulated through them33 So where are we heading Are TNCs converging towards a more or less universal form or are we likely to see continued differentiation In my view the answer is emphatically the latter These observations on the continuing geographical distinctiveness of TNCs need to be kept in mind during the remainder of this chapter as we outline some of the broad characteristics of TNC networks Configuring the TNCs internal networks Coping with complexity a diversity of organizational architectures One of the basic laws of growth of any organism or organization is that as growth occurs its internal structure has to change In particular the functional role of its component parts tends to become more specialized and the links between the parts become more complex In other words its organizational architecture has to change As the size organizational complexity and geographical spread of TNCs have increased the internal interrelationships between their geographically sepa rated parts have become a highly significant element in the global economy The traditional approach to changing a TNCs organizational architecture based primarily on the hierarchical Western that is US model depicts it as a sequential process whereby firms transform their organizational structures from a functional form in which the firm is subdivided into major functional units production marketing finance etc into a divisional form usually product based In such a divisional structure each product division is responsible for its own functions particularly of production and marketing although some functions 05Dicken4084Ch05indd 127 19102010 35023 PM Part Two Processes of Global Shift 128 especially finance tend to be performed centrally for the entire corporation Each product division also usually acts as a separate profit centre The main advan tage of the divisional structure is its greater ability to cope with product diversity Adoption of a divisional structure gave firms greater control over their increas ingly diverse product environment However operating across national bounda ries rather than within a single country poses additional problems of coordination and control Largely through trial and error TNCs have groped their way towards more appropriate organizational structures Figure 58 shows four commonly used structures Which one is actually adopted depends upon a number of factors including the age and experience of the enterprise the nature of its operations and its degree of product and geographical diversity The form most commonly adopted in the early stages of TNC development is simply to add on an international division to the existing divisional structure Figure 58a This tends to be a shortlived solution to the organizational problem if the firm continues to expand its international operations because problems of coordination and tension inevitably arise between the parts of the organization operated on product lines the firms domestic activities and those organized on an area basis the international operations There are two obvious possible solutions One is to organize the firm on a global product basis that is to apply the productdivision form throughout the world and to remove the international division Figure 58b The other possibility is to organize the firms activities on a worldwide geographical basis Figure 58c But neither of these structures resolves the basic tension between product and Figure 58 Types of transnational organizational architecture CORPORATE HEADQUARTERS corporate control functions CORPORATE HEADQUARTERS corporate control functions Product division structure with separate international division a Global product division structure b d Simplified global matrix structure Global geographical division structure c d i v i s i o n a l c o n t r o l f u n c t i o n s d i v i s i o n a l c o n t r o l f u n c t i o n s d i v i s i o n a l c o n t r o l f u n c t i o n s A A A A A B B B B B X X X X X X Y Y Y Y Y Y INTERNATIONAL DIVISION P P P P P P P P P P P P P P P P M M M M M M M Product Area P Production Marketing M M M M M M M M M M CORPORATE HEADQUARTERS corporate control functions CORPORATE HEADQUARTERS corporate control functions 05Dicken4084Ch05indd 128 19102010 35023 PM Transnational Corporations 129 Table 51 Some idealtypes of TNC organization basic characteristics Characteristics Multinational International Global Integrated network Structural Decentralized Coordinated Centralized Distributed network configuration federation federation hub of specialized Many key Many assets Most strategic resources assets responsibilities assets and capabilities responsibilities resources resources decisions decisions responsibilities decentralized decentralized but and decisions controlled by HQ centralized Administrative Informal HQ Formal Tight central Complex process of control subsidiary management control of coordination and relationship planning and decisions cooperation in an simple financial control systems resources and environment of control allow tighter HQ information shared decision subsidiary linkage making Management Overseas Overseas Overseas Overseas operations attitude operations operations operations seen an integral part towards overseas seen as seen as treated as of complex network operations portfolio of appendages to a delivery of flows of independent central domestic pipelines components businesses corporation to a unified products resources global market people information amongst interdependent units Role of overseas Sensing and Adapting and Implementing Differentiated operations exploiting local leveraging parent parent contributions by opportunities company company national units to competencies strategies integrated worldwide operations Development and Knowledge Knowledge Knowledge Knowledge diffusion of developed and developed at the developed developed knowledge retained within centre and and retained jointly and shared each unit transferred to at the centre worldwide overseas units Source based on material in Bartlett and Ghoshal 1998 areabased systems For such reasons some of the largest TNCs have adopted sophisticated global grid or global matrix structures Figure 58d containing elements of both product and area structures and involving dual reporting links Although there is plenty of evidence to support such a sequence there is also plenty of evidence to demonstrate far greater organizational diversity In this regard Bartlett and Ghoshals typology though far from perfect is very useful34 Table 51 summarizes the major features of each idealtype 05Dicken4084Ch05indd 129 19102010 35023 PM Part Two Processes of Global Shift 130 The multinational organization model emerged particularly during the 1930s A combination of economic political and social factors forced firms to decentralize their operations in response to national market differences The result was a decen tralized federation of overseas units and simple financial control systems overlain on informal personal coordination Figure 59 The companys worldwide opera tions are organized as a portfolio of national businesses This was the kind of transnational organizational form used extensively by expanding European com panies Each of the firms national units has a very considerable degree of auton omy and a predominantly local orientation It is able therefore to respond to local needs but its fragmented structure lessens scale efficiencies and reduces the internal flow of knowledge The international organization model came to prominence in the 1950s and 1960s as large US corporations expanded overseas to capitalize on their firm specific assets of technological leadership or marketing power This idealtype involves far more formal coordination and control by the corporate headquar ters over the overseas subsidiaries Figure 510 Whereas multinational organ izations are in effect portfolios of quasiindependent businesses international organizations see their overseas operations as appendages to the controlling domestic corporation Thus the international subsidiaries are more dependent on the centre for the transfer of knowledge and the parent company makes greater use of formal systems of control The international TNC is better equipped to leverage the knowledge and capabilities of its parent company but its particular configuration and operating systems tend to make it less respon sive than the multinational model It is also rather less efficient than the next idealtype Multinational mentality Management regards overseas operations as a portfolio of independent businesses Personal control Informal HQsub relationships overlaid with simple financial controls Decentralized federation Many key assets responsibilities and decisions decentralized Figure 59 Multinational organization model Source based on Bartlett and Ghoshal 1998 Figure 31 05Dicken4084Ch05indd 130 19102010 35023 PM Transnational Corporations 131 The global organization model was one of the earliest forms of international busi ness used for example by Ford and by Rockefeller in the early 1900s as well as by Japanese firms in their much later internationalization drive of the 1970s and 1980s It is based upon a tight centralization of assets and responsibilities in which the role of the local units is to assemble and sell products and to implement plans and policies developed at the centre Figure 511 Overseas subsidiaries have far less freedom to create new products or strategies or to modify existing ones Thus the global TNC capitalizes on scale economies and on centralized knowledge and expertise But this implies that local market conditions tend to be ignored and the possibility of local learning is precluded International mentality Management regards overseas operations as appendages to a central domestic corporation Administrative control Formal management planning and control systems allow tighter HQsub linkage Coordinated federation Many assets resources responsibilities and decisions still decentralized but controlled from headquarters Figure 510 International organization model Source based on Bartlett and Ghoshal 1998 Figure 32 Global mentality Management treats overseas operations as delivery pipelines to a unified global market Operational control Tight central control of decisions resources and information Centralized hub Most strategic assets resources responsibilities and decisions centralized Figure 511 Global organization model Source based on Bartlett and Ghoshal 1998 Figure 33 05Dicken4084Ch05indd 131 19102010 35023 PM Part Two Processes of Global Shift 132 what Hedlund terms a heterarchical structure37 and also outside the firm through a complex network of interfirm relationships We will explore this issue further later in the broader context of networks of externalized relationships The point to emphasize is the continuing diversity of organizational architec tures TNCs come in all shapes sizes and forms of governance Their internal architecture reflects not only the external constraints and opportunities they have to face including the structures made possible by new communications tech nologies38 but also a strong element of path dependency Firms organized on hierarchical principles not only still exist but also may still be in a majority The newer flatter organizational forms tend to be confined to a limited number of firms in certain sectors Complex process of coordination and cooperation in an environment of shared decision making Large flows of components products resources people and information among interdependent units Distributed specialized resources and capabilities Figure 512 Integrated network organization model Source based on Bartlett and Ghoshal 1998 Figure 51 Although each of these three organizational types developed initially during specific historical periods one did not simply replace the other Because each has its strengths as well as weaknesses each has tended to persist in either a pure or a hybrid form helping to produce todays diverse TNC population35 There is some correlation between organizational type and nationality of parent company but it is by no means perfect it is better to regard firms of different national ori gins as having a predisposition to one or other form of organization36 The dilemma facing TNCs is that they need the best features of each organiza tional form to be globally efficient geographically flexible and capable of captur ing the benefits of worldwide learning all at the same time Hence it is argued we are now seeing the emergence of a fourth idealtype TNC the integrated net work organization model characterized by a distributed network configuration and a capacity to develop flexible coordinating processes Figure 512 Such capabilities apply both inside the firm displacing hierarchical governance relationships with 05Dicken4084Ch05indd 132 19102010 35024 PM Different places within the firm organizationally and geographically develop their own identities ways of doing things and ways of thinking over time The firms dominant culture created by and expressed through the activities and understandings of top management at headquarters necessarily contains multiple subcultures Some of these may revolve around functions and cut across places engineers versus sales people for example but some will have real geographical locations they will have grown up in specific plants in particular places Grounding the TNC mapping the firms internal geographies Every business is a package of functions and within limits these functions can be separated out and located at different places42 Given their chosen organizational architecture how do TNCs choose to locate their productive assets and capabilities This is a fundamental issue for all TNCs regardless of the kind of business they are in whether they produce manufactured goods or business services whether their product is hard like cars or semiconductors or food or soft like information or money another kind of information or retailing It is important to make this point because we are concerned in this book with all kinds of production not only manufacturing Different business functions have different locational needs and because these needs can be satisfied in various types of geographical location each part tends to develop rather distinctive spatial patterns Some functions tend to be geographically dispersed others are geographically concentrated and colocated with other parts of the firm In the following sections we look at the geographical orientations of four of the major business functions control and coordination research and development marketing and sales production Centres of strategic control and coordination The corporate headquarters is the locus of overall control of the entire TNC43 It is the strategic centre responsible for all the major strategic investment and disinvestment decisions that shape and direct the enterprise which products and markets to enter or to leave whether to expand or contract particular parts of the enterprise whether to acquire other firms or to sell off existing parts The headquarters has to prevent subsidiaries from pursuing strategic initiatives that diverge from the TNCs strategy In addition the headquarters assesses the value of strategic resources distributed across the TNC network and coherently affects their mobility so as to assure that resources are made available where they are actually necessary44 The headquarters is also the legal core of the TNC responsible for complying with all the legal financial and regulatory functions required of the firm by the jurisdictions in which it is located One of its key roles is financial The corporate headquarters holds the purse strings and decides on the allocation of the corporate budget between its component units Headquarters offices are above all handlers processors and transmitters of information to and from other parts of the enterprise and also between similarly highlevel organizations outside The most important of these are the major business services on which the corporation depends financial legal advertising and also very often major departments of government both foreign and domestic There is evidence that the size and complexity of corporate headquarters varies substantially between firms from different home countries45 Regional headquarters offices constitute an intermediate level in the corporate organizational structure having a geographical sphere of influence encompassing several countries Regional headquarters perform several distinctive roles46 Most commonly their primary responsibility is to integrate the parent companys activities within a region that is to coordinate and control the activities of the firms affiliates manufacturing units sales offices etc and to act as the intermediary between the corporate headquarters and its affiliates within its particular region Regional headquarters therefore are both coordinating mechanisms within the TNC and also an important part of the TNCs intelligencegathering system A regional headquarters may also have an entrepreneurial role to act as a base to initiate new regional ventures or to demonstrate to governments that the company has a commitment to the region In either case regional headquarters act as strategic windows on regional developments and opportunities47 In some cases regional headquarters are located close to the firms major production facilities in a particular country or region But that is not always the case These characteristic functions of corporate and regional headquarters define their particular locational requirements Both require a strategic location on the global transportation and communications network in order to keep in close contact with other geographically dispersed parts of the organization Part Two Processes of Global Shift 136 Angeles Montreal San Francisco Toronto Asia eg Beijing Hong Kong Osaka Seoul Singapore Taipei One of the most striking features of the geography of corporate headquarters as opposed to regional headquarters is their geographical inertia Very few if any major TNCs have moved their ultimate decisionmaking operations outside their home country An analysis of headquarters relocations of the Fortune Global 500 covering the period 1994200250 found only one And this was the result of the ultimately failed merger between Daimler of Germany and Chrysler of the US Such geographical fixedness is a further strong indicator of the continuing sig nificance of the home base for corporate behaviour On the other hand TNCs are more willing to shift regional headquarters to meet changing circumstances In East Asia for example there is an identifiable shift northwards as some firms move their regional HQs from Singapore to Shanghai although Singapore remains a major regional focus51 Within individual countries on the other hand the locational pattern of both corporate and especially regional headquarters is far from static with substan tial geographical decentralization of corporate headquarters out of the city cen tres of New York and London In the case of London most of these shifts are a short distance to the less congested outer reaches of the metropolitan area In the US on the other hand there appears to be a much higher degree of locational change in headquarters functions Nevertheless corporate headquarters tend not to be spread very widely within any particular country In the UK for example there are very few corporate headquarters of major firms or regional headquar ters of foreign TNCs outside London and the southeast in France few locate outside Paris In Italy the most important centre is Milan in the highly industrial ized north which is more important than Rome as a location for foreign TNCs Apart from corporate and regional headquarters there are other key coordina tion functions that may be separated out geographically For example although a TNCs supply chain management is normally located at or near the corporate headquarters or at one or more of the regional headquarters sites there are cases where this function has been located beyond this part of the network The Anglo Dutch consumer products company Unilever has concentrated all its European supply chain coordination and management at a completely new site at Schaffhausen in Switzerland IBM has moved its global procurement headquarters from New York to Shenzhen China Corporate RD facilities The process of research and development RD is a complex sequence of operations Figure 513 consisting of three major phases each of which tends to have rather different locational requirements although in each case the TNC has to reconcile several factors52 One of these is the advantage of gaining scale economies from concentrating RD in one or a few large establishments Another is the possible benefit of locating RD close to corporate headquarters 05Dicken4084Ch05indd 136 19102010 35024 PM Transnational Corporations 137 or alternatively close to production units to enhance communications and the sharing of ideas Yet another possible locational pull is to markets in order to benefit from closeness to customer needs tastes and preferences The type of RD undertaken by TNCs within their own transnational net work can be classified into three major categories The lowest level is the support laboratory whose primary purpose is to adapt parent company technology to the local market and to provide technical backup It is by far the most common form of overseas RD facility The locally integrated RD laboratory is a much more substantial unit in which product innovation and development are carried out for the market in which it is located The international interdependent RD laboratory is of a quite different order Its orientation is to the integrated global enterprise as a whole rather than to any individual national or regional market Indeed there may be few if any direct links with the firms other affiliates in the same country Only a small number of technologically intensive global corporations operate international interdependent laboratories Of course these categories are not fixed and unchanging In particular the development of socalled open innovation is changing the nature and relationships of corporate RD units Figure 513 Corporate RD processes Source based in part on Buckley and Casson 1976 Figure 27 Marketing of final product Production of final product Debugging and adaptation to the local environment Marketing experience with prototype Production experience with prototype Product development Product specificatio n Product design Marketing experience Access to Universities research institutes trade associations etc Access to large supply of highly qualified scientists engineers and technicians Access to relevant production and marketing units Marketing research Applied scientific research Production experience Environmental scanning PHASE III PHASE II PHASE I Major locational requirements RD processes 05Dicken4084Ch05indd 137 19102010 35024 PM Part Two Processes of Global Shift 138 Open innovation means the end of the traditional RD centre where scien tists worked on confidential corporate projects in relative isolation from the outside world Instead companies are working with growing networks of external partners to commercialize their internal innovations and find other peoples inventions to exploit53 There is considerable disagreement over the extent to which TNCs are dispersing their RD geographically On the one hand they continue to show a very strong preference for keeping their highlevel RD at home Why should such home country bias persist The answer lies in the importance of the kinds of untraded interdependencies and of knowledge clusters discussed earlier see Chapters 3 and 4 Two key features related to the launching of major innovations may help explain the advantages of geographic concentration the involvement of inputs of knowl edge and information that are essentially personembodied and a high degree of uncertainty surrounding outputs Both of these are best handled through geographic concentration Thus it may be most efficient for firms to concentrate the core of their technological activities in the home base with international listening posts and small foreign laboratories for adaptive RD54 On the other hand there is some evidence of increasing geographical dispersal of RD activities within TNC networks For example by the late 1990s there was an increasing share of companyfinanced RD performed abroad by US firms as compared to domestically financed industrial RD US firms investment in over seas RD increased three times faster than did companyfinanced RD per formed domestically55 In this regard Asia is playing an increasingly important role as a location for certain kinds of RD especially in product development56 There are two major reasons for Asias increasing significance Asias greatest overall advantage is its huge supply of scientists and engi neers particularly in China and India at a time when students in the west are turning away from science and engineering Companies in the US and Europe can exploit Asias trained workforce by building research and development centres there or collaborating with Asian companies and universities57 The other advantage of an Asian location for some kinds of RD is cost The relative costs of doing research in Asia vary enormously according to cir cumstances However the pay of newly graduated researchers in India and China is around onequarter of US levels For more senior staff it is usually at least half the US level and in exceptional circumstances may even exceed it58 Support laboratories tend to be the most widely spread geographically in so far as they generally locate close to production units But the largerscale and more complex RD activities tend to be confined to particular kinds of location The need for a large supply of highly trained scientists engineers and technicians together with proximity to universities and other research institutions confines 05Dicken4084Ch05indd 138 19102010 35024 PM Transnational Corporations 139 such facilities to large urban complexes These are often also the location of the firms corporate headquarters A secondary locational influence is that of quality of living for the highly educated and highly paid research staff an amenityrich setting including a good climate and potential for leisure activities as well as a stimulating intellectual environment Spatial patterns of corporate RD in both the US and the UK illustrate both of these locational influences In the US corporate RD is still predominantly a big city activity despite recent growth in smaller urban areas The pull of the amenityrich environment is illustrated by the considerable concentration of RD activities in locations such as Los Angeles San Francisco and San Diego in California Denver Boulder in Colorado and the Research Triangle in North Carolina In the UK corporate RD like corporate headquarters and regional offices is disproportion ately concentrated in southeast England Almost twothirds 61 per cent of the research undertaken by foreign affiliates in the UK is located in the southeast region of the country compared with only 40 per cent of domestic firms research59 Marketing and sales units Of all the various functions within a TNC it is the marketing and especially the sales units that are likely to be the most geographically dispersed The reason is obvi ous These functions need to be as close as possible to the markets served by the firm They must be sensitive to local conditions in order to be able to feed back relevant information They must be in a position to help to tailor the firms products to local tastes Not least they must be in a position to prevent the firm from making costly and often embarrassing mistakes in misreading the various consumer cultures in which the firms are operating The marketing literature is full of examples of insen sitive sometimes culturally insulting branding or packaging decisions made by for eign TNCs which have not fully understood local conditions It is for such reasons that firms such as the Swiss company Nestlé have developed a strategy in which the consumer is paramount Every decision has to be made as close to the consumer as possible It makes no sense for us in Vevey to decide on the taste of a soup to be sold in Chile60 Apart from the obvious tendency to locate marketing andor sales units in the firms most important geographical markets there is a good deal of flexibility in the precise geographical articulation of such activities Marketing functions in particular are often concentrated either at corporate headquarters or increasingly within regional headquarters where they are responsible for all the marketing decisions in the specific region In some cases they are located close to some of the firms RD activities especially those at the development end of the spec trum in order to create positive synergy between product development and mar ket needs Of course with sophisticated internal communications systems virtual geographical proximity may replace physical proximity Sales units on the other hand tend to be smaller and very widely dispersed 05Dicken4084Ch05indd 139 19102010 35024 PM Part Two Processes of Global Shift 140 Production facilities There are clearly some identifiable geographical regularities in the patterns of TNC headquarters RD and marketing and sales activities This is because their locational needs are broadly similar for all firms regardless of the particular activities hard or soft in which they are involved This is not so for production units whose locational requirements vary considerably according to the specific organizational and technological role they perform within the enterprise and the geographical distribu tion of the relevant locationspecific resources they need It is certainly true that compared with corporate headquarters and RD facilities production units of TNCs have become more and more dispersed geographically But there is no single and simple pattern of dispersal whether at the global scale or within individual nations The pattern varies greatly from one industry to another Figure 514 illustrates four types of geographical orientation that a TNC might adopt for its production units Each production unit performs a separate operation in a production process and ships its output to a final assembly plant in another country Each production unit performs a separate part of a production sequence Units are linked across national boundaries in a chainlike sequence the output of one plant is the input of the next plant Transnational vertical integration d Each production unit produces only one product for sale throughout a regional market of several countries Individual plant size very large because of scale economies offered by the large regional market Product specialization for a global or regional market c Each production unit produces a range of products and serves the national market in which it is located No sales across national boundaries Individual plant size limited by the size of the national market Hostmarket production b All production occurs at a single location Products are exported to world markets Globally concentrated production a Figure 514 Alternative ways of organizing the geography of transnational production 05Dicken4084Ch05indd 140 19102010 35024 PM enterprise as part of a rationalized product or process strategy to serve a global or a large regional market such as the European Union North America or East Asia The existence of a huge geographical market together with differences in locationally specific characteristics between countries within a region facilitates the establishment of very large specialized units of TNCs to serve the entire regional market rather than single national markets The key locational consideration therefore involves the tradeoff between economies of largescale production at one or a small number of large plants additional transportation costs involved in assembling the necessary inputs and in shipping the final product to a geographically extensive regional market Part Two Processes of Global Shift 142 This tradeoff is once again becoming increasingly problematic as rising energy prices feed through to increased transportation costs Firms that have been moving towards a network of fewer but very large production units are having to rethink this strategy A rather different kind of transnational production strategy involves geo graphical specialization by process or by semifinished product in which differ ent parts of the firms production system are located in different parts of the world Figure 514d shows two ways in which such transnational process spe cialization might be organized as part of a vertically integrated set of operations across national boundaries Materials semifinished products components and finished products are transported between geographically dispersed production units in a highly complex web of flows In such circumstances the traditional geographical connection between production and market is broken The output of a plant in one country may become the input for a plant belonging to the same firm located in another country Alternatively the finished product may be exported to a thirdcountry market or to the home market of the parent firm In such cases the host country performs the role of an export platform Its role is to act as international sourcing point for the TNC as a whole Such offshore sourcing and the development of vertically integrated production networks at a global scale were virtually unknown before the early 1960s The pioneers were US electronics firms that set up offshore assembly operations in East Asia as well as in Mexico Since then the growth of such transnational production networks has been extremely rapid in most sectors Indeed there has been a veri table avalanche of firms in the older industrialized countries of the West shifting some of their manufacturing or lowerlevel service operations like call centres or basic information processing to cheaper developing country locations The choice of location for a production unit at the global scale is by no means as simple as it is often made out to be It is not just a matter of looking at differ ences in labour costs between one country and another or at the subsidies grants or tax incentives offered by governments to attract investment see Chapter 7 Despite the enormous shrinkage of geographical distance that has occurred the relative geographical location of parent company and overseas production unit may still be significant The sheer organizational convenience of geographical proximity may encourage TNCs to site offshore production in locations close to their home country even when labour costs there are higher than elsewhere Of course just as geographical proximity may override differentials in labour costs so too may other locational influences dominate in any particular case For the largest TNCs the world is indeed their oyster Their production units are spread globally often as part of a strategy of dual or multiple sourcing of components or products This is one way of avoiding the risk of overreliance on a single source whose operations may be disrupted for a whole variety of reasons In a vertically integrated production sequence in which individual production units are tightly 05Dicken4084Ch05indd 142 19102010 35024 PM Transnational Corporations 143 interconnected an interruption in supply can seriously affect the other units perhaps those located at the other side of the world In an extreme case a whole segment of the TNCs operations may be halted Nevertheless major TNCs have developed highly complex and geographically extensive networks of control RD sales and marketing and production facilities Figure 515 provides just one example the electronics firm Solectron Solectron was concentrated in a single campus in Silicon Valley until 1991 when its key customers Sun Microsystems Hewlett Packard and IBM began to demand global manufacturing and process engineering support Within ten years the companys footprint had expanded to nearly 50 facilities worldwide Today Solectron operates a set of global and regional headquarters high and low mix manufacturing facilities purchasing and materials management cen ters new product introduction centers aftersales repair service centers for products manufactured by Solectron and others and technology centers to develop advanced process and component packaging technologies61 Solectron was taken over by Flextronics in 2008 and a process of rationalization will inevitably change the shape of the production network shown in Figure 515 Technology centres Aftersales repair service centres New product introduction centres Materials purchasing and management centres Manufacturing facilities Global and regional headquarters Solectron global locations and functions 2001 Figure 515 Solectrons global network Source based on Sturgeon 2002 Table 2 05Dicken4084Ch05indd 143 19102010 35024 PM Part Two Processes of Global Shift 144 However there are dangers in simply shifting production offshore Many companies that tried to set up manufacturing networks across several parts of the world have produced a haphazard collection of plants which typi cally lacks global coherence And the costs are much higher than expected62 Moving production abroad remains by far the dominant trend But for a wide variety of reasons ranging from poor decisionmaking and preparation and rising transport and labour costs some European companies are mov ing production back closer to home63 More manufacturers in the US and western Europe are putting their invest ments closer to domestic operations as part of an effort to simplify supply structures This trend towards socalled nearshoring highlights difficul ties facing US companies in particular in managing their production opera tions in China In the past few years US companies have been more willing than they were at the end of the 1990s to invest in production operations in Mexico Many see it as a lowcost region that is easier to operate in than China in Europe more companies are finding it more attractive to put production investments in lowwage areas in eastern Europe as opposed to grappling with the problems of bringing in parts and finished goods over much longer distances64 Of course this should not be interpreted as heralding a complete reversal of long distance networks On the contrary But what are sometimes presented as inexo rable trends in one particular direction are in fact far less determinate Reality consists of exceedingly complex crosscutting tendencies both in time and over geographical space TNCs within networks of externalized relationships In the previous section the focus was on how TNCs organize and geographically configure their internalized networks However TNCs are also locked into external networks of relationships with a myriad of other firms transnational and domestic large and small public and private see Figure 35 As we saw earlier the boundary between what is inside and what is outside the firm has become far more blurred Outsourcing relationships No firm is completely selfsufficient Overall between 50 and 70 per cent of manufacturing costs are to purchase inputs Indeed a very strong general trend 05Dicken4084Ch05indd 144 19102010 35025 PM The increasing implementation of outsourcing strategies is one of the most remarkable changes that has characterized firm behavior in the last decades This strategy allows firms to concentrate their capabilities and resources in their respective core businesses giving up those activities where firms do not have any competitive advantage As a consequence specialist outsourcing firms have emerged particularly in the case of those business services whose function is to arrange and facilitate outsourcing Outsourcing especially through longerterm relationships is a kind of halfway house between complete internalization of procurement on the one hand and armslength transactions through the open market on the other There are broadly two major types of outsourcing both based on a supplier firm producing a good or service to a principal firms specifications Commercial outsourcing the manufacture of a finished product Industrial outsourcing Specialty outsourcing involves the carrying out often on a longterm basis Costsaving outsourcing is based upon differentials in production costs Complementary or intermittent outsourcing is a means adopted by principal firms to cope with occasional surges in demand without expanding their own production capacity Part Two Processes of Global Shift 146 linked firms However innovations in transportation and communications have greatly increased the geographical extensiveness of outsourcing networks Much of the increase in longdistance sourcing was driven by the desire to take advantage of the wide differentials in labour costs between different parts of the world As the distance between customers and suppliers increased however problems inevitably arose in terms of the reliability of supplies Many firms had to establish sophisticated and very costly systems of stockinventory hold ing to insure against interruptions in the supply of finished goods or compo nents This is the kind of justincase system shown on the lefthand side of Table 52 Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn Tn T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T3 T2 T2 T2 T2 T2 T2 T2 Tier 1 supplier Tier 1 supplier Tier 1 supplier Outsourcing firm Figure 516 Outsourcing as a multitiered process Types of relationship between principal firm and supplier Benefits and costs to principal firm Benefits and costs to supplier Time period may be long term short term single batch Principal may provide some or all materials or components Principal may provide detailed design or specification Principal may provide finance eg loan capital Principal may provide machinery and equipment Principal may provide technical andor general assistance and advice Principal is invariably responsible for all marketing arrangements Avoids need to invest in new production capacity Flexible easier to change suppliers Externalizes some risks while retaining some control Possible problems of controlling how suppliers work including labour issues Access to markets Continuity of orders Access to technical knowledge possible injection of finance Risk of being expendable if principal firm changes its priorities Possible overdependence on one or a small number of customers Figure 517 Outsourcing relationships 05Dicken4084Ch05indd 146 19102010 35025 PM Transnational Corporations 147 However as we saw in Chapter 4 production processes have changed dramati cally The emphasis is increasingly on rapid product turnover speed to market responsiveness to customer needs on what in the context of the automobile industry has come to be called lean production see Chapter 11 In such a pro duction system holding large stocks of inventory in warehouses is anathema Supplies must be delivered precisely when and where they are needed that is justintime JIT The major features of a JIT system are shown on the righthand side of Table 52 When JIT first came to prominence largely within Japanese automobile and electronics firms in the 1970s it was widely predicted that the result would be a largescale geographical reconcentration of suppliers near to their customers In other words there would be a return to the oldstyle industrial clusters In fact although there have undoubtedly been some geographical shifts towards closer links between customers and suppliers there has not been universal Table 52 Justincase and justintime systems of supplier relationships Justincase system Justintime system Characteristics Components delivered in large but Components delivered in small very frequent infrequent batches batches Very large buffer stocks held to protect Minimal stocks held only sufficient to meet against disruption in supply or discovery of the immediate need faulty batches Quality control based on sample check after Quality control built in at all stages supplies received Large warehousing spaces and staff required Minimal warehousing space and staff required to hold and administer the stocks Use of large number of suppliers primarily Use of small number of preferred selected on the basis of price suppliers within a tiered supply system Remote relationships between customer Very close relationships between customer and suppliers and suppliers No incentive for suppliers to locate close Strong incentive for suppliers to locate close to customers to customers Disadvantages Lack of flexibility difficult to balance Must be applied throughout the entire supply flows and usage of different components chain Very high cost of holding large stocks Reliance on small number of preferred suppliers increases risk of interruption in supply Remote relationships with suppliers prevents sharing of developmental tasks Requires a deep vertical hierarchy of control to coordinate different tasks Source based on material in Sayer 1986 05Dicken4084Ch05indd 147 19102010 35025 PM It is tempting to regard suppliers as always being in a subservient position merely small cogs in a much larger structure over which they have no influence Often that is the case although much depends on the position they occupy within a production network and also the kind of network involved see the next section However Andersen and Christensen argue that some subcontractors act as important connecting nodes in supply networks They identify five such bridging roles Local integrator firms able to provide access to additional production capacity through their relationships with other firms in the same locality Export base such firms act as the gate of access to a local technological district Import base these firms represent the gateway to international resources or skills for customers in the local or national area International spanner often such firms have evolved from being an export or import base subcontractor as their supply sources and buyers have internationalized Global integrator A hybrid form of subcontractor responsible for all bridging activities of the international supply chain connecting internationally Transnational Corporations 149 dispersed buyers and subcontractors and supplying the necessary logistical infrastructure for carrying out exchange The primary strategic asset is its developed infrastructure and its ability to often manage quite different streams of manufactured goods Compared to the roles taken by the other subcon tractors in the typology the global integrator has a strong bargaining position towards buyers as well as subcontractors 1270 Benefits and costs of outsourcing For the outsourcing firm the process is widely seen as a way of enabling it to focus on its core competences and to shed activities that do not fit The logic is that costs will be reduced and profits enhanced through such concentration on core activities This may well be the case But there are also risks in outsourcing as a number of wellpublicized cases have shown In 2005 for example British Airways became mired in a very messy dispute with the firm supplying all its airline food Gate Gourmet Originally BA had produced all its catering needs inhouse and what became Gate Gourmet was the result of a selloff of these activities to a US venture capital firm Should BA have retained the catering function as one of its core activities The company said no others were less sure A more recent example of the potential problems of outsourcing to cheap labour locations occurred in 2007 when toys produced under outsourcing arrangements by WalMart were found to contain lead The case clearly illustrates the problems of controlling geographically and organizationally extended production networks WalMart squeezes Mattel the toy maker Mattel squeezes its supplier that supplier squeezes its supplier and at the end of the chain you have a remote business far out in the countryside that takes a different approach They dont put lead in paint because they are wicked its just what works for them China is so large and industrialization has been so rapid that maintaining any con trol over multiple sites is extremely difficult68 For supplier firms on the other hand one of the major benefits of the increasing trend for firms to outsource some of their major functions is that it provides opportunities to fill the gap This has certainly been a major reason for the rapid industrialization of a number of developing countries especially in East Asia but also elsewhere as well as in Eastern Europe In fact however the trend towards outsourcing though very strong at present is not inevitable or irreversible There are many examples of activities that have been outsourced being brought back in later as the firm reassesses its priorities The unpredictability of supply and the changing impact of volatile currency exchange rates have encouraged a good many firms to switch to sup plier firms closer to home or even to take the process back inhouse In other words the boundary between externalization and internalization and between 05Dicken4084Ch05indd 149 19102010 35025 PM Part Two Processes of Global Shift 150 sourcing abroad and at home is continuously shifting and not always in predictable directions Different ways of coordinating transnational production networks In Chapter 3 we noted that production networks can be coordinated in a variety of different ways involving a mix of intrafirm and interfirm structures It is now time to examine this more closely69 Figure 518 shows one way of categorizing types of network coordination In this discussion I will concentrate on three of the five coordination types shown in Figure 518 captive relational and modular production networks In all three networks what we are interested in are the changing relationships between lead firms and suppliers We will encounter examples of these different types of network in the case studies of Part Three Captive production networks These are networks in which a lead firm is dominant and effectively controls although it does not own all the major components in the network Coordination mechanism Market Modular Relational Captive Hierarchy May involve repeat transactions but switching costs low for both parties Production to customers specification Complex interactions between buyers and sellers often creating mutual dependence and high levels of asset specificity Small suppliers transactionally dependent on larger buyers Suppliers face significant switching costs Vertical integration within a firm with governance of subsidiaries and affiliates based on head quarters managerial control Complexity of transactions Ability to codify transactions Capabilities of potential suppliers Degree of explicit coordination and power asymmetry LOW HIGH HIGH LOW HIGH HIGH HIGH HIGH LOW HIGH LOW HIGH HIGH LOW LOW HIGH HIGH Figure 518 Different ways of coordinating transnational production networks Source based on material in Gereffi et al 2005 05Dicken4084Ch05indd 150 19102010 35025 PM Transnational Corporations 151 Lead firms seek to lockin suppliers in order to exclude others from reaping the benefits of their efforts Therefore the suppliers face significant switching costs and are captive Captive suppliers are frequently confined to a narrow range of tasks for example mainly engaged in simple assembly and are dependent on the lead firm for complementary activities such as design logistics component purchasing and process technology upgrading70 In such networks the instructions to suppliers are highly codifiable while power is highly asymmetrical and lies unequivocally with the lead firm The hierarchically organized networks of major Japanese and Korean compa nies discussed earlier are captive networks An especially graphic although not necessarily a typical example is provided by the US sports footwear company Nike Nike does not wholly own any production facilities but consists entirely of a complex tiered and tightly coordinated network of subcontractors that perform specialist roles controlled from the corporate headquarters in Beaverton Oregon where most of the firms RD is also carried out Figure 519 Nike employs indirectly more than 800000 workers in its contract supply chain in a vast number of factories Figure 520 In terms of its geographical extensiveness it is certainly global However there is a strong bias towards East Asia which contains almost 60 per cent of total suppliers Of these the majority are located in China followed by Thailand Indonesia Vietnam and Malaysia are also significant elements in the network Only around 8 per cent of the total sup pliers are in South Asia mostly in Sri Lanka and India 10 per cent are in Central Latin America mostly in Mexico and Brazil and 12 per cent are in Europe pri marily Portugal and Turkey Relational production networks Relational production networks are governed less by the authority of lead firms and more by social relationships between network actors especially those based on trust and reputation71 Relational production networks therefore have more symmetrical power rela tionships than captive production networks They are the kinds of network that exist among overseas Chinese businesses and some other ethnicsocial groups The technical transnational communities that have developed in the US electronics industries around Taiwanese Chinese and Indian immigrants have facilitated rapid and extensive growth of global production networks based on relational processes72 In many cases these individuals have created relational production networks in their home countries that are integrated into global networks Many of these are the kinds of born global enterprises discussed earlier Within Europe examples of relational networks have been identified in Germany the complex contracting relationships between small and medium firms and in Italy In both cases as well as in other parts of the world it has been 05Dicken4084Ch05indd 151 19102010 35025 PM Part Two Processes of Global Shift 152 Market First tier production partnerships Second tier subcontracting Internally developed materials and components Research and development HQ coordination NIKE Beaverton Oregon Future developed partners under tutelage Most have exclusive relationship with Nike Developing sources Production of latest most expensive statement products Exclusive relationship with Nike Vertically disintegrated organization Developed partners Production of more standardized lines Act as additional capacity for Nike but also supply other firms More vertically integrated than developed partners Volume producers Locally subcontracted materials and components Componentry materials and subassembly from developed partners and Nike Speciality components Figure 519 Organization of the Nike production network Source based on Donaghu and Barff 1990 Figure 4 5424 50 132 10 1 Number of suppliers Figure 520 Nikes global supplier network Source based on data in Nike Inc 2009 Nike Contract Disclosure List 05Dicken4084Ch05indd 152 19102010 35025 PM Transnational Corporations 153 argued that it is the close spatial proximity between firms and other social institu tions that provides the relational cement for the networks to exist During the 1980s in particular it became extremely popular to eulogize such industrial dis tricts as the way forward from the old rigidities of Fordist mass production sys tems However important as close spatial proximity may be in facilitating the development of relational production networks on its own it is not sufficient as we saw in discussing localized knowledge clusters in Chapter 4 One view of relational networks is that they may point the way towards the emergence of the virtual firm or the cellular network organization Figure 52173 Organizationally the entire network structure is relatively flat and nonhierarchi cal Its essence is that the participants are all separate firms with no common ownership They are cooperative relational structures between independent and quasiindependent firms that are based upon a high degree of trust something that takes time to develop However this does not mean that there are not power differentials within the network There certainly are Network forms of this broad type are gradually emerging in such knowledge businesses as advanced electron ics computer software design biotechnology design and engineering services healthcare and the like Modular production networks For many industries the changes of the past twenty years mean that organiz ing production has become more like playing with a set of Legos than building a model airplane or a car In other words its now possible to create many Distribution firm Service firm Service firm Designer firm Producer firm Supplier firm Service firm Supplier firm Supplier firm Coordinating firm Figure 521 A pure relational network Source based in part on Miles and Snow 1986 Figure 1 05Dicken4084Ch05indd 153 19102010 35026 PM The development of modular production networks depends largely on the fact that some modern production circuits have natural breakpoints where there is a transition from dependence on tacit knowledge to one where information can be codified through standard agreed protocols This has led in an increasing number of industries to a situation in which lead firms concentrate primarily on product development marketing and distribution while what are termed turnkey suppliers concentrate on producing those functions outsourced by lead firms and to sell them in effect as services to a wide range of customers To achieve this turnkey suppliers develop three types of crosscutting specialization base process one which is used to manufacture products sold in a wide range of endmarkets base component one that can be used in a wide variety of endproducts base service one that is needed by a wide variety of endusers Transnational Corporations 155 Circuit which now operate a global network of establishments serving the leading brandname electronics manufacturers see Figure 515 These different types of production network hierarchical captive relational and modular coexist in varying combinations in different industries and in dif ferent parts of the world There is some evidence to suggest that firms from par ticular national origins tend to adopt particular types of production network For example the modular network form has developed most clearly in the US and reflects a relative openness of procedures and a desire to reduce the degree of mutual dependence Key to this system is the extensive and intensive use of IT suppliers that provide widely applicable base processes and widely accepted standards that enable the codifiable transfer of specification across the interfirm link These preconditions lead to generic not productspecific capacity at suppli ers that has the potential to be shared by the industry as a whole79 The extent to which such a system will be adopted more widely and lead to convergence of prac tice is an open question and relates to the comments made about the persistence of nationally grounded variations in TNC structures and practices discussed earlier in this chapter Transnational strategic alliances Related to the development of relational and modular production networks is one of the most significant developments in the global economy in recent years the growth and spread of transnational strategic alliances between firms80 Collaborative Admin Administration Admin Marketing Marketing Marketing Sales Reps System Int Sales Reps System Int End user End user Product strategy Product RD Functional design Form design Prototype fabrication Product strategy Product Process RD Functional design Form design Prototype fabrication Parts purchasing Manufacturing Testing Packaging Process RD Design for mfg Parts purchasing Manufacturing Testing Packaging a Vertical integration b Modularity Brand name firm Contract manufacturer Traditional manufacturing firm Market channel Market channel Codifiable transfer of specifications CAE CAD CAM EDI SCM at the interfirm link Figure 522 From vertical integration to modular production networks Source based on Sturgeon 2002 Figure 1 05Dicken4084Ch05indd 155 19102010 35026 PM ventures between firms across national boundaries are not new What is new is their current scale their proliferation and the fact that they have become central to the global strategies of many firms rather than peripheral to them Transnational Corporations 157 The majority of strategic alliances therefore are in sectors with high entry costs scale economies rapidly changing technologies andor substantial operating risks Pharmaceuticals chemicals electronic equipment computers telecommuni cations and financial and business services are examples of industries char acterized by a large number of strategic alliances Although a large number of alliances are still formed in manufacturing industries more and more stra tegic alliances are taking place in the services As the world economy becomes more servicebased strategic alliances are playing a more impor tant role in crossborder restructuring in service sectors82 Advocates of strategic alliances claim that by cooperating companies can combine their capabilities in ways that will benefit each partner But not everybody shares this rosy view Many fear that entering into such alliances will result in the loss of key technologies or expertise by one or other of the partners More broadly strategic alliances are clearly more difficult to manage and coordinate than single ventures the potential for misunderstanding and disagreement particularly between partners from different cultures is great Certainly many such alliances have relatively short lives For example the global network alliances in the global telecommunications industry Global One Concert ATT World Partners all failed and were dismantled83 Nevertheless the obvious attractions of international strategic alliances in todays volatile and competitive global economy are likely to guarantee their continued growth as a major organizational form Externalization Merger Technologyoriented M O D E S O F C O L L A B O R A T I O N Informal Internalization Acquisition Equity Customersupplier agreements Service maintenance Venture capital RD corporations Technology sharing Distribution Universityindustry government Cooperative RD Cooperative production Promotion marketing Licensing Regulatory assistance Researchoriented Formal Armslength transactions Collaborative agreements Marketoriented University based cooperation Figure 523 Types of interfirm collaboration Source based on Anderson 1995 Figure 1 05Dicken4084Ch05indd 157 19102010 35026 PM Perpetual change reshaping TNCs internal and external networks Transnational Corporations 159 coordination and geographical configuration of the TNCs production network Decisions to outsource or internalize particular functions to centralize or to decentralize decisionmaking powers or to cluster or disperse some or all of the firms functions in particular ways are however contested decisions They are the outcome of power struggles within firms both within their headquarters and between headquarters and affiliates How they are resolved depends very much on the nature and the location of the dominant coalition The globallocal question an oversimplified view of the TNCs dilemma Such processes also have to be seen within the context of an apparently funda mental tension facing TNCs whether to globalize fully or to respond to local differentiation In broad terms the intensification of global competition in a world that retains a high degree of local differentiation creates for all TNCs an internal tension between globalizing forces on the one hand and localizing forces on the other As Figure 524 shows there are considerable potential advantages for a firm pursuing a globally integrated strategy But there are also substantial disadvantages Figure 525 captures this basic tension within a global integration local responsiveness framework The vertical axis shows the major pressures on firms to strive for global strategic coordination of their activities the horizontal axis shows the countervailing pressures on firms to develop locally responsive strategies The firms oligopoly power is increased through the exploitation of scale and experience effects beyond the size of individual national markets The TNC is placed in a better position to exploit the growing discrepancy between a relatively efficient market for goods created by freer trade and very inefficient markets for production factors The possibility of exploiting differences in tax rates and structures between countries is increased and so therefore is the possibility of engaging in transfer pricing The specialized and integrated function of indi vidual country operations makes hostile govern ment action less rewarding and less likely The TNC may be vulnerable to disruption of its entire operations or part of them because of labour unrest or government policy changes affecting a particular unit Fluctuations in currency exchange rates may disrupt integration strategies drastically altering the economies of intrafirm transactions of intermediate or final goods Governments may impose performance require ments or other restrictions which impede the optimal operation of the firms integrated production chain The task of managing a globally integrated oper ation is more complex and demanding than that of managing separate national subsidiaries Advantages Costs and risks Figure 524 The advantages and disadvantages of a globally integrated strategy Source based on material in Doz 1986b 05Dicken4084Ch05indd 159 19102010 35026 PM A global integration local responsiveness framework Transnational Corporations 161 geographically dispersed assemblage of functions offices factories and the like have evolved over time rather than having been planned Some will have been located in particular places for reasons that may have been valid at the time the decisions were made but which in the light of changed circumstances may no longer be optimal for the firms current needs Because so much TNC growth and expansion have been through acquisition and merger virtually all TNCs consist of elements originally put in place by quite different firms often of dif ferent nationalities and ways of doing things In many cases these have been only partially integrated into the new corporate entity often creating a veritable dogs breakfast of bits and pieces This is one reason why so many mergers and acquisi tions are far less successful than their advocates predict Not only is the entire system in flux because of the dynamics of competition or the uncertainties inherent in operating in uncertain and sometimes volatile polit ical environments but also each of the individual elements is continuously faced with uncertainty One of the diagnostic characteristics of TNCs is that they con tinuously monitor the performance of each of their individual operations and benchmark them against some bestpractice metric Hence transnational corporate networks are almost always in a state of rationalization and restructuring either in whole or in part Precisely because TNC operations are located in different coun tries such adjustments perhaps involving the closure downsizing or functional status of individual establishments have very sensitive political implications The geography of reorganization and restructuring Whether corporate reorganization is the result of a consciously planned strategy for rational change or simply a reaction to a crisis internal or external its geo graphical outcome may take several different forms Figure 526 The very large global corporations are developing into global scanners They use their immense resources to evaluate potential production locations in all parts of the world The performance of existing corporate units and external suppliers is monitored and evaluated against competitors against the rest of the corporate network and also against potential alternative locations Those existing plants or suppliers that fall short of expectations created by such benchmarking procedures85 may be disposed of As plants become obsolete in one location they are closed down whether or not new investment occurs in the same locality depends upon its suitability for the TNCs prevailing strategy The chances are in many cases that the new investment will be made at a different location quite possibly in a different country altogether However we should beware of overexaggerating the speed and ease with which TNCs can and do radically restructure their operations There are barriers to exit Production units represent huge capital investments sunk costs which once undertaken cannot be fully recovered through their transfer or sale86 Political pressures may also inhibit firms from closing plants especially in areas of 05Dicken4084Ch05indd 161 19102010 35026 PM The term container should not be taken too literally It is used as a fairly loose metaphor to capture the idea that nationstates are one of the major ways in which distinctive cultures practices and institutions are bundled together Of course such containers are not except in very rare cases hermetically sealed off from the outside world The container is permeable or leaky to varying degrees Most Transnational Corporations 163 majority of their operations outside their home country One measure of such geographical spread is the transnationality index TNI of each of the leading 100 TNCs87 The TNI is a weighted average of three indicators foreign sales as a per centage of total sales foreign assets as a percentage of total assets and foreign employment as a percentage of total employment The higher the value the greater the extent of a firms transnationality the lower the value the more a firm is domestically oriented Figure 527 compares TNIs for firms from individual countries over a 15year period It shows that the degree of transnationality among the leading 100 TNCs has increased progressively In 1993 the average TNI was 516 in 2007 it was 627 Nevertheless this still means that around 40 per cent of their activities are based in their home countries Of course the composition of the top 100 did not remain constant because of entries and exits into the list over the period However the degree of transnationality continues to vary substantially between firms from different geographical origins Part of this is explained by country size the smaller the country in general the more transnational its companies tend to be But that is not the entire story Japanese firms continue to have the lowest average TNI of the major home countries though it increased substantially between 1993 and 2007 Although the US average increased from 367 to 572 the overall extent of transnationality of US firms remains significantly lower than that of other major countries Thus despite many decades of international operations x 627 10 20 30 40 50 60 70 80 90 100 USA 572 Japan 539 France 634 Germany 565 UK 762 Netherlands 789 Italy 592 Switzerland 736 2007 x 516 10 20 30 40 50 60 70 80 90 100 Transnationality index USA 367 Japan 330 France 540 Germany 457 UK 686 Netherlands 689 Italy 356 Switzerland 846 1993 Figure 527 Transnationality indices by country of origin Source calculated from UNCTAD World Investment Report various issues 05Dicken4084Ch05indd 163 19102010 35027 PM TNCs at least in quantitative terms remain strongly connected with their home base The TNI in fact goes only a very small way towards answering the question of how global the worlds leading TNCs are It tells us something about the relative geographical extent of TNC activities outside the home country but it only distinguishes between home and foreign A firm might have a TNI of say 80 meaning that 80 per cent of its activities were outside its home country but all of those activities might be located in just one foreign country An example would be the large number of US firms that operate only in Canada Neither does it help us to establish whether or not TNCs of different national origins are becoming similar in their modes of operation It is at least possible that TNCs may retain more of their assets and employment in their home country but still be converging organizationally and behaviourally towards a universal global form Regionalizing transnational production networks A growing body of research suggests that rather than being globally organized most of the largest TNCs have a very strong propensity to organize their production networks regionally that is at the multinational scale of groups of contiguous states For example for Western core companies regionalism has become the institutional framework of choice within which the struggle for preservation of their core positions is played out the acceleration in the rate of internationalization after 1995 was an intraregional phenomenon In 2004 fourfifths of the 500 largest TNCs in the world had almost 80 per cent of both their sales and their assets concentrated in their home region Global is certainly not The basis for such a regional orientation is evident in Figure 514c In effect a regional strategy offers many of the efficiency advantages of globalization while more effectively responding to the organizational barriers it entails From the perspective of a TNC a regional strategy may represent an ideal solution to the competing pressures for organizational responsiveness and global integration In particular Regionalscale manufacturing facilities may represent the limits of potential economies of scale Regionalization allows for faster delivery greater customization and smaller inventories than would be possible under globalization Regionalization accommodates organizational concerns and exploits subsidiary strengths Transnational Corporations 165 The tendency we noted earlier for firms to draw back somewhat from allout global sourcing whether intra or interfirm is strongly reflected at the regional scale as a recent report suggested Manufacturers are abandoning global supply chains for regional ones in a big shift brought about by the financial crisis and climate change concerns Companies are increasingly looking closer to home for their components meaning that for their US or European operations they are more likely to use Mexico and Eastern Europe than China as previously A future where energy is more expensive and less plentifully available will lead to more regional sup ply chains Gerard Kleisterlee chief executive of Philips one of Europes biggest companies93 In some instances TNC regionalization is reinforced by regional political structures as in the cases of the EU or the NAFTA although this is not necessarily the case Simple geographical proximity is itself a very powerful stimulus for integrating operations Transnational production networks organized at the regional scale are evident in most parts of the world but most especially in the three major regions of Europe North America and East Asia as we shall see in several of the case study chapters in Part Three In North America the establishment of the NAFTA has led to a reconfiguration of corporate activities especially in Mexico to meet the opportunities and constraints of the new regional system94 In Europe the increas ing integration and enlargement of the European Union is leading to substantial reorganization of existing corporate networks and the establishment of panEU systems by existing and new TNCs The EU can be seen as a gigantic interna tional production complex made up of the networks of TNCs which straddle across national boundaries and form trade networks in their own right95 There is abundant evidence of US and Japanese TNCs as well as many European firms themselves creating regional networks within the EU Some Japanese companies for example have adopted a threetier European operation partly centralised and partly decentralised A number of them have set up small new panEuropean head offices with a purely strategic role financial control overall direction highlevel brand management The real work is done however by the next two tiers of the business the operational centres production distribution logistics organised on a panEuropean basis and sited where convenient For distribution this means in the heartland of western Europe with easy access to France and Germany for production it will increasingly mean in eastern and central Europe where costs are lower Sales and tactical marketing are handled at a national level Perhaps where two or three countries have very similar charac teristics such as the Nordic region they can be aggregated together But in general national markets are sufficiently distinctive to require their own local sales operations96 05Dicken4084Ch05indd 165 19102010 35027 PM Part Two Processes of Global Shift 166 The process is complicated On the one hand supplyside forces are stimulating a panEU structure of operations to take advantage of scale efficiencies On the other hand demandside forces are still articulated primarily at the country specific level where linguistic and cultural differences play a major role in the demands for goods and services In effect the strategic tensions between global integration and local responsiveness discussed at the beginning of this chapter are played out at the EU regional level Although East Asia does not have the same kind of regional political framework as the EU or NAFTA there is very strong evidence of the existence of regional production networks organized primarily by Japanese firms although nonAsian as well as some other Asian firms from Korea Hong Kong Singapore and Taiwan for example also tend to organize their production networks regionally97 Within East Asia a clear intraregional division of labour has developed consisting of four tiers of countries 1 Japan 2 Hong Kong Korea Singapore and Taiwan 3 China and 4 Malaysia Thailand Indonesia the Philippines and Vietnam Of course the rapid emergence of China both as a huge potential market and as a production location is transforming intraregional networks in East Asia NOTES 1 DAveni 1994 2 2 See Palloix 1975 1977 3 Herod 1997 2 4 Hymer 1976 5 Dunning 1992 2000 6 Vernon 1966 1979 Wells 1972 7 Cantwell 1997 8 Dicken and Miyamachi 1998 Mason 1994 9 Peter Brabeck CEO of Nestlé quoted in the Financial Times 22 February 2005 10 Gabrielsson and Kirpalani 2004 Mathews and Zander 2007 Melén and Nordman 2009 Oviatt and McDougall 2005 Sasi and Arenius 2008 11 Mathews and Zander 2007 390 12 Mathews and Zander 2007 388 13 Oviatt and McDougall 2005 38 14 See Badaracco 1991 Blois 2006 Cerrato 2006 Dicken and Malmberg 2001 Forsgren et al 2005 Markusen 1999 15 Forsgren et al 2005 978 16 Bartlett and Ghoshal 1998 Faulconbridge 2008 Forsgren et al 2005 Hedlund 1986 Heenan and Perlmutter 1979 Morgan et al 2004 Schoenberger 1997 Whitley 2004 17 Heenan and Perlmutter 1979 18 Dicken 2000 2003b 19 Pauly and Reich 1997 1 4 5 24 20 Financial Times 4 December 2007 05Dicken4084Ch05indd 166 19102010 35027 PM Transnational Corporations 167 21 Van Veen and Marsman 2008 196 22 Yeung 2000 408 23 Fruin 1992 Gerlach 1992 24 Gerlach 1992 4 25 Wade 2004a 324 26 Hamilton and Feenstra 1998 1289 27 Hamilton and Feenstra 1998 134 135 28 Yeung 2000 425 See also Yeung 2004 29 Abo 1994 1996 See also Beechler and Bird 1999 30 Yeung 2004 31 See for example Bathelt and Gertler 2005 Buck and Shahrim 2005 32 Poon and Thompson 2004 123 33 Doremus et al 1998 3 9 34 Bartlett and Ghoshal 1998 35 Harzing 2000 Malnight 1996 36 Heenan and Perlmutter 1979 37 Hedlund 1986 21830 38 Fields 2004 Roche and Blaine 2000 39 Birkinshaw 2001 Birkinshaw and Morrison 1995 Cerrato 2006 Phelps and Fuller 2000 40 Birkinshaw and Morrison 1995 7325 41 Schoenberger 1999 21011 42 Haig 1926 426 43 See Baaij et al 2004 Cerrato 2006 Collis et al 2007 Young et al 2000 44 Cerrato 2006 261 45 Collis et al 2007 Young et al 2000 46 Lasserre 1996 47 Yeung et al 2001 165 48 Alderson and Beckfield 2004 See also Carroll 2007 49 Friedmann 1986 Sassen 2001 Taylor 2004 50 Baaij et al 2004 143 51 Financial Times 19 March 2007 52 See Blanc and Sierra 1999 Cantwell 1997 HotzHart 2000 Patel 1995 Zanfei 2000 53 Financial Times 30 October 2006 54 Patel 1995 152 55 Blanc and Sierra 1999 188 56 Financial Times 23 June 2005 57 Financial Times 9 June 2005 58 Financial Times 9 June 2005 59 Cantwell and Iammarino 2000 322 60 CEO of Nestlé cited in the Financial Times 22 February 2005 61 Sturgeon 2002 4612 62 Institute for Manufacturing Cambridge University quoted in the Financial Times 17 December 2007 63 Financial Times 5 June 2008 64 Financial Times 10 June 2005 05Dicken4084Ch05indd 167 19102010 35027 PM Part Two Processes of Global Shift 168 65 Mol et al 2005 Berggren and Bengtsson 2004 66 Merino and Rodriguez 2007 1147 67 Andersen and Christensen 2004 1261 Numbers in parentheses in the following paragraphs refer to pages in this study 68 Teagarden quoted in the Financial Times 4 September 2007 69 This section draws in part on Gereffi et al 2005 Sturgeon 2002 2003 70 Gereffi et al 2005 87 71 Sturgeon 2003 482 72 Saxenian 2002 186 73 Miles et al 1999 74 Berger 2005 61 75 This section draws heavily on Sturgeon 2002 2003 See also Berger 2005 76 Sturgeon 2002 4667 quotations are from that work 77 Sturgeon 2002 467 78 Sturgeon 2002 2003 Lüthje 2002 79 Sturgeon 2002 486 80 See Anderson 1995 GomesCasseres 1996 Kang and Sakai 2000 Mockler 2000 81 GomesCasseres 1996 2 82 Kang and Sakai 2000 20 83 Ulset 2008 84 Schoenberger 1997 204 85 See Sklair 2001 Chapter 5 86 Barham and Coomes 2005 162 See also Schoenberger 1997 88 87 The data are derived from the annual UNCTAD World Investment Report 88 Elango 2004 KozulWright and Rowthorn 1998 Morrison and Roth 1992 Muller 2004 Rugman and Brain 2003 Rugman and Verbeke 2004 2008 89 Muller 2004 ix 219 original emphasis 90 Rugman and Verbeke 2008 Tables 1 and 2 91 Morrison and Roth 1992 45 46 92 Morrison and Roth 1992 467 93 Financial Times 10 August 2009 94 Eden and Monteils 2002 Holmes 2000 95 Amin 2000 675 96 Financial Times 8 November 2001 97 Abo 2000 Borrus et al 2000 Coe 2003a Dicken and Yeung 1999 Yeung 2001 Yeung et al 2001 05Dicken4084Ch05indd 168 19102010 35027 PM Six THE STATE REALLY DOES MATTER CHAPTER OUTLINE The state is dead oh no it isnt That was then this is now States nations nationstates States as containers Cultural dimensions Variegated capitalisms States as regulators Managing national economies Regulating trade and industry Trade strategies Foreign direct investment strategies Industry strategies Labour market strategies Economic strategies in the older industrialized economies Jumpstarting economic development From import substitution to export orientation Variations on a theme States as competitors States as collaborators The proliferation of regional trade agreements Types of regional economic integration Regional integration within Europe the Americas East Asia and the Pacific The European Union The Americas East Asia and the Pacific 06Dicken4084Ch06indd 169 19102010 110726 AM Part Two Processes of Global Shift 170 The state is dead oh no it isnt That was then this is now The nation state is just about through as an economic unit1 Such a sentiment has formed a central claim of the hyperglobalizers over the past 40 years that we live in a borderless world where states no longer matter A combination of the revolutionary technologies of transportation and communica tions see Chapter 4 and the increasing power of TNCs see Chapter 5 has it was argued shifted economic power out of the control of nationstates to the market Market fundamentalism a neoliberal agenda that urged the reduction of state involvement in the economy the privatization of state economic and social assets lower direct taxation unfettered trade and financial movements a reduction in the states social welfare role became the mantra especially in the US and the UK Government argued US President Ronald Reagan in the early 1980s was not a solution to our problem government is the problem A similar sentiment was echoed by the UK government of Margaret Thatcher Such a free market ideology formed the basis of what came to be called the Washington Consensus a set of views that exerted immense influence on both developed and especially developing countries That was then This is now and how the world has changed The cataclysmic events that stunned the global economy in 2008 saw a dramatic reversal in the apparently unchallenged dominance of the free market and a revival of the view that states really do matter The change was most apparent in the financial sector see Chapter 12 where the Masters of the Universe2 had to go on bended knee to the state to be rescued but also in such industries as automobiles see Chapter 11 Governments poured billions of dollars pounds and euros into propping up the financial sector In some cases notably in the US and the UK this amounted to little short of nationalization a bête noire of the market fun damentalists Quite how this will play out over the next few years is not yet clear However there is a generally held view that things will never be quite the same again Something big is happening What started out as a series of pragmatic ad hoc responses by governments and central banks is moving the boundary between state and market Politicians are now overlaying expediency with ideology Government is no longer a term of abuse The consequences of the crash of 2008 will be felt well beyond the eventual recovery What is certain is that things cannot be as they were3 The state is back 06Dicken4084Ch06indd 170 19102010 110726 AM The State Really Does Matter 171 In fact the state never really went away The notion that the power of the state had been totally emasculated by globalizing forces was always a highly misleading view While some of the states capabilities were reduced and there may well have been a process of hollowing out4 the process was not a simple one of uniform decline on all fronts5 While smaller or less influential states might have experienced a decline in power other states such as the USA experience no diminution and per haps even an enhancement of geopolitical and geoeconomic power Much of the end of the state or reasserting the state literature focuses on western notions of statehood and experiences Implicit is a common experience of the emergence of the state in the nineteenth century and its zenith in the postwar Fordist regime of accumulation In many parts of the world how ever experiences of statehood have followed a quite different trajectory and are in a postcolonial context still being actively constructed strengthened and extended rather than weakened6 The state therefore has remained a most significant force in shaping the world economy despite the hyperglobalist rhetoric It has always played a fundamental role in the economic development of all countries and indeed in the process of globalization itself After all an increased facility to transcend geographical dis tance made possible by transportation and communication technologies is of little use if there are political barriers to such movement An important enabling factor underlying globalization therefore has been the progressive reduction in political barriers to flows of commodities goods finance and other services In fact the more powerful states have actually used globalization as a means of increasing their power States actively construct globalization and use it as soft geopolitics and to acquire greater power over and autonomy from their national economies and societies respectively for example The US and the G7s other dominant members design and establish the international trade agreements organizations and legislation that support and govern the transborder investments production networks and marketpenetration constitutive of contemporary economic globalization Advanced capitalist states particu larly use these political instruments to shape international economic deci sionmaking and policy in their interests7 Governments have also used the rhetoric of the supposedly unstoppable forces of globalization to justify particular kinds of domestic policy including not taking certain kinds of action on the argument that there is no alternative States nations nationstates We need to be clear about what we mean by the terms state nation and nationstate8 06Dicken4084Ch06indd 171 19102010 110727 AM A state is a portion of geographical space within which the resident population is organized ie governed by an authority structure States have externally recognized sovereignty over their territory A nation is a reasonably large group of people with a common culture sharing one or more cultural traits such as religion language political institutions values and historical experience They tend to identify with one another feel closer to one another than to outsiders and to believe that they belong together They are clearly distinguishable from others who do not share their culture A nation is an imagined community Note that whereas a state has a recognized and defined territory a nation may not A nationstate is the condition where state and nation are coterminous A nationstate is a nation with a state wrapped around it That is it is a nation with its own state a state in which there is no significant group that is not part of the nation Although it is often regarded as a natural institution for all of us it has always been there the nationstate is actually a relatively recent phenomenon It emerged from the particular configuration of power relationships in Europe following the Treaty of Westphalia that ended the Thirty Years War in 1648 Since then the map of nationstates has been redrawn continuously sometimes peacefully and incrementally often violently through revolution During the second half of the twentieth century two particular events had a profound effect on the map of nationstates First the waves of decolonization that swept through Africa and Asia in the 1960s created a whole new set of nationstates Second the collapse of the former Soviet Union after 1989 resulted in the creation not only of a new Russian Federation but also of a number of newly independent states throughout Eastern Europe As a result the number of nationstates has grown dramatically But that isnt all An important feature of the contemporary world is the tension that exists between the triad of nation state and nationalism Increasingly it seems there are more and more nations without states manifested in separatist movements engaged in conflict with the state in which they are wrongly in their view embedded obvious examples include the Basques in Spain and France the indigenous groups in Chiapas Mexico the East Timoreans in Indonesia the Palestinians in Israel United Kingdom Iceland Canada United States of America Mexico Guatemala El Salvador Nicaragua Honduras Belize Costa Rica Panama Colombia Ecuador Micronesia Palau Venezuela Guyana Suriname Brazil Bahamas Dominican Republic Haiti Cuba Jamaica Peru Bolivia Paraguay Argentina Chile Lesotho South Africa Namibia Swaziland Angola Zambia Zimbabwe Mauritius Madagascar Seychelles Malawi Tanzania Mozambique Botswana Kenya Dem Rep of Congo Rwanda Burundi Gabon Sao Tome Principe Congo Uganda Somalia Ethiopia Eritrea Sudan Nigeria Côte dIvoire Mali Niger Liberia Sierra Leone Guinea The Gambia Senegal Chad Mauritania Algeria Morocco Cape Verde Libya Egypt Tunisia Malta Portugal Andorra San Marino Monaco Spain Cyprus France Ireland Italy Turkey Poland Estonia Latvia Lithuania Belarus Ukraine Norway Sweden Finland Russian Federation Syria Iraq Iran Kuwait Saudi Arabia UAE Oman Djibouti Yemen Pakistan India Nepal Bhutan Bangladesh Burma Laos Vietnam Cambodia Malaysia Brunei Thailand Singapore Philippines Comoros Papua New Guinea Indonesia TimorLeste Australia New Zealand New Caledonia Vanautu Kiribati Tuvalu Nauru Solomon Islands Marshall Islands Fiji Tonga Samoa Sri Lanka Maldives China Kazakhstan Kyrgyzstan Tajikistan Uzbekistan Afghan istan South Korea North Korea Taiwan Japan Mongolia Uruguay 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 Greenland French Guiana Western Sahara Antigua Barbuda St Kitts Nevis Dominica St Lucia St Vincent Grenadines Barbados Grenada Trinidad Tobago 39 40 41 42 43 44 45 46 Burkina Faso Guinea Bissau Ghana Togo Benin Cameroon Central African Republic Equatorial Guinea 31 32 33 34 35 36 37 38 Macedon Israel Jordan Bahrain Qatar ia Romania Moldova Bulgaria Albania Greece Georgia Armenia Azerbaijan Turkmenistan Lebanon 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Denmark Netherlands Belgium Germany Luxembourg Czech Republic Slovakia Switzerland Liechtenstein Austria Hungary Slovenia Croatia BosniaHerzegovina Serbia Montenegro 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Figure 61 A world of nationstates 06Dicken4084Ch06indd 173 19102010 110727 AM obviously a major impact of modern communications systems especially the Internet is to make national containers even more permeable But that does not mean that the container no longer exists at all Indeed there is a good deal of compelling evidence to show the persistence of national distinctiveness although not necessarily uniqueness in structures and practices which help to shape local national and global patterns of economic activity Hofstede went on to show how different countries could be characterized in terms of their positions on varying combinations of these four dimensions Figure 62 Part Two Processes of Global Shift 176 Although there is obviously some overlap between these two schemes what mat ters for our purposes is not so much the detail as the fact that there are identifiable cultural attributes that do appear to vary across countries and that this in turn affects both how the major actors we identified in Chapter 3 are likely to behave and also the kinds of institutions within which such behaviour is organized and regulated Although it is always rather dangerous to classify phenomena into sta tistical boxes the categories shown in Figure 62 seem intuitively reasonable Most of us would be able to recognize our own national contexts whilst also realizing the danger of using simple stereotypes without due care East Asias emergence as the most dynamic growth region in recent decades has sometimes been attributed to its having a very distinctive set of value systems specifically an emphasis on collective responsibility rather than individualism and on the roles and responsibilities of the state which is seen as essentially paternal istic Figure 63 sets out the major components of this concept of Asian values which in effect recast Asia as a moral opposite of the West Thus the Asian penchant for hard work frugality and love of the family are unproblematically figured as things the West lacks or has lost15 Whether such opinions reflect the situation across all of East Asia let alone across Asia as a whole is doubtful This is after all a region of immense social cultural and religious diversity But in so far as they reflect at least some of the social and political characteristics of some successful East Asian economies they form a considerable contrast with the situ ation in other parts of the world and help to explain some of the differences between East Asias and say Latin Americas economic development trajectories East Asians do not believe in extreme forms of individualism Every individual is a member of a nuclear and extended family clan neighbourhood community nation and state East Asians want their governments to maintain a morally wholesome environment in which to bring up their children Good governments in Asia want a free press They do not believe that such a freedom is an absolute right the press must act responsibly East Asians believe in strong families They believe that the family is the building block of society In some Asian countries governments have sought to make every citizen a stakeholder in the country East Asians revere education This is a value held by all strata of society There is an Asian version of a social contract between the people and the state Governments have an obligation to treat their people with fairness and humanity Citizens are expected to be lawabiding respect those in authority work hard save and motivate their children to learn and be selfreliant Taken together these 10 values form a framework that has enabled societies in East Asia to achieve economic prosperity progress harmonious relations between citizens and law and order East Asians believe in the virtues of saving and frugality They believe that individuals families and governments should lead frugal lives East Asians practise national teamwork Government business and employees work cooperatively for the good of the nation East Asians consider hard work a virtue The chief reason this region is outcompeting Europe Figure 63 Asian values Source based on material in Koh 1993 06Dicken4084Ch06indd 176 19102010 110728 AM The specific cultural and institutional forms that have evolved over time in different national contexts have resulted in distinctive modes of economic organization even within the apparently universal ideology of capitalism Capitalism in other words is variegated not uniform Part Two Processes of Global Shift 178 A key question is the extent to which such variegated capitalism will continue to exist One view is that there are inherent obstacles to convergence among social systems of produc tion of different societies for where a system is at any one point in time is influenced by its initial state Existing institutional arrangements block cer tain institutional innovations and facilitate others There are critical turning points in the history of highly industrialized societies but the choices are limited by the existing institutional terrain Being path dependent a social system of production continues along a particular logic until or unless a fun damental societal crisis intervenes18 An alternative view is that the pressures exerted by globalizing forces will inevitably produce a convergence of economic governance systems towards a best practice form Many argued that the neoliberal model based on the success of its leading advocate the US would come to replace national systems In other words even though the unique kinds of state capacities found in Japan and Germany have deeprooted political preconditions these face the prospect of perma nent dismantling by way of gradual liberal erosion19 But as we have seen the pure gold of the neoliberal model is now looking distinctly tarnished and it is difficult to imagine that it will retain its attractiveness If this is so then variegated capitalism will continue to be the norm although in a dynamic not static form As we have seen the state is back although its precise presence will vary widely According to one commentator Neoauthoritarian states may indeed offer an alternative political model to other developing countries But they do not offer a credible alternative to liberal democracy as a form of government for countries with sophisticated highincome economies Is there an alternative economic model on offer The answer is no if one means there is a viable alternative to the market economy The answer is yes if one means viable variants of the market economy The wide divergences among highincome countries over the size of the state the generosity of welfare systems the structure of corporate gover nance and the pervasiveness of financial markets all demonstrate the possible divergences20 States as regulators Recognizing that countries continue to differ as containers of distinctive struc tures and practices is important in emphasizing that we do not live in a homog enized world In this section we focus specifically on some of the ways states regulate how their economies operate as they attempt to control what happens within and across their boundaries 06Dicken4084Ch06indd 178 19102010 110728 AM Managing national economies The institutions of the state are not simply involved in regulating economy and society for state activity is necessarily involved in constituting economy and society and the ways in which they are structured and territorially organized states do not merely intervene in markets they underpin and help to constitute their very existence Although a high level of contingency may well be involved in how states strive to manage their economy no states behave in exactly the same way certain themes can be identified These will reflect the kinds of cultural social and political structures institutions and practices in which the state is embedded the kind of capitalism the state practises However the precise policy mix adopted by a state will also be influenced by the size of the national economy especially that of the domestic market its resource endowment both physical and human its relative position in the world economy including its level of economic development and degree of industrialization Two basic types of macroeconomic policy are used by the state to manage its national economy Fiscal policies to raise or lower taxes on companies andor individual citizens and to determine appropriate levels and recipients of government expenditure Raising taxes dampens down domestic demand lowering taxes stimulates demand although as the Japanese experience during the 1990s showed such automatic responses to changes in fiscal policy do not always occur Similarly raising or lowering public expenditure or targeting specific types of expenditure can influence the level of economic activity in the economy Monetary policies aimed at influencing the size of the money supply within the country and at either speeding up or slowing down its rate of circulation its velocity The main mechanism employed is manipulation of the interest rate on borrowing Lowering interest rates should stimulate economic activity through increased investment or private expenditure while conversely raising interest rates should dampen down activity Again however rapid and automatic adjustment does not always occur In the international context exchange rates also have to be taken into account because their level and volatility affect the costs of exports and imports Such policies are also underpinned by the states regulation of financial services Part Two Processes of Global Shift 180 physical infrastructure of national economies roads railways airports seaports telecommunications systems without which private sector enterprises whether domestic or transnational could not operate They are the providers too of the human infrastructure in particular of an educated labour force as well as of sets of laws and regulations within which enterprises must operate For several decades after the end of the Second World War in 1945 the role of the state in the developed economies expanded considerably notably through the provision of welfare benefits for particular segments of the population and the development of a considerable though varied degree of public ownership of productive assets The majority of economies outside the command economies of the statesocialist world became mixed economies In many countries certain eco nomic sectors such as telecommunications railways energy steel and the like became state owned or controlled As a result government spending as a percent age of GDP rose very substantially In the OECD countries such spending increased from less than 20 per cent of GDP in the early 1960s to 35 per cent in the early 1990s In the developing countries the average growth was from around 15 per cent to 27 per cent Of course the pattern varied a lot between countries Starting in the mid 1980s many states reduced their direct involvement in their economies most notably through a systematic process of marketization that is extending the principles of market transactions into more and more aspects of public life This was apparent not only in the older industrialized countries but also in many developing countries and most dramatically of course in the former statesocialist countries of Eastern Europe in the former Soviet Union and in China Such market liberalization consisted of two related processes The first was deregulation To varying degrees virtually all industrialized coun tries jumped aboard the deregulation bandwagon However the issues are far less simple than the deregulationists claim Because no activity can exist without some form of regulation otherwise anarchy ensues deregulation cannot take place without the creation of new regulations to replace the old23 In effect what is often termed deregulation is really reregulation Processes of deregulation spread to most economic sectors most notably in financial services see Chapter 12 telecommunications and utilities such as energy and water The labour market also became a particularly significant focus of deregulation The second related process was that of privatization The state pulled out of a whole variety of activities in which it was formerly centrally involved and trans ferred them to the private sector The selling of stateowned assets and the greater participation of the private sector in the provision of both private goods the denationalization of stateowned economic activities and public goods such as healthcare or education have demonstrated a pervasive though uneven move ment However this has not reduced government expenditure as much as might have been expected the rhetoric has often been stronger than the reality as Figure 64 shows The average GDP share of government spending in the 26 countries shown was 436 per cent 06Dicken4084Ch06indd 180 19102010 110728 AM The State Really Does Matter 181 0 20 30 Percent of GDP 10 40 OECD average 436 50 Sweden France Denmark Austria Hungary Belgium Finland Italy Portugal Germany Netherlands Czech Republic United Kingdom Greece Iceland Poland Norway Luxembourg Canada New Zealand Spain Japan Slovakia United States Ireland South Korea Figure 64 Central government spending as a share of GDP 20047 average Source OECD data In response to the deep economic crisis that began in 2008 however these figures will have to be revised upwards very extensively as all governments have intervened in a massive way in an attempt to restimulate their economies The figures are astronomical24 The combined stimulus expenditure of the G20 coun tries for 2009 was 692 billion the equivalent of 14 per cent of their GDP The US accounted for almost 40 per cent of this In 2010 the US share of the total stimulus package will be even higher at 60 per cent Its total over the 200910 period will be 841 billion The other countries with very large stimulus packages are China 204 billion Germany 130 billion and Japan 104 billion Such largescale intervention during a period of economic recession reflects the influence of John Maynard Keynes whose analysis of the Great Depression of the 1930s demonstrated that markets do not necessarily correct themselves25 Under certain circumstances they have to be stimulated by government actions possibly in a very largescale way through for example reducing interest rates providing financial assistance to specific firms and sectors and investing heavily in infrastructure Regulating trade and industry National governments possess an extensive kit of regulatory tools with which to control and to stimulate economic activity and investment within their own boundaries and to shape the composition and flow of trade and investment at 06Dicken4084Ch06indd 181 19102010 110728 AM Trade strategies Of all the measures used by nationstates to regulate their international economic position policies towards trade have the longest history The shape of the emerging world economy of the seventeenth and eighteenth centuries was greatly influenced by the mercantilist policies of the leading European nations Policies towards imports Policies towards exports Tariffs Financial and fiscal incentives to export producers Nontariff barriers Export credits and guarantees Import quotas eg voluntary export restraint orderly marketing agreements Setting of export targets Import licences Operation of overseas export promotion agencies Import deposit schemes Establishment of export processing zones andor free trade zones Import surcharges Voluntary export restraint Rules of origin Embargo on strategic exports Antidumping measures Exchange rate manipulation Special labelling and packaging regulations Health and safety regulations Customs procedures and documentation requirements Subsidies to domestic producers of importcompeting goods Countervailing duties on subsidized imports Local content requirements Government contracts awarded only to domestic producers Exchange rate manipulation The State Really Does Matter 183 Although in general tariffs have continued to decline the period since the mid 1970s witnessed a marked increase in the use of nontariff barriers Indeed today NTBs are more important than tariffs in influencing the level and com position of trade between nationstates It has been estimated that NTBs affect more than a quarter of all industrialized country imports and are even more extensively used by developing countries Certainly much of what has been termed the new protectionism consists of the increased use of NTBs National trade policy is unique in that since the late 1940s it has been set within an international institutional framework the GATTWTO We will have much more to say about this in Chapter 17 Here we merely need to note the basic features of this regulatory system The purpose of the GATT was to create a set of multilateral rules to facilitate free trade through the reduction of tariff barriers and other types of trade discrimination The GATT was eventually replaced by the World Trade Organization WTO in 1995 an institutional change which greatly broadened the remit of the trade regulator Today around 97 per cent of world trade is covered by the WTO framework Foreign direct investment strategies In a world of transnational corporations and of complex flows of investment at the international scale national governments have a clear vested interest in the effects of FDI whether positive or negative From a national viewpoint such investment is of two types outward investment by domestic enterprises and inward investment by foreign enterprises Few national governments operate a totally closed policy towards FDI although the degree of openness varies considerably Figure 66 summarizes the major types of national FDI policy Most are con cerned with inward investment although governments may well place restrictions on the export of capital for investment for example through the operation of exchange control regulations or insist that proposed overseas investments be approved before they can take place Historically there have been very large dif ferences in the policy positions adopted by countries towards inward FDI At the broadest level developed countries tended to adopt a more liberal attitude towards inward investment than developing countries26 although there were exceptions within each broad group For example among developed countries France had a much more restrictive stance than most other European countries Among devel oping countries Singapore had a particularly open policy far more so than most other Asian countries In the past two decades however national FDI policies have tended to converge in the direction of liberalization Attempts to regulate at the international scale have not been successful see Chapter 7 Although national differences still exist therefore they are now rather less stark than in the past Figure 67 summarizes the major regulatory changes towards FDI between 1991 and 2008 The proportion of regulatory changes that are more favourable to FDI continues to far outweigh those that are unfavourable However 06Dicken4084Ch06indd 183 19102010 110728 AM Part Two Processes of Global Shift 184 Government screening of investment proposals Exclusion of foreign firms from certain sectors or restriction on the extent of foreign involvement permitted Restriction on the degree of foreign ownership of domestic enterprises Operations Insistence on involvement of local personnel in managerial positions Compliance with national codes of business conduct including information disclosure Insistence on a certain level of local content in the firms activities Insistence on a minimum level of exports Requirements relating to the transfer of technology Locational restrictions on foreign investment Finance Restrictions on the remittance of profits andor capital abroad Level and methods of taxing profits of foreign firms Incentives Direct encouragement of foreign investment competitive bidding via overseas promotional agencies and investment incentives Necessity for government approval of overseas investment projects Restrictions on the export of capital eg exchange control regulations Policies relating to inward investment by foreign firms Entry Policies relating to outward investment by domestic firms Figure 66 Major types of FDI policy Figure 67 Changes in national regulation of FDI 19912008 Source based on UNCTAD 2009 Table I14 Number of countries introducing changes in their regulatory regimes Number of changes more favourable to FDI Number of changes less favourable to FDI 0 0 20 40 60 80 100 120 1991 1993 1995 1997 1999 2001 2003 2005 2007 50 100 Number of regulatory changes Number of countries introducing changes 150 200 250 300 scepticism about foreign direct investment FDI now appears to be spreading among the rich nations A succession of developed countries has recently tightened up their laws and declared high profile assets offlimits to foreign investors Usually about 90 per cent of the new laws governing FDI passed 06Dicken4084Ch06indd 184 19102010 110728 AM The State Really Does Matter 185 around the world made it easier for foreigners to invest But in the last three years 30 or 40 per cent of the laws have gone in the direction of being less welcome to investment27 The US will not let foreigners buy airlines television networks or increasingly any business remotely connected with security France protects 11 sectors from foreign takeovers including casinos and defence subcontractors But companies bent on acquiring a British business need have few concerns about interference even if they come from countries that practise such protectionism28 Industry strategies National policies towards trade or FDI are explicitly concerned with crossborder issues But there is a third policy area industry policy that although essentially concerned with internal issues also has broader international implications Indeed the boundaries between trade FDI and industry policies are extremely blurred Figure 68 sets out the major types of regulatory industry policies that may be used by national governments The various stimulatory and regulatory policies may be applied generally across the whole of a nations industries or they may be applied selectively Such selectiv ity may take a number of forms particular sectors of industry particular types of 1 Particular sectors of industry 2 Particular types of firm 3 Particular geographical areas eg eg eg a to bolster declining industries b to stimulate new industries c to preserve key strategic industries a to encourage entrepreneurship and new firm formation b to attract foreign firms c to help domestic firms against foreign competition d to encourage firms in importsubstituting or export activities a economically depressed areas b areas of growth potential cluster policies Some or all of these policies may be applied either generally or more commonly selectively Selectivity may be based on several criteria Merger and competition policies Company legislation Taxation policies Labour market regulation National technical and product standards State ownership of production assets Environmental regulations Health and safety regulations Labour union legislation Immigration policies Investment incentives Labour market policies State procurement policies Technology policies Small firm policies Policies to encourage industrial restructuring Policies to promote investment Capitalrelated Taxrelated Subsidies Training The range of potential industry policies Figure 68 Major types of industry policy 06Dicken4084Ch06indd 185 19102010 110728 AM Labour market strategies States especially in the older industrialized economies have become increasingly involved in labour market policies especially in terms of attempting to make labour markets more flexible A new conventional wisdom has emerged whose essence is that of removing what are seen to be rigidities in the labour markets of the older industrialized countries to make their labour markets more in tune with what are seen to be the dominant characteristics of a globalizing world economy The flexibilization of labour markets through deregulation involves greatly increased pressures and restrictions on labour organizations the drastic cutting back of welfare provisions and the move away from welfare towards workfare The process has gone furthest in the US Its apparent success in continuing to create large numbers of jobs albeit with the widening of income gaps has been the most persuasive argument for neoliberal policies Most European governments are concerned that the social costs of reducing unemployment using the US model may be politically unacceptable in a system in which the social dimension of the labour market is very strongly entrenched But there are clear signs of change as governments become increasingly concerned about the financial costs of sustaining existing practices and the continuing loss of competitive edge As a result a variety of labour market measures employed in various combinations in different European countries has emerged including the use of more temporary and fixedterm contracts the introduction of different forms of flexible working time moves to encourage greater wage flexibility by getting the longterm unemployed and the young to take lowpaid jobs increased vocational training to provide more transferable skills reforms in state employment services incentives to employers to take on workers measures to encourage workers to leave the labour market reductions in the nonwage labour cost burdens on employers specific schemes to target the longterm unemployed The State Really Does Matter 187 Economic strategies in the older industrialized economies As we saw earlier the continental European countries on the one hand and the US on the other represent distinctively different types of capitalism Historically a major difference has been the centrality of some kind of industrial policy together with a greater degree of social accountability of business in Europe and the absence of such policy and accountability in the US31 The UK occupies an intermediate position between the virtually pure market capitalism of the US and the kinds of social market capitalism practised in continental Europe but with a tendency in some areas notably labour market policy to be closer to the US The policy stance of the United States reflects both the sheer scale and wealth of its domestic economy and also a basic philosophy of nonintervention by the federal government in the private economic sector until the 2008 crisis when this stance was overturned at least for the time being As far as industry is con cerned the role of the federal government has generally been regulatory to ensure the continuation of competition Action at the federal level has been based pri marily on macroeconomic policies of a fiscal and monetary kind The aim has been to create an appropriate investment climate in which private sector institu tions could flourish This has not however prevented the federal government from rescuing specific firms especially very large ones from disaster At the other end of the size spectrum the Small Business Administration has provided aid to stimulate new and small firms Federal procurement policies are generally non discriminatory but the sheer size of federal government purchases particularly in the defence and aerospace industries has exerted an enormous influence on US industry Entire economic sectors regions and communities are heavily dependent on the work created by federal defence and other procurement contracts and on subsidies in such sectors as agriculture see Chapter 9 US policy towards international trade during most of the postSecond World War period has been one of urging liberalization and the reduction of tariffs in multilateral negotiations through the GATTWTO However since the 1980s there has been an increasing willingness to develop bilateral trading arrangements with other countries US trade policy is complicated by the structure and com position of the US Congress and the ways that new trade policies have to be negotiated with domestic interest groups32 As the worlds strongest economy the US like Britain in the nineteenth century has been the leading advocate of free trade Even so the federal government has intervened with the use of tariff and nontariff barriers to protect particular interests A Buy American initiative was part of the Obama administrations stimulus measures introduced in 2009 In the eyes of many parts of the world the US is seen as having a strong unilat eralist tendency very much at odds with its traditional multilateral trading stance The US has become increasingly embroiled in a whole series of trade disputes 06Dicken4084Ch06indd 187 19102010 110729 AM Part Two Processes of Global Shift 188 particularly with East Asian countries increasingly this means China and with the European Union There is also concern that the US has a tendency to intro duce extraterritorial trade legislation to achieve its broader political objectives One example was the HelmsBurton law that penalized foreign companies from doing business with Cuba Within Europe despite the existence of the EU see below an ideological divide continues to exist between the socalled market and social models of how the economy should be organized that is between the UKs more neoliberal position and that of France and Germany where the principle of the social mar ket remains strongly entrenched However the lines are not always quite as clear as is often claimed Although the United Kingdoms policy position does contrast in a number of ways with that of the continental European countries and is closer to that of the US the UK remains more interventionist than the US Nevertheless the UK has strongly adopted economic policies of privatization and deregulation Its labour market policies in particular are far closer to the US model than to the EU model There are considerable differences in policy emphasis between continental European member states Of the leading EU states France maintains the most nationalistic economic position having long had the most explicit state industrial policy a reflection of a tradition of strong state involvement dating back to the seventeenth century A major component of French industrial policy has been the promotion of national champions in key industrial sectors often through state ownership of largescale enterprises Frances current policy position retains many of these traditional qualities and an especially strong antagonism to the Anglo American neoliberal economic model Despite considerable privatization the French state retains a very considerable direct involvement in the economy The major exception among the continental European nations to a centralized approach to industrial policy has been Germany In part at least this reflects its federalist political structure with power divided between the federal government and the provinces Länder But although often described as light the federal governments role has been far from insubstantial It has pursued policies of active intervention in industrial matters including a substantial programme of financial subsidy Such involvement has to be seen within the German model of a social market economy33 The German economy is characterized both by a considerable degree of competition between domestic firms and also by a high level of con sensus between various interest groups including labour unions the major banks and industry The major challenge facing Germany since 1990 of course has been to cope with the fundamental transformation of the economy brought about by reunification Putting together the strongest economy in Europe the former West Germany with one that for half a century had existed in a completely different ideological system has been an immense undertaking It has put enormous strains on the federal budget because of the huge problems of rebuilding infrastructure and dealing with the unemployment brought about by restructuring34 06Dicken4084Ch06indd 188 19102010 110729 AM The State Really Does Matter 189 Japan can be regarded as the archetypal developmental capitalist state in which the governments economic role has been very different from that in most Western countries35 There has long been a high level of consensus between the major interest groups in Japan on the need to create a dynamic national economy This consensus is often regarded as a cultural characteristic of Japanese society with its deep roots in familism But it also reflected the poor physical endowment of Japan and the limited number of options facing the country when in the 1860s it sud denly emerged from its feudal isolation In other words consensus was also a pragmatic stance built up over more than 100 years Given virtually no natural resources and a poor agricultural base Japans only hope of economic growth lay in building a strong manufacturing base both domestically and internation ally through trade In this process the state played a central role not through direct state ownership but rather by guiding the operation of a highly competi tive domestic market economy Indeed there has been relatively little state owned enterprise in Japan and a generally much smaller public sector than in most Western economies For more than 50 years after the end of the Second World War the key govern ment institution concerned with both industry policy and trade policy was the Ministry of International Trade and Industry MITI renamed the Ministry for Economy Trade and Industry METI in 2001 After its establishment in 1949 MITI became the real guiding hand in Japans economic resurgence although its role has often been misunderstood and exaggerated in the West Until the 1960s Japan operated a strongly protected economy and it was not until 1980 that full internationalization of the Japanese economy was reached During the 1950s and early 1960s MITI together with the Ministry of Finance exerted very stringent controls on all foreign exchange foreign investment and the import of technology Initially MITI focused its energies on the basic industries of steel electric power shipbuilding and chemical fertilizers but then progressively encouraged the development of petrochemicals synthetic textiles plastics automobiles and elec tronics Japan was transformed from a lowvalue lowskill economy to a high value capitalintensive economy The foundation of this transformation was the clearly targeted selective nature of Japanese industry policy together with a strongly protected domestic economy A key element in Japanese economic policy was the specific treatment of inward FDI which for much of the postwar period was extremely tightly regu lated The technological rebuilding of the Japanese economy was based on the purchase and licensing of foreign technology and not on the entry of foreign branches or subsidiaries However the inward investment laws have been liberal ized and foreign firms do indeed operate within Japan in increasing numbers and in some cases in highly significant ways Since the early 1990s Japanese policy has been especially exercised by the prob lem of a highvalue currency with contentious trading relationships with the US and Europe and especially with the deep domestic recession which accompanied 06Dicken4084Ch06indd 189 19102010 110729 AM Part Two Processes of Global Shift 190 the collapse of the socalled bubble economy at the end of the 1980s Currently there is much debate about whether Japan can recover its economic dynamism and what kind of role the government should play Certainly attempts throughout the 1990s by successive Japanese governments to stimulate the domestic economy through fiscal mechanisms were not successful Questions over the kind of capital ism that might develop in Japan abound Changes are certainly occurring but the core characteristics of the Japanese economy are unlikely to disappear Jumpstarting economic development Ever since Britain emerged as the worlds first fully industrialized nation in the late eighteenth and early nineteenth centuries most other countries have tried to go down the same path Underlying all of these attempts have been explicit state policies notably those based initially on the ideas of the nineteenthcentury German economist Friedrich List36 List heavily criticized Britain for advocating free trade policies only after it had attained a position of global industrial leader ship In fact all the newly industrializing economies of the nineteenth century in particular the US Germany France and other European nations as well as Japan adopted a set of policies that were strongly protectionist in order to nurture their infant industries before relaxing some of the trade barriers when those industries were seen to be strong enough to face external competition A similar strategy was subsequently followed by the next wave of newly industrializing economies of East Asia and Latin America in the second half of the twentieth century In other words every successful industrial power at some point in its history has carried out an activist industrial policy37 From import substitution to export orientation The essence of most policies aimed at jumpstarting the process has been one of an initial emphasis on importsubstituting industrialization ISI the manufacture of products that would otherwise be imported based upon protection against such imports The aim is to protect a nations infant industries so that the overall indus trial structure can be developed and diversified and dependence on foreign technol ogy and capital reduced To this end many of the policies listed in Figures 65 66 and 68 have been employed The ISI strategy in theory is a longterm sequential process involving the pro gressive domestic development of industrial sectors through a combination of protection and incentives The realization that an importsubstituting strategy can not on its own lead to the desired level of industrialization began to dawn in a growing number of countries some during the 1950s rather more during the 1960s Generally it was the smaller industrializing countries that first began to shift 06Dicken4084Ch06indd 190 19102010 110729 AM towards a greater emphasis on export orientation because of the constraints imposed upon such a policy by their small domestic market Increasingly an exportoriented industrialization EOI strategy became the conventional wisdom among such international agencies as the Asian Development Bank and the World Bank A shift towards exportbased industrialization was made possible by the rapid liberalization and growth of world trade during the 1960s the shrinkage of geographical distance through the enabling technologies of transportation and communications the global spread of transnational corporations and their increasing interest in seeking out lowcost production locations for their export platform activities Such export orientation was invariably based upon a high level of government involvement in the economy The usual starting point was a major devaluation of the countrys currency to make its exports more competitive in world markets The whole battery of export trade policy measures shown in Figure 65 was invariably employed by the newly industrializing economies In effect these amounted to a subsidy on exports that greatly increased their price competitiveness Of course the major domestic resource on which this exportoriented industrialization rests has been that of the labour supply not only its relative cheapness but also its adaptability and very often its relative docility Indeed in many cases the activities of labour unions have been very closely regulated and often suppressed sometimes violently In fact the paths of industrialization followed by individual NIEs have been rather more complex than is often suggested Figure 69 sets out a fivephase sequence of industrialization based upon the experiences of the Latin American and East Asian NIEs A number of important points can be made The distinction commonly drawn between inwardoriented Latin American industrialization strategies and outwardoriented East Asian industrialization strategies is misleading The initial stages of industrialization were common to NIEs in both regions the subsequent divergence in the regional sequences stems from the ways in which each country responded to the basic problems associated with the continuation of primary ISI The duration and timing of these development patterns varied by region Primary ISI began earlier lasted longer and was more populist in Latin America than in East Asia The East Asian NICs began their accelerated export of manufactured products during a period of extraordinary dynamism in the world economy after 1973 the developing countries began to encounter stiffer protectionist measures in the industrialized markets These new trends were among the factors that led the East Asian NIEs to modify their EOI approach in the 1970s Latin America Mexico 18801930 Brazil 18801930 Mexico 19301955 Brazil 19301955 Mexico 19551970 Brazil 19551968 Mexico 1970present Brazil 1968present Commodity exports Unrefinedsemiprocessed raw materials agricultural goods minerals oil etc Primary importsubstituting industrialization ISI Shift from imports to local manufacture of basic consumer goods textiles clothing footwear food processing Secondary ISI Substitution of domestic production for imports of capital and technologyintensive manufactures such as consumer durables eg autos intermediate goods eg petrochemicals steel capital goods eg heavy machinery Diversified export promotion and continued secondary ISI Primary exportoriented industrialization EOI Emphasis on exports of manufactures especially labourintensive products Secondary ISI Heavy and chemical industrialization and Secondary EOI Higher valueadded and skillintensive products which require a more fullydeveloped local industrial base East Asia Taiwan 18951945 Korea 19101945 Taiwan 19501959 S Korea 19531960 Taiwan 19601972 S Korea 19611972 Taiwan 1973present S Korea 1973present The State Really Does Matter 193 EPZs come in a number of different forms free trade zones special eco nomic zones bonded warehouses free ports and maquiladoras45 Within devel oping countries EPZs have been located in a variety of environments Some have been incorporated into airports seaports or commercial free zones or located next to large cities Others have been set up in relatively undeveloped areas as part of a regional development strategy EPZs themselves vary enor mously in size ranging from geographically extensive developments to a few small factories from employment of more than 30000 to little more than 100 workers EPZs in developing countries share many features in common The overall pat tern of incentives to investors is broadly similar as is the type of industry most commonly found within the zones Historically the production of textiles and clothing and the assembly of electronics both employing predominantly young female labour has dominated However the position is not static Table 61 Growth in export processing zones 1975 1986 1995 1997 2003 2007 No of countries with EPZs 25 47 73 93 116 130 No of EPZs 79 176 500 845 3000 3500 Employment millions na na na 225 43 66 Asia 37 56 Central America and Mexico 22 53 Middle East 07 10 North Africa 04 06 SubSaharan Africa 04 09 North America 03 03 South America 03 05 Transition economies 03 14 Caribbean 02 06 Indian Ocean 01 02 Europe 005 Pacific 001 Source ILO 2003 Table 1 2007b 12 Industrial zones with special incentives set up to attract foreign investors in which imported materials undergo some degree of processing before being re exported again43 Table 61 shows the rapid growth in EPZs especially during the past 30 years Some 90 per cent of all EPZs in the developing countries are located in Latin America the Caribbean Mexico and Asia However in terms of employment Asia is by far the most important region for EPZs with 85 per cent of the total Of these the biggest concentration is in China which has 40 million of the world total of 66 million EPZ workers44 06Dicken4084Ch06indd 193 19102010 110729 AM Part Two Processes of Global Shift 194 Zones have evolved from initial assembly and simple processing activities to include high tech and science zones logistics centres and even tourist resorts Their physical form now includes not only enclavetype zones but also singleindustry zones such as the jewellery zone in Thailand or the leather zone in Turkey singlecommodity zones like coffee in Zimbabwe and singlefactory such as the exportoriented units in India or singlecompany zones such as in the Dominican Republic46 Variations on a theme Although the recurring central theme running through the development of all NIEs has been the role of the state each individual NIE performs a specific variation on that general theme a reflection of its particular historical cultural social political and economic complexion47 In all cases the state has played a highly interventionist role although the degree and nature of its involvement as well as the extent of its success vary greatly from one NIE to another In some cases state ownership of production has been very substantial in others it has been insignificant In some cases the major policy emphasis has been upon attracting foreign direct investment in others such investment has been tightly regulated and the policy emphasis placed on nurturing domestic firms As we noted earlier Figure 69 newly industrializing economies in East Asia and Latin America have followed similar though distinctive paths to industrializa tion Of the two geographical areas the East Asian NIEs have been significantly more successful in creating dynamic economies Three examples can be used to illustrate how the state has been involved South Korea officially the Republic of Korea came into being in 1948 follow ing the partition of Korea into two From 1910 to 1945 Korea was a Japanese colony very tightly integrated into the imperial economy Between 1948 and 1988 when political liberalization occurred South Korea was governed by a suc cession of authoritarian militarybacked and strongly nationalistic governments that operated a strong statedirected economic policy articulated through a series of fiveyear plans48 Two important developments during the 1950s helped to provide the basis for industrialization the land reform of 194850 which removed the old landlord class and created a more equitable class structure and the redis tribution of Japaneseowned and state properties to wellconnected individuals which helped to create a new Korean capitalist class49 A powerful economic bureaucracy was created with a key role played by a new Economic Planning Board EPB At the same time the financial system was placed firmly in the hands of the state This highly centralized statecorporatist bureaucracy in effect aggressively orchestrated the activities of private firms50 In particular the state made possible and actively encouraged the development of a small number of extremely large and highly diversified firms the chaebol that continue to dominate the Korean economy By controlling the financial system particularly the availability of credit the Korean government was able to operate a strongly interventionist economic 06Dicken4084Ch06indd 194 19102010 110729 AM The State Really Does Matter 195 policy The chaebol were consistently favoured through their access to finance and very strong longterm relationships were developed between them and the state From the 1960s Korean policy had a strong sectoral emphasis as the state decided which particular industries should be supported through a bat tery of measures including financial subsidy and protection against external competition Like Japan at a similar stage in its development Korea for the most part eschewed the use of inward foreign investment to acquire technology Indeed Korea adopted the most restrictive policy towards inward foreign investment of all the four leading Asian NIEs Korean government policy has been to build a very strong domestic sector As a consequence the share of FDI in the Korean economy has been relatively modest Table 22 In the early 1980s the emphasis of Korean economic policy began to shift towards a greater degree of restricted liberalization Indeed much of Koreas traditional industry policy has been gradually diluted51 Major changes were made in policies of financial regulation exchange rate management and investment coordination The formerly tightly controlled financial sector was significantly liberalized and the policy of exchange rate management virtually abandoned The central pillar of South Korean industrial policy for 40 years the coordination of investment began to be dismantled When the East Asian financial crisis of 1997 hit Korea the countrys problems as for the other affected East Asian economies were attributed by the IMF and by the Western financial community in general to the existence of an overregulated statedominated economy with excessively close even corrupt relationships between government and business Yet in the case of Korea that was no longer entirely the case It could be argued in fact that the Korean government had already gone too far in abandoning the principles on which its spectacular eco nomic growth had been based Clearly certain reforms were needed as both the Korean economy itself and the broader global environment were changing Not least was the need to reform the chaebol which had come to distort the economy and which were themselves in great financial difficulty That battle is still being fought The chaebol argue that the proposed reforms will leave them vulnerable to foreign takeover the government argues that reform of crossshareholdings will make them more competitive The issue of foreign takeover is however very sensitive in Korea as a whole Singapore demonstrates a very different model of industrialization albeit one in which the state has played a dominant role52 Singapore is by far the smallest of all the East Asian NIEs Like both Korea and Taiwan it had a very long history as a colony within the British system Unlike the two larger Asian countries how ever it was less tightly integrated into its imperial system although it played a highly significant role as a commercial entrepôt a reflection of its strategic geo graphical position Singapore became fully independent in 1965 when it separated from Malaysia Since then although Singapore is a parliamentary democracy it has 06Dicken4084Ch06indd 195 19102010 110729 AM Part Two Processes of Global Shift 196 been governed by one political party the Peoples Action Party For the first 30 years of its existence it was led by one powerful individual Lee Kuan Yew From the very beginning the Singapore government pursued a very aggressive policy of exportoriented labourintensive manufacturing development Concentration on manufacturing especially labourintensive manufacturing was adopted because of the need to reduce a very high unemployment rate in a society that at the time had one of the fastest population growth rates in the world The twin pillars of the policy were those of complementary economic and social planning the latter being much more overt than in other East Asian NIEs The particular ways in which Singapore has operated its exportoriented policy have been substantially different from those of Korea and Taiwan Most signifi cantly the central pillar was a strategy of attracting FDI as a result of which the Singaporean economy is overwhelmingly dominated by foreign firms Table 22 The most explicit industrialization measures therefore were those of incentives to inward investors using a sectorally selective process The government agency responsible was the Economic Development Board EDB which still plays an extremely influential role in the Singapore economy With a few exceptions Singapore operated a free port policy with little use of trade protectionist meas ures The second set of direct measures used to promote industrial development was the establishment of a highquality physical infrastructure At the same time a series of social policy measures was introduced aimed at creating an amenable environment for foreign investment Most notably the labour unions were effectively incorporated into the governance system through the establishment of a National Trades Union Council Strikes and other indus trial action were declared illegal unless approved through secret ballot by a major ity of a unions members In essential services strikes were banned altogether These labour market regulations resulted in the creation of a highly disciplined and depoliticised labour force in Singapore53 Thus through a whole battery of interlocking policies the Singapore government has created a very highgrowth increasingly affluent industrialized society in which foreign firms have played the dominant economic role in production but within a highly regulated political and social system Singapore sets out to market itself as a global business centre on the basis of the very high quality of its physical and human infrastructure and its strategic geo graphical location Government policies are geared towards this goal which also includes an explicit strategy to regionalize the Singaporean economy by encour aging domestic firms to set up operations in Asia while Singapore develops as the control centre of a regional division of labour The government introduced a series of initiatives using governmentlinked corporations to develop major infra structural projects in Asia and more broadly to develop international networks54 At the same time the emphasis on research and development and technological upgrading continues with a specific emphasis on biotechnology to enhance its already significant role as a pharmaceuticals centre and on IT55 Two recent policy 06Dicken4084Ch06indd 196 19102010 110729 AM The State Really Does Matter 197 initiatives have been the greater liberalization of the financial system and a push for greater Asian regionalism The key question however is the extent to which this highly paternalistic state is able to loosen its grip on the countrys political and social life without damaging its economic influence The Peoples Republic of China PRC came into being in 1949 with the replace ment of the nationalist government by a communist government led by Mao Zedong For the next 30 years China followed a policy of economic selfreliance This policy was pursued through a series of major often extreme initiatives Initially the new government followed the example of the Soviet Union in estab lishing a FiveYear Plan 19537 This relatively successful policy was jettisoned in 1958 when Mao announced the Great Leap Forward a total transformation of economic planning with the emphasis on smallscale and rural development Although this initiated the notion of rural industrialization the Great Leap Forward was disastrous in its consequences with mass famine one of the results In 1966 policy changed again with the introduction of the Cultural Revolution a phase that lasted for some 10 years with again disastrous human and social implications The period after Maos death in 1976 was one of political hiatus that was even tually resolved by the emergence of Deng Xiaoping as leader It was under Dengs leadership that China began to jettison the selfreliance policy of the previous 30 years and to make links with the world market economies56 This has been done however without substantial political change In the words of the new Party Constitution of 1997 it is Socialism with Chinese characteristics The pivotal year was 1979 when China began its open policy based upon a carefully controlled trade and inward investment strategy This was set within the socalled Four Modernizations concerned with agriculture industry education and science and defence A central element of the new policy has been the opening up of the Chinese economy to foreign direct investors As we saw in Chapter 2 FDI has grown very rapidly indeed in China since the early 1980s The organizational form of these investments varies from wholly owned foreign subsidiaries to equity joint ventures with Chinese partners and other partnership arrangements The most distinctive feature of the open policy however is the explicit use of geography in its implementation Partly in order to control the spread of capitalist market ideas and methods within Chinese society and partly to make the policy more effective through external visibility and agglomeration economies FDI was steered to specific locations Initially the foci were the four Special Economic Zones SEZs established in 1979 at Shenzhen Zhuhai Shantou and Xiamen Figure 610 Significantly each of these was located to maximize their attraction to investors from overseas Chinese notably in Hong Kong Macau and Taiwan The Chinese SEZs offered a package of incentives including tax concessions dutyfree import arrangements and serviced infrastructure The original SEZs were located in areas well away from the major urban and industrial areas in order to control the extent of their influence However since the mid 1980s there has 06Dicken4084Ch06indd 197 19102010 110729 AM Part Two Processes of Global Shift 198 been considerable development of Economic and Technological Developments Zones ETDZs as Figure 610 shows Despite massive inflows of foreign capital and technologies China remains a centrally controlled command economy in which stateowned enterprises SOEs predominate despite more than halving in numbers Reform of the SOEs is an immense task and one surrounded by massive controversy A major problem for a country trying economically to modernize is the sheer inefficiency by Western standards and high levels of corruption of the SOEs SOEs are embedded within the Communist Party system and this fact pervades their operations57 The problems posed by the SOEs have been intensified with Chinas accession to the WTO Although this greatly enhanced Chinas economic potential it also imposes severe stresses on the domestic economy and institutions Not only have tariff levels fallen from their previously high levels thus exposing Chinese enter prises to intense competition but also nontariff barriers matters relating to intel lectual property rights safety regulations financial and telecommunications regulations are all affected It is notable that the Chinese government now actively encourages Chinese businesses to invest overseas and there have been a number of Xiamen Haicang Hainan Yangpu Shanghai Jinqiao Ningbo Suzhou Urumqi Shihezi Lhasa Xining Lanzhou Yinchuan Xian Chengdu Wuhan Guiyang Zhengzhou Huhhot Taiyuan Hefei Nanjing Nanchang Changsha Nanning Kunming Shenyang Yingkou Yantai Weihai Dalian Changchun Harbin Tianjin Qinhuangdao Qingdao Fuzhou Wenzhou Hangzhou Xiaoshan Kunshan Wuhu Lianyungang Nantong Shanghai Minhang Shanghai Hongqiao Shanghai Caohejing Ningbo Daxie Guangzhou Guangzhou Nansha Huizhou Dayawan Dongshan Fuqing Rongqiao Zhanjiang Beijing Chongqing Zhuhai Shantou Xiamen Shenzhen Established 200002 Established 199293 Established 198488 Established 1979 Economic and Technological Development Zones Special Economic Zones Figure 610 The geography of Chinas open policy 06Dicken4084Ch06indd 198 19102010 110729 AM The State Really Does Matter 199 significant Chinese acquisitions of foreign businesses notably the IBM PC business by Lenovo in 2004 Financially China continues to be under pressure to revalue the renminbi not least because it has the largest trade surplus in the world Overall it is clear that the institutional structure of the Chinese economy is in a state of flux with a much increased variety of forms As in the past however the key lies in the internal political power struggles between the modernizers who wish to sustain and develop the open policies of the recent past and those who wish to retain a degree of isolation So far Chinas reform policies are proving successful But the key test of the survival of such a policy is its continued success in delivering economic growth and raising incomes for the majority of Chinese and not just those in the more developed parts of the country For a country so large and so populous this is a very tall order indeed States as competitors Do states compete Can we think of nations as being in competition with each other just as firms compete with other firms Although Krugman argues that the very idea of competitive states is a dangerous obsession58 the generally accepted view is very different The transformation of the nationstate into a competition state lies at the heart of political globalization59 Engaging in economic competition is another manifestation of the exercise in soft power by states60 Books government reports newspaper articles TV pro grammes in virtually all countries resonate with the language and imagery of the competitive struggle between states for a bigger slice of the global economic pie Prior to the East Asian crisis of the late 1990s much of the concern focused on the perceived loss of economic standing by the US and European countries visà vis Japan and the East and South East Asian NIEs Today although the focus is different the big threat is now seen to be China and to a lesser extent India and possibly Brazil and Russia the socalled BRICs the rhetoric remains the same Indeed the Swiss business school IMD publishes an annual World Competitiveness Yearbook with a competitiveness scoreboard or league table of 49 countries based on no fewer than 286 individual criteria States compete to enhance their international trading position in order to cap ture as large a share as possible of the gains from trade They compete to attract productive investment to build up their national production base which in turn enhances their international competitive position Indeed one of the most graphic expressions of competition between states is their intense involvement in what have been called locational tournaments the attempts to entice investment projects into their own national territories There has been an enormous escalation in the extent 06Dicken4084Ch06indd 199 19102010 110730 AM of competitive bidding between states and between local communities within the same state to attract the relatively limited amount of geographically mobile investment see Chapter 7 Michael Porter argues that national competitive advantages are created through highly localized processes internal to the country Porter conceives of this set of processes as a diamond an interconnected system of four major determinants Figure 611 Connecting all of the components other than chance by doubleheaded arrows emphasizes the fact that the diamond is a mutually reinforcing system Each of the four determinants can be broken down into several subcomponents Factor conditions The factors most important to competitive advantage in most industries especially the industries most vital to productivity growth in advanced economies are not inherited but are created within a nation through processes that differ widely across nations and among industries Thus nations will be competitive where they possess unusually high quality institutional mechanisms for specialized factor creation 74 80 emphasis added The most important include the levels of skills and knowledge of the countrys population and the provision of sophisticated physical infrastructure including transport and communications Demand conditions The home market usually has a disproportionate impact on a firms ability to perceive and interpret buyer needs proximity to the right type of buyers is of decisive importance in national competitive advantage 86 87 However the extent to which a nations firms are connected into international markets also increases national competitiveness Related and supporting industries that are internationally competitive Perhaps the most important benefit of homebased suppliers is in the process of innovation and upgrading Competitive advantage emerges from close working relationships between worldclass suppliers and the industry 103 Firm strategy structure and rivalry The way in which firms are managed and choose to compete is affected by national circumstances Some of the most important are attitudes toward authority norms of interpersonal interaction attitudes of workers toward management and vice versa social norms of individualistic or group behaviour and professional standards These in turn grow out of the education system social and religious history family structures and many other often intangible but unique national conditions 109 Porter lays great emphasis on the importance of intense rivalry between domestic firms arguing that this creates strong pressures on firms to innovate in both products and processes to become more efficient and to become highquality suppliers of goods and services Vigorous local competition not only sharpens advantages at home but pressures domestic firms to sell abroad in order to grow Toughened by domestic rivalry the stronger domestic firms are equipped to succeed abroad It is rare that a company can meet tough foreign rivals when it has faced no significant competition at home 119 In addition to the four primary competitive determinants that in combination form his diamond Porter attributes secondary importance to two other components The role of chance For example the occasionally random occurrence of innovations or the historical accidents that may create new entrepreneurs The role of government Porter explicitly refuses to regard government as a competitive determinant of the same order as the four primary determinants of his diamond He sees government as merely an influence on his four determinants a contingent rather than a central factor Porters competitive recipes have been adopted by many governments both national and local in their attempts to improve their competitive position On the other hand there are considerable criticisms It is highly reductionist in compressing immense complexity into a simple fourpointed diamond Hence as a policy prescription it needs to carry a public policy health warning62 Its underplaying of the role of the state in pursuit of national competitiveness is a significant omission As we have seen all states perform a key role in the ways in which their economies operate although they differ substantially in the specific measures they employ and in the precise ways in which such measures are combined It neglects the influence of the transnationalization of business activity on national diamonds there is ample evidence to suggest that the technological and organizational assets of TNCs may be influenced by the configuration of the diamonds of the foreign countries in which they produce and that this in turn may impinge upon the competitiveness of the resources and capabilities in their home countries63 States as collaborators While there is controversy over whether states do or should see themselves as competitive states there is no doubt that states collaborate with other states to achieve specific economic and welfare goals64 Such collaborations can take many forms Here we focus on one dimension the tendency for states to develop politicaleconomic relationships at the regional scale through regional trade agreements RTAs Indeed such regionalism has become one of the dominant features of the contemporary global economy The proliferation of regional trade agreements The basis of regional trade agreements is the preferential trading arrangement PTA Technically PTAs are not necessarily regional that is involving states that are geographically proximate They simply involve states agreeing to provide preferential access to their markets to other specified states wherever they are located primarily through tariff reductions at least initially However the WTO uses the term regional trade agreement for all such arrangements RTAs have a twosided quality they liberalize trade between members whilst at the same time discriminating against third parties65 There has been an especially marked acceleration in RTA formation since the early 1990s as Figure 612 shows At least onethird of total world trade occurs within RTAs Such growth reflects a number of motivations by national governments Most have a strongly defensive character they represent an attempt to gain advantages of size in trade by creating large markets for their producers and protecting them at least in part from outside competition There is also an undoubted bandwagon effect a fear of being left out while the rest of the world swept into regionalism either because this would be actually harmful to excluded countries or just because if everyone else is doing it shouldnt we Trade diversion occurs where as the result of regional bloc formation trade with a former trading partner now outside the bloc is replaced by trade with a partner inside the bloc Trade creation occurs where as the result of regional bloc formation trade replaces home production or where there is increased trade associated with economic growth in the bloc In addition regional trading blocs also have a major influence on flows of investment by TNCs The effects of regional integration on direct investment like those on trade can also be conceptualized in terms of creation and diversion In the latter case the removal of internal trade and other barriers may lead firms to realign their organizational structures and valueadding activities to reflect a regional rather than a strictly national market see Figure 514 This by definition diverts investment from some locations in favour of others Despite a widespread view that RTAs are a relatively new phenomenon they have in fact been an important feature of the global economic landscape since the middle of the nineteenth century But their basis and their nature have changed over time Four waves of regionalism can be identified67 During the second half of the nineteenth century there were a number of trade agreements in place especially in Europe for example the German Zollverein the customs unions between the Austrian states and those between several of the Nordic countries As of the first decade of the twentieth century Great Britain had concluded bilateral arrangements with fortysix states Germany had done so with thirty countries and France had done so with more than twenty states 596 After the disruptive effects of the First World War 191418 a new wave of regional arrangements occurred but this time in a more discriminatory form Some were created to consolidate the empires of major powers including the customs union France formed with members of its empire in 1928 and the Commonwealth system of preferences established by Great Britain in 1932 Most however were formed among sovereign states The Rome Agreement of 1934 led to the establishment of a PTA involving Italy Austria and Hungary Belgium Denmark Finland Luxembourg the Netherlands Norway and Sweden concluded a series of economic agreements throughout the 1930s Outside of Europe the US forged almost two dozen bilateral commercial agreements during the mid1930s many of which involved Latin American countries 597 Since the end of the Second World War 193945 there have been two distinct waves of regionalism The first took place from the late 1950s through the 1970s and was marked by the establishment of the EEC EFTA the CMEEA and a plethora of regional trade blocs formed by developing countries These arrangements were initiated against the backdrop of the Cold War the rash of decolonisation following World War II and a multilateral commercial framework all of which coloured their economic and political effects 600 A further wave of economic regionalism from the late 1980s onwards occurred in the drastically changed geopolitical circumstances of the collapse of the Sovietled system and the increased uncertainties of a more fragmented political and economic situation Furthermore the leading actor in the international system the US is actively promoting and participating in the process PTAs also have been used with increasing regularity to help prompt and consolidate economic and political reforms in prospective members a rarity during prior eras And unlike the interwar period the most recent wave of regionalism has been accompanied by high levels of economic interdependence a willingness by the major economic actors to mediate trade disputes and a multilateral that is the GATTWTO framework 601 Types of regional economic integration There are four major types of politically negotiated regional integration agreements involving increasing degrees of economic and political integration Free trade area trade restrictions between member states are removed by agreement but member states retain their individual trade policies towards nonmembers Customs union member states both operate a free trade arrangement with each other and also establish a common external trade policy tariffs and nontariff barriers towards nonmembers Common market not only are trade barriers between member states removed and a common external trade policy adopted but also the free movement of factors of production capital labour etc between member states is permitted Economic union the highest form of regional economic integration short of fullscale political union in which not only are internal trade barriers removed a common external tariff operated and free factor movements permitted but also broader economic policies are harmonized and subject to supranational control As Figure 613 shows the progression is cumulative each successive stage of integration incorporates elements of the previous stage together with the additional element that defines each particular stage The vast majority of regional trade agreements fall into the first two categories shown in Figure 613 the free trade area and the customs union Indeed around 90 per cent of all RTAs are free trade areas There is a small number of common market arrangements but only one group the European Union comes close to being a true economic union In fact not only is there enormous variation in the scale nature and effectiveness of these regional trade agreements but also there is in some cases a considerable overlap of membership of different groups Table 62 shows the major regional trade agreements currently in force while Figure 614 maps the intricate webs of preferential trading relationships that involve but also go beyond the major regional blocs NAFTA EU EFTA AFTAASEAN ACP COUNTRIES GULF COOPERATION COUNCIL SOUTHERN AFRICA CUSTOMS UNION MEDITERRANEAN COUNTRIES CARICOM MERCOSUR ANCOM Canada United States Dominican Republic Mexico Chile Uruguay Morocco Croatia Macedonia Albania Israel South Africa Jordan Costa Rica Honduras El Salvador Guatemala Bolivia Peru India China South Korea Japan Thailand Singapore Philippines Australia New Zealand Trade agreements Existing Negotiations under way or planned Figure 614 The tangled web of major regional trade agreements Source based on WTO data Financial Times 19 November 2003 press reports 06Dicken4084Ch06indd 206 19102010 110731 AM The State Really Does Matter 207 Regional integration within Europe the Americas East Asia and the Pacific In Chapters 2 and 4 we observed a strong tendency for a disproportionate share of global production trade and FDI to be regionalized Such concentrations reflect first and foremost the basic economicgeographical processes of preference for proximity to markets and suppliers and a general tendency to followership in Table 62 Major regional trade agreements Regional group Membership Dates Type EU European Austria Belgium Bulgaria Cyprus 1957 Economic Union Czech Republic Denmark Estonia European union France Finland Germany Greece Common Hungary Ireland Italy Latvia Market Lithuania Luxembourg Malta Netherlands Poland Portugal 1992 European Romania Slovakia Slovenia Spain Union Sweden UK NAFTA North Canada Mexico US 1994 Free trade American Free area Trade Agreement EFTA European Iceland Norway 1960 Free trade Free Trade Lichtenstein Switzerland area Association Mercosur Argentina Brazil Paraguay 1991 Common Southern Cone Uruguay Venezuela 2006 market Common Market ANCOM Andean Bolivia Colombia Ecuador 1969 revived Customs Common Market Peru Venezuela 1990 union CARICOM Caribbean Antigua Barbuda Bahamas 1973 Common Community Barbados Belize Dominica market Grenada Guyana Haiti Jamaica Montserrat St Kitts Nevis St Lucia St Vincent the Grenadines Suriname Trinidad Tobago AFTA ASEAN Free Brunei Darussalam Cambodia 1967 ASEAN Free trade Trade Agreement Indonesia Laos Malaysia Myanmar area Philippines SingaporeThailand 1992 AFTA Vietnam ChinaASEAN Free China Brunei Darussalam 2010 Free trade Trade Agreement Cambodia Indonesia Laos area Malaysia Myanmar Philippines SingaporeThailand Vietnam 06Dicken4084Ch06indd 207 19102010 110731 AM Part Two Processes of Global Shift 208 location decisionmaking But there are also rather different kinds of regional integration agreement in each of the three major regions In this section we briefly explore these different manifestations of regional integration The European Union The European Union is the duckbilled platypus of the political world a curi ouslooking animal that defies simple categorization Some people think it resembles a bird others a reptile or a mammal Similarly everyone interprets the EU according to their own preconceptions rather than seeing it for the singular institution it is68 The EU is by far the most highly developed and structurally complex of all the worlds regional economic blocs Although initially established as a sixmember European Economic Community EEC in 1957 it was always more than simply an economic institution Indeed the initial stimulus was the desire to bring together France and Germany in such a way that their traditional enmities could no longer find their outlet in another round of European wars and also to strengthen Western Europe in the face of the perceived Soviet threat Figure 615 shows how the EU has grown from its original six member states in 1957 to 12 in the 1970s1980s 15 in the 1990s 25 in 2004 and its current 27 member states Since the early 1990s four developments have been especially important for the EU The first was the drive to complete the Single European Market in 1992 Almost 40 years after the Treaty of Rome individual countries were still resorting to tactics which prevented or delayed the import of certain products from other member nations through the use of various kinds of nontariff barrier The European Commission argued that the costs of nonEurope amounted to a sig nificant loss of potential GDP and of jobs as well as a lessened ability to compete with the US and Japan The Single European Act aimed at the removal of the remaining physical tech nical and fiscal barriers the liberalization of financial services the opening of public procurement and other measures Such internal liberalization and deregu lation it was argued would create a virtuous circle of growth for the European Community as a whole for its member states and for those business firms success fully taking advantage of the changes It is virtually impossible to measure pre cisely the actual effects of the Single Market process However a review of a range of evaluative studies concluded that there is no convincing empirical evidence of European integration having led to either shortterm or sustained economic growth effects The regulatory changes of the Single Market project were part of a global process of eco nomic restructuring and mainly served to enhance the competitiveness of worldmarket oriented European countries69 The second major event in the EU since the early 1990s was the Treaty on European Union TEU signed at Maastricht in 1991 This introduced a far more ambitious political agenda aimed at creating a fully fledged economic union In particular it 06Dicken4084Ch06indd 208 19102010 110731 AM Levels of economic integration Free Trade Area Customs Union Common Market Economic Union Removal of trade restrictions between member states Common external trade policy towards nonmembers Free movement of factors of production between member states Harmonization of economic policies under supranational control Figure 613 Types of regional economic integration Part Two Processes of Global Shift 210 The pros and cons of a single European currency remain finely balanced The major benefits are the reduced costs and uncertainties associated with having to deal with many separate currencies within the Single Market and the overall stability this is intended to produce Set against this is the fact that an individual states ability to use monetary mechanisms to deal with periodic economic crises is greatly reduced Such constraints on national freedom of manoeuvre become especially apparent during major financial crises as in 2010 with Greece The crisis in 2010 demonstrated the potential fragility of the Eurozone At the same time the fact that some EU members notably Denmark Sweden and the UK remain outside the EMU creates further difficulties in achieving consensus on EUwide actions The third major development has been the dramatic enlargement of membership during the mid 2000s to 27 states with the potential of further enlargement In this regard the most contentious applicant is Turkey over which opinion within the EU is highly polarized The majority of the new members were previously embedded within the Sovietdominated system with very different recent histo ries and sociopolitical structures from the existing EU members Others are smaller countries like Cyprus and Malta Significantly the income gap between existing and new members is much wider than in previous rounds of enlargement The average GDP per head of the 10 new members in 2004 was only 465 per cent of the existing EU average This compares with the average of 955 per cent for Denmark Ireland and the UK when they joined in 1973 and the 1036 per cent for Austria Finland and Sweden on their accession in 1995 Such huge income differences pose massive problems for the already stressed EU budget Nevertheless politicaleconomic integration in the EU is unique in its extent and depth Many though not all of the economic policies of individual mem ber states have been relocated to the supranational EU level For example there is just one EU trade commissioner representing the EU in the WTO and in all other international trade negotiations There are EUwide policies on competi tion on subsidies both industrial and agricultural and on investment incentives On the other hand there are significant areas where policy is set at the national level for example in labour markets and taxation However even in areas of common EU policy the differing ideological posi tions of individual member states clearly affect the process of reaching consensus Trade negotiations for example including issues relating to the Common Agricultural Policy have become increasingly contested within the EU with a sharp divide opening up between states with a more protectionist stance notably France but also Poland and those espousing more open trade policies notably the UK and some of the northern European states In the sphere of competition policy as well there is much heated argument over the acquisition of domestic firms even by firms from other EU member states The greatly increased size and diversity of the EU enlargement makes the process of consensus even more difficult hence the fourth major development was the implementation of the Lisbon Treaty on 1 December 2009 This had been an immensely tortuous and contested process over several years with a number of 06Dicken4084Ch06indd 210 19102010 110732 AM The State Really Does Matter 211 states refusing to ratify the original EU Constitution The result is a considerably less ambitious structure but one that does nevertheless involve some important changes In particular the position of the European Parliament is strengthened with greater powers regarding EU legislation the EU budget and international agreements National parliaments are to have greater involvement especially in ensuring that the EU only acts where this will result in better outcomes than would be achieved at the national level the principle of subsidiarity The aim is to create a more efficient Europe with simplified working methods and voting rules streamlined and modern institutions for a EU of 27 members and an improved ability to act in areas of major priority for todays Union70 Significantly it makes it possible for a member state to leave the EU The Americas Whereas the history of politicaleconomic integration in Europe has been one of progressive deepening and widening albeit with many interruptions and uncertainties the history of attempts to create regional trade agreements in the Americas has been far more fragmented and shallow To a great extent this reflects the overwhelming dominance of the US in the region the fact that until very recently the US had chosen not to enter into bilateral or regional trading arrange ments and the limited success among Latin American countries in creating robust and lasting regional agreements The picture in the Americas therefore is of a mosaic of regional trade agreements of different type and scope Figure 616 By far the most important regional trade agreement in the Americas is the North American Free Trade Agreement NAFTA between the US Canada and Mexico By integrating two highly developed countries and one large developing country into a single free trade area it radically changed the economic map of North America The income gap between the US and Mexico is very much greater than that between the richest and poorest states within the EU The NAFTA came into force in 1994 but its origins can be traced back into the 1980s One important building block although this was not its intent was the CanadaUS Free Trade Agreement CUSFTA signed in 1988 and implemented in 1989 As the CUSFTA was being signed two other developments were also occur ring President George Bush Senior had made freer trade with Mexico a campaign issue in 1988 At the same time President Carlos Salinas of Mexico made clear his determination to negotiate a free trade area with the US Within a short time of bilateral talks starting Canada had joined in an obvious defensive response The arguments in favour of creating the NAFTA varied between the three parties For the US it formed part of its longterm objective of ensuring stable economic and political development in the western hemisphere and also gave access to Mexican raw materials especially oil markets and lowcost labour It also promised further US leverage in a world of increasing regional integration The Canadian government was anxious to consolidate the recent CUSFTA The motives of the Mexican government were primarily to help to lock in the eco nomic reforms of the previous few years to create a magnet for inward investment 06Dicken4084Ch06indd 211 19102010 110732 AM Part Two Processes of Global Shift 212 NAFTA North American Free Trade Agreement Mercosur Southern Cone Common Market ANCOM Andean Common Market CARICOM Caribbean Community LAIA Latin American Integration Association Canada Canada United States United States Mexico Mexico Bahamas Bahamas Belize Belize Jamaica Jamaica Haiti Haiti St Kitts Nevis St Kitts Nevis Antigua Barbuda Antigua Barbuda Dominica Dominica St Lucia St Lucia St Vincent the Grenadines St Vincent the Grenadines Grenada Grenada Barbados Barbados Trinidad Tobago Trinidad Tobago Chile Chile Uruguay Uruguay Suriname Suriname Venezuela Venezuela Colombia Colombia Ecuador Ecuador Peru Peru Bolivia Bolivia Argentina Argentina Paraguay Paraguay Brazil Brazil Guyana Guyana Figure 616 The mosaic of regional trade agreements in the Americas 06Dicken4084Ch06indd 212 19102010 110732 AM The State Really Does Matter 213 not only from the US but also from Europe and Asia and to secure access to the US and Canadian markets The aims of the NAFTA were gradually to eliminate most trade and investment restrictions between the three countries over a 10 to 15year period The possi bility of other countries joining the NAFTA was left open to negotiation The NAFTA is not a customs union it does not incorporate a common external trade policy Each member is free to make trade agreements with other states outside the NAFTA In contrast to the EU politicaleconomic integration is minimal so that unlike the EU there are no social provisions within the NAFTA although two side agreements on the environment and on labour standards were incorporated to meet US and Canadian concerns The NAFTA was and remains a highly controversial issue in all three mem ber countries Against the claimed benefits of an enlarged economic space from both a production and a marketing point of view is set a number of concerns In the US there are particular worries about environmental and labour impacts In the latter case a former presidential candidate Ross Perot offered the spectre of a giant sucking sound as jobs left the US for Mexico71 A similar fear was expressed in Canada One politician saw the NAFTA as a nightmare of US continentalists come true Canadas resources Mexicos labour and US capital72 In Mexico the fear was expressed that the country would become even more dominated by the US The jury is divided Today most trade economists read the evidence as saying that NAFTA has worked intraarea trade and foreign investment have expanded greatly Trade sceptics and antiglobalists look at the same history and feel no less vindi cated Politically the skeptics can fairly claim victory NAFTA is unpopu lar in all three countries In Mexico the agreement is widely regarded as having been useless or worse In all three countries the perceived results of NAFTA seem to have eroded support for further trade liberalization73 Not surprisingly therefore attempts to create a Central American Free Trade Agreement CAFTA between the US and five Central American countries Costa Rica El Salvador Honduras Nicaragua plus the Dominican Republic have been far from smooth Although the legislation was passed in the US in July 2005 the agreement has not been fully implemented The major opposition has come from US labour organizations and sugar farmers fearing job relocations to the cheap labour economies and poorer working conditions of Central America On the other hand CAFTA is seen as being a way for Central American producers of sugar and of garments to gain better access to their biggest markets In fact unlike the NAFTA which removed most US barriers to imports from Mexico and Canada CAFTA largely makes permanent the access Central America already has to the US market under the Caribbean Basin Initiative in exchange for significantly greater access to the Central American market74 06Dicken4084Ch06indd 213 19102010 110732 AM Part Two Processes of Global Shift 214 Whereas US interest in regional trade agreements did not emerge until the late 1980s Latin America has a long history of attempts to create free trade areas and customs unions dating back to 1960 with the establishment of the Latin American Free Trade Area LAFTA75 As Figure 616 shows there has been a complex overlapping of bilateral and multilateral agreements between Latin American countries Some of these agreements have failed to develop notably the LAFTA despite its reinvention as LAIA Latin American Integration Association in 1980 Two Latin American regional trade agreements have had rather more stay ing power the Andean Community and Mercosur Of the two Mercosur is the more widely significant76 It was established in 1991 with the intention of liberalizing trade between the four founding member states establishing a common external tariff coordinating macroeconomic policy and adopting sectoral agreements Economically Mercosur has certainly increased the degree of internal trade In some respects Mercosur has some features in common with the EU Like the EU one of its primary motivations was to deal with security relationships between Argentina and Brazil a parallel with the FrancoGerman relationship in Europe It certainly goes some way beyond a simple free trade area such as the NAFTA On the other hand Mercosur does not have any of the supranational institutions that are at the heart of the EU Conflict continues to plague the organization because of a lack of coordinated economic policies and supranational institutions Deepening of the integration process has slowed because member states have not established common mechanisms for coordinated macroeconomic policy nor have they truly com mitted themselves despite the rhetoric to establishing a regional institutional framework rather loose regulations and shallow institutionalism have been maintained at a relatively low political cost Put simply the member states of Mercosur want the maximum economic and political benefits from integra tion while forgoing as little sovereignty as possible77 Looming over all attempts to create a more vigorous regional economy in Latin America is the US which aspires to create a panhemispheric Free Trade Area of the Americas FTAA encompassing North Central and South America So far the negotiations involving 34 countries have stalled Partly to subvert an FTAA there are countermoves to create a South America Community of Nations whose core would be a merger over 15 years between Mercosur and the Andean Community East Asia and the Pacific Regional trading arrangements in the AsiaPacific are much looser less formal ized and more open than the EU and NAFTA78 Until 2010 there were two main 06Dicken4084Ch06indd 214 19102010 110732 AM The State Really Does Matter 215 regional economic collaborations and a host of bilateral agreements An ASEAN Free Trade Agreement AFTA was initiated in 1992 among the ASEAN countries ASEAN itself had been established in 1967 as a group of four then six South East Asian countries Singapore Malaysia Thailand Indonesia the Philippines Brunei ASEANs membership grew to 10 countries in the 1990s with the addition of Cambodia Laos Myanmar and Vietnam Figure 617 ASEAN as an intergovernmental institution established to promote regional cooperation offers a striking contrast to the Western institutions such as EU and NAFTA it is based on a different concept of institutionalization Thailand Thailand Myanmar 1997 Myanmar 1997 China China Cambodia 1999 Singapore Laos 1997 Laos 1997 Vietnam 1995 Brunei Philippines M a l a y s i a I n d o n e s i a Original members 1967 Subsequent members with date of entry ChinaASEAN FTA 2010 ASEAN Figure 617 The ChinaASEAN Free Trade Agreement 06Dicken4084Ch06indd 215 19102010 110732 AM Part Two Processes of Global Shift 216 Paying full respect for the sovereignty and independence of each member state is one of the fundamental principles of the Association most of the decisions have been made by consensus through the consultation based on the ASEAN tradition which means to negotiate and consult thoroughly till achieving an agreement The mechanism for dispute settlement also reflects ASEANs preference for an informal approach This is a striking contrast with the Western approach to dispute settlement in which preference is clearly on the side of judicial settlement based on clear rules and binding decisions79 Such a system has both strengths and weaknesses80 One of its strengths is that it has helped what is a very diverse group of countries to maintain positive relation ships One of its weaknesses is that firm and rapid response to problems is often difficult especially in the light of the principle of noninterference in domestic matters of member states ASEAN has had only limited success in stimulating economic activity As a consequence in 1992 the original six member states agreed to initiate an ASEAN Free Trade Agreement Increasing competitive pressures on the ASEAN region from other East Asian countries notably China has forced the organization to look towards making agreements with other countries in East Asia Some ASEAN members notably Singapore have negotiated bilateral trade agreements with China South Korea and Japan and with the EU the US Canada Mexico and Chile see Figure 614 However the ChinaASEAN agreement Figure 1617 which came into being in January 2010 is at a different scale The deal creates the third largest regional trading agreement by value after the European Union and the North American Free Trade Agreement covering countries with mutual trade flows of 231bn 161bn in 2008 and combined gross domestic product of about 6000bn However the deal remains short of genuine free trade The trade in goods agreement provides for each country to register hundreds of sensitive goods on which tariffs will continue to apply in many cases until at least 202081 At the same time a free trade agreement has been reached between ASEAN Australia and New Zealand An agreement has also been negotiated with India to establish an IndoASEAN free trade area by 2012 The other major regional economic organization in East Asia is the Asia Pacific Economic Cooperation forum APEC established in 1989 on the initiative of the Australian government Figure 618 shows the extremely diverse compo sition of APEC It includes not only the obvious East and South East Asian states themselves including China and Taiwan but also Australia and New Zealand on the one hand and the US Canada Mexico and Chile on the other However APEC is so far little more than a broadly based forum and little real progress has been made in fulfilling its stated goal of open regionalism Particularly fol lowing the Asian financial crisis of 1997 APEC became increasingly criticized by Asian participants 06Dicken4084Ch06indd 216 19102010 110733 AM The State Really Does Matter 217 APECs failure to provide any meaningful response to the biggest economic crisis in the AsiaPacific region since 1945 made it if not irrelevant then less important for many Asian members Increasingly Asian observers evalu ated APEC as a tool of American foreign economic policy And the resistance of Asian policy makers to a strengthened APEC was caused by their fear of US dominance APEC has not been successful in creating a joint identity as the basis for further panPacific cooperation and the lack of tangible ben efits has been progressively criticized APEC has failed to provide much needed political legitimacy for the wider regional liberal economic project82 This failure of APEC has led to various initiatives within East Asia to create a more robust regional economic and financial framework It is suggested that We are seeing the emergence of a new regionalism in Asia that exhibits three overlapping and complex trends 1 An interest in monetary regionalism arising from the desire to combat financial volatility 2 An interest in bilateral trade initiatives within the context of the wider mul tilateral system largely at the expense of the APEC style open regionalism of the 1990s 3 The emergence of a voice of region beyond that of the subregions Southeast and Northeast Asia but more restricted than that of the Pacific as a megaregion the voice of region in the global political economy that is emerging is a new one an East Asian one83 Canada South Korea South Korea Japan Taiwan China Philippines New Zealand Australia Papua New Guinea Indonesia Singapore Brunei Brunei Thailand USA Mexico Chile Vietnam Vietnam Malaysia Russia Peru Figure 618 The AsiaPacific Economic Cooperation Forum APEC 06Dicken4084Ch06indd 217 19102010 110733 AM Part Two Processes of Global Shift 218 NOTES 1 Kindleberger 1969 207 2 This was the term coined by the novelist Tom Wolfe in The Bonfire of the Vanities 1988 3 Stephens 2008 4 Jessop 1994 5 See Gilpin 2001 Gritsch 2005 Hirst et al 2009 Hudson 2001 Jessop 2002 Wade 1996 Weiss 1998 2003 6 Kelly 1999 38990 emphasis added 7 Gritsch 2005 23 Nye 2002 also addresses the question of soft power in the context of the USs current geopolitical position 8 Glassner 1993 3540 9 Agnew and Corbridge 1995 and Taylor 1994 discuss the general notion of states as containers and the nature and significance of territoriality and space in geopolitics 10 See Granovetter and Swedberg 1992 Lee 2009 Smelser and Swedberg 2005 11 Terpstra and David 1991 6 12 Hofstede 1980 13 A study of 700 managers across a large number of countries confirmed the persistence of significant cultural differences Financial Times 15 October 2004 See also Drogendijk and Slangen 2006 14 Schwartz 1994 Drogendijk and Slangen 2006 15 Yao 1997 238 16 See Berger and Dore 1996 Brenner et al 2010 Hall and Soskice 2001 Hollingsworth and Boyer 1997 Peck and Theodore 2007 Whitley 1999 2004 17 Peck and Theodore 2007 7508 18 Hollingsworth 1997 266 2678 19 Peck and Theodore 2007 756 20 Wolf 2008b 1 21 Hudson 2001 489 emphasis added 22 Hudson 2001 76 23 Cerny 1991 174 24 Brookings Institution 2009 wwwbrookingseduarticles200903g20stimulus prasadaspx 25 Keynes 2007 Most standard economics texts contain a discussion of Keynesianism 26 Mortimore and Vergara 2004 and Mytelka and Barclay 2004 discuss FDI policies with particular reference to developing countries 27 Financial Times 25 April 2008 28 Financial Times 24 January 2007 29 Peck 2001 10 30 Faux and Mishel 2000 101 31 See Gilpin 2001 Chapter 7 32 See Chorev 2007 33 Contributors to Vitols 2004 explore the extent to which the German model is sustainable 06Dicken4084Ch06indd 218 19102010 110734 AM The State Really Does Matter 219 34 Gretschmann 1994 471 35 Accounts of Japanese economic policy are provided by Dore 1986 Johnson 1985 Porter et al 2000 36 List 1928 37 Gilpin 2001 201 38 Gereffi 1990 18 39 Gereffi 1990 21 40 Gereffi 1990 21 41 Gereffi 1990 22 42 ILO 2003 2007a 43 ILO 2003 1 44 ILO 2007a 45 ILO 2003 1 46 ILO 2003 2 47 Douglass 1994 543 48 Especially useful accounts of Korean industrialization policy are by Amsden 1989 Chang 2007 Koo and Kim 1992 Wade 1990 2004a 49 Koo and Kim 1992 50 Wade 2004a 320 See also Amsden 1989 51 See the detailed analysis provided by Chang 1998a 52 Singapores developmental policies are discussed by Lall 1994 Ramesh 1995 Rodan 1991 Yeung 1998 53 Yeung 1998 392 54 The regionalization strategy of Singapore is discussed in detail by Yeung 1998 1999 55 Coe 2003b 56 Useful accounts of Chinese economic development policy are provided in Benewick and Wingrove 1995 Crane 1990 Hutton 2007 Nolan 2001 Zheng 2004 57 Nolan 2001 58 Krugman 1994 59 Cerny 1997 251 60 Gritsch 2005 2 61 Numbers in parentheses in the following list refer to pages in Porter 1990 62 Martin and Sunley 2003 5 63 Dunning 1992 142 64 Cable and Henderson 1994 Gamble and Payne 1996 Gibb and Michalak 1994 Hoekman and Kostecki 1995 Chapter 9 Lawrence 1996 Mansfield and Milner 1999 Schiff and Winters 2003 65 Mansfield and Milner 1999 592 66 Schiff and Winters 2003 9 67 Mansfield and Milner 1999 595602 Numbers in parentheses in the following list refer to pages in this work 68 Thornhill 2008 69 Ziltener 2004 953 70 wwweuropaeulisbontreatyglanceindexenhtml 71 Lawrence 1996 723 06Dicken4084Ch06indd 219 19102010 110734 AM Part Two Processes of Global Shift 220 72 Quoted in McConnell and MacPherson 1994 179 73 The Economist 3 January 2004 74 Financial Times 23 February 2005 75 See Grugel 1996 Gwynne 1994 Kaltenthaler and Mora 2002 76 This discussion of Mercosur is based upon Kaltenthaler and Mora 2002 77 Kaltenthaler and Mora 2002 92 93 78 Bowles 2002 Dieter and Higgott 2003 Haggard 1995 HamiltonHart 2003 Higgott 1999 79 Liao 1997 1501 80 Narine 2008 81 Financial Times 2 January 2010 82 Dieter and Higgott 2003 433 83 Dieter and Higgott 2003 446 06Dicken4084Ch06indd 220 19102010 110734 AM Seven THE UNEASY RELATIONSHIP BETWEEN TNCs AND STATES DYNAMICS OF CONFLICT AND COLLABORATION CHAPTER OUTLINE The ties that bind Bargaining processes between TNCs and states Seducing investors locational tournamentsand competitive bidding The problem of transfer pricing Relative bargaining powers of TNCs and states Attempts at regulating transnational corporations The ties that bind In the preceding two chapters we focused on the major characteristics of TNCs and of states as separate actors in shaping the global economy However so far the relationships between TNCs and states have been merely hinted at see Figure 36 In this brief chapter we focus explicitly on these relationships because they are in many ways at the very centre of the processes of global shift and of global eco nomic transformation In the case studies of Part Three we will see how these relationships are played out in different industries whilst in Chapter 14 we will examine the potential impact of TNCs on home and host economies Here the aim is simply to outline the major general features of the relationships between TNCs and states 07Dicken4084Ch07indd 221 19102010 110745 AM the terms on which TNCs may have access to markets andor resources TNCs and States 223 On the other hand although their relationships may be conflictual in certain circumstances states and firms need each other Clearly states need firms to generate material wealth and provide jobs for their citizens They might prefer such firms to be domestically bounded in their allegiance but that is not an option in a capitalist market economy Indeed many regard TNCs as important extensions of their state foreign policy For example in addition to ensuring control of key natural resources American political leaders have believed that the national interest has also been served by the foreign expansion of US corporations in manufacturing and services Foreign direct investment has been considered a major instru ment through which the US could maintain its relative position in world markets and the overseas expansion of multinational corporations has been regarded as a means to maintain Americas dominant world economic position5 Conversely TNCs need states to provide the infrastructural basis for their contin ued existence both physical infrastructure in the form of the built environment and also social infrastructures in the form of legal protection of private property institutional mechanisms to provide a continuing supply of educated workers and the like TNCs in particular look to their homecountry government to provide it with diplomatic protection in hostile foreign environments TNC objectives Performance Technology Highorder functions Responsiveness Maximize profits and shareholder value Undertake RD at locations optimal to the needs of the firm as a whole Locate headquarters and other high order functions to fit optimal pattern of the firms overall operations Retain flexibility to move profits in optimal manner Retain flexibility to modify the geographical configuration of the firms production network to meet changing conditions Retain flexibility to use the labour force as required Maximize growth of GDP Stimulate the development of locallyrooted technology Maintain indigenous headquarters Retain power to gain a fair return on local operations of TNCs through taxation policies Maximize the extent and benefits of local supplier linkages Prevent the closurescaling down of local TNC operations Develop a flexible highskill highearning labour force Attract and retain key operations of TNCs Minimize cost base consistent with customer need Gain access to all necessary technology Maximize quantity and quality of employment opportunities State objectives Figure 71 Some conflicting objectives of TNCs and states Source based in part on Hood and Young 2000 Table 11 07Dicken4084Ch07indd 223 19102010 110745 AM There is a widespread view that the major cause of the states alleged demise is the counterposed growth of the TNC Indeed one of the most common arguments is to compare the size of TNCs and national states The typical argument is as follows TNCs and States 225 At first sight it seems obvious that TNCs would seek the removal of all regulatory barriers that act as constraints and impede their ability to locate wherever and to behave however they wish Such barriers include those relating to entry into a national market whether through imports or a direct presence freedom to export capital and profits from local operations freedom to import materials components and corporate services freedom to operate unhindered in local labour markets Certainly given the existence of differential regulatory struc tures in the global economy TNCs will seek to overcome circumvent or sub vert them Regulatory mechanisms are indeed constraints on a TNCs strategic and operational behaviour Yet it is not quite as simple as this TNCs may perceive the very existence of regulatory structures as an opportunity enabling them to take advantage of regula tory differences between states by shifting activities between locations according to differentials in the regulatory surface that is to engage in regulatory arbitrage One aspect of this is the ability of TNCs to stimulate competitive bidding for their mobile investments by playing off one state against another as states themselves strive to outbid their rivals to capture or retain a particular TNC activity see below More generally TNCs seem to have a rather ambivalent attitude to state regulatory policies TNCs have favoured minimal international coordination while strongly sup porting the national state since they can take advantage of regulatory dif ferences and loopholes While TNCs have pressed for an adequate coordination of national regulation they have generally resisted any strengthening of international state structures Having secured the mini malist principles of national treatment for foreignowned capital TNCs have been the staunchest defenders of the national state It is their ability to exploit national differences both politically and economically that gives them their competitive advantage9 More specifically it has been argued that TNCs will tend increasingly to support a strategic trade policy in their home country with the expectation that this will open up market access in foreign countries and enable them to benefit from large economies of scale and learning curve effects10 Bargaining processes between TNCs and states It is clear that the relationships between TNCs and states are exceedingly com plex In the final analysis such relationships revolve around their relative bar gaining power the extent to which each can implement their own preferred strategies The situation is especially complex when TNCs pursue a strategy of transnational integration but geographical fragmentation of their activities in which individual units in a specific host country form only a part of the firms 07Dicken4084Ch07indd 225 19102010 110745 AM overall operations In such circumstances governments have a number of legitimate concerns TNCs and States 227 lower limits In addition the host economy has an interest in lowering the lower limit through the creation of an advantageous investment climate political sta bility constitutional guarantees against appropriation etc which might persuade the TNC to accept a lower rate of return14 Seducing investors locational tournaments and competitive bidding The greater the competition between potential host countries for a specific investment the weaker will be any one countrys bargaining position because countries will tend to bid against one another to capture the investment Indeed one of the most striking developments of the last few decades has been the development of socalled locational tournaments There has been an enormous intensification in competitive bidding between states and between communities within the same state for the relatively limited amount of internationally mobile investment It has also become increasingly common for TNCs to try to lever various kinds of state subsidies in order to persuade them to keep a plant in a particular location Otherwise it is threatened the plant will be closed or much reduced in scale Such cutthroat bidding undoubtedly allows TNCs to play off one state against another to gain the highest return for their investment An example from the US illustrates this situation The latest 2008 cheap manufacturing site for European companies is not in Asia or eastern Europe but the US The reason is less the value of the dol lar but rather the large number of incentives that some US states are offer ing companies to set up factories in their region Tennessee has disclosed X A Direct investment Rate of return Y Z Maximum rate TNC can earn while host economy is willing to admit XA amount of FDI Upper limit of bargaining range for investment XA Lower limit of bargaining range for investment XA Figure 73 A simplified model of the bargaining relationship between a TNC and a host country Source based on Nixson 1988 Figure 1 07Dicken4084Ch07indd 227 19102010 110745 AM Part Two Processes of Global Shift 228 that it agreed to give German carmaker Volkswagen 577m in incentives for its 1bn plant in Chattanooga A senior executive of Fiat said with the amount of money US states are willing to throw at you you would be stupid to turn them down at the moment ThyssenKrupp the German steelmaker and industrial group is receiving more than 811m to build a steel mill in Alabama It turned down an offer from Louisiana which is reported to have offered as much as 2bn as well as an additional 900m in cheap debt from Alabama A VW official suggested that the US had a competitive advantage because European Union state aid rules made support for factories complicated It is more difficult in Europe The chairman of a large Swiss group said States are willing to pay for new roads retrain workers and offer huge tax breaks that is a competitive pack age that not many parts of the world can match when you look at how produc tive US workers are and where the dollar is15 The EU has strong state aid rules to control such competitive subsidization but it is always a highly sensitive and contested process For example the tortuous saga of the onoff sale of GMs European operations in 2009 raised the issue of coun tries where the plants are located outbidding each other in subsidies to retain employment see Chapter 11 The situation has become especially complex within the expanded EU After 1989 but prior to the accession of Eastern European states into the EU firms from the West had moved rapidly into the newly emerging market economies attracted by very generous incentives Generous deals were made across eastern Europe to spur investment in fields as diverse as banking sugar production and agribusiness Subsidies tax breaks import quotas and other commercial advantages were granted to those willing to invest and help create jobs But the subsequent need to adhere to EU rules has meant an end to the highly lucrative arrangements for the companies involved and that in turn has provoked calls for compensation16 At the international scale the use of relatively lower tax as an incentive to TNCs is increasingly common Corporate tax rates indeed vary widely and it has become a frequent occurrence for TNCs to threaten to leave a particular country because of perceived high tax rates Although often the threat is more apparent than real states do not necessarily know that Such a strategy is especially marked in regions like Europe where as Figure 74 shows there are very substantial differences in national rates of corporate tax offering many possible locational options within what is a huge regional market and production space Evidence suggests that tax competition has increased sharply in Europe driven not only by the influx of new member states but also by the aggressive competition for FDI by countries like Ireland and Switzerland Studies show that location of FDI is becoming more sensitive to taxation and that corporate income tax rates can influence a TNCs decision to undertake FDI especially if competing jurisdictions have similar enabling 07Dicken4084Ch07indd 228 19102010 110745 AM TNCs and States 229 conditions For instance EU investors were found to increase their FDI positions in other EU member states by approximately 4 if the latter reduced their corporate income tax rates by one percentage point relative to the European mean17 The threat of increased taxation on companies following the 2008 financial crisis provoked a wave of predictions that TNCs would relocate operations to lowertax countries In the UK for example a number of TNCs have relocated or threat ened to relocate their headquarters to countries like Ireland or Switzerland to avoid higher taxes Examples include WPP the worlds largest advertising com pany Shire Pharmaceuticals United Business Media and Henderson Global Investors However there is some doubt as to the exact extent that these firms have actually relocated their HQ operations an issue under investigation by the UK tax authorities The problem of transfer pricing One of the most problematical yet most opaque issues in the relationships between TNCs and states is that of how a TNCs internal transactions and its profits are actually taxed by the states in which that TNC has a presence By definition a TNC moves both tangible materials and products finished and semifinished and also various kinds of corporate services across international borders to the various parts of its operations In external markets prices are charged on an armslength basis between independent sellers and buyers In 0 5 10 15 Corporate tax rate 2008 20 25 30 35 Malta Belgium France Italy Spain Luxembourg Germany United Kingdom Sweden Finland Netherlands Portugal Greece Denmark Austria Slovenia Estonia Czech Republic Slovakia Poland Romania Hungary Lithuania Latvia Ireland Cyprus Bulgaria Figure 74 IntraEU differences in corporate taxation Source based on material in the Financial Times 8 September 2008 07Dicken4084Ch07indd 229 19102010 110745 AM Part Two Processes of Global Shift 230 the internal market operated by TNCs however transactions are between related parties units of the same organization The rules of the external market do not apply The TNC itself sets the transfer prices of its goods and services within its own organizational boundaries and therefore has very considerable flexibility in setting those transfer prices to help achieve its overall goals The ability to set its own internal prices within the limits imposed by the vigilance of the tax authorities enables the TNC to adjust transfer prices either upwards or downwards and therefore to influence the amount of tax or duties payable to national governments For example as Figure 75 suggests it would be in a TNCs interest to charge more for the goods and services supplied to its sub sidiaries located in countries with high tax levels and vice versa A similar incen tive exists where governments restrict the amount of a subsidiarys profits that can be remitted out of the country In general the greater the geographical differences in levels of corporate taxes tariffs duties and exchange rates the greater will be the incentive for the TNC to manipulate its internal transfer prices The very large highly centralized global TNC has the greatest potential for doing so But it has proved extremely difficult for governments and researchers to gather hard evidence on its actual extent Picture a General Motors plant in Windsor Ontario producing hundreds of items for assembly in autos that will be sold in the Canadian market as well as for assembly by its sister plants in Michigan No independent public market exists for many of the items since no other firm produces these prod ucts Nor is it obvious what the production cost may be of the items that cross the USCanadian border that kind of estimate will depend heavily on how the fixed costs of the Windsor plant are allocated among the many items produced an allocation that cannot fail to be arbitrary Without an obvious selling price or an indisputable cost price all the ingredients exist for a pitched battle over the transfer price When the item crossing the border is intangible such as a right bestowed by the parent on a foreign subsidiary to use the trademark of the parent or to draw on its pool of technological knowhow the indeterminateness of a reasonable price becomes even more apparent How much is the use of the IBM trade name worth to its subsidiary in France How valuable is the access granted to a team of engineers in an Australian subsidiary to the databank of a parent in Los Angeles18 High corporate taxation levels andor tight restrictions on profit repatriation In TNCs interest to inflate local costs by charging the local affiliate a higher price for goods and services supplied by the parent company Country A Low corporate taxation levels andor loose restrictions on profit repatriation In TNCs interest to deflate local costs by charging the local affiliate a lower price for goods and services supplied by the parent company Country B Headquarters Goal is to maximize global profits and minimize tax liabilities TNC Figure 75 The incentives for TNCs to engage in transfer pricing 07Dicken4084Ch07indd 230 19102010 110745 AM TNCs and States 231 A US House of Representatives study claimed that more than half of almost 40 foreign companies surveyed had paid virtually no taxes over a 10 year period The Internal Revenue service estimated that some 53 billion was lost through the transfer pricing mechanism in 2001 alone19 In the UK a study of 210 TNCs showed that 83 per cent had been involved in a transfer pricing dispute20 According to a UK House of Commons Report one in four of the largest com panies in the UK paid zero corporation tax in 2006721 In 2009 both the US and the UK governments began investigations into the tax disclosure practices of TNCs22 The UK is arguing that there should be international agreement on countrybycountry reporting so that TNCs would have to reveal the profits they make and the tax they pay in each country in which they operate Even in devel oped economies like the US or the UK it is extremely difficult for government to assess the actual extent of transfer pricing It is even more difficult for developing countries to do so because they simply do not have the resources A countryby country reporting system would undoubtedly help them Relative bargaining powers of TNCs and states In general TNCs wish to maximize their locational flexibility to take advantage of geographical differences in the availability quality and cost of production inputs in serving their existing and new markets Their ideal would be to pursue such goals without any hindrance from the regulatory practices of states States on the other hand strive to capture as much as possible of the value created from production within their territories In this latter sense a primary aim of a host state is to try to embed a TNCs activities as strongly as possible in the localnational economy One way of thinking about this specific process is to conceive of two idealtypes of embeddedness active embeddedness and obligated embeddedness23 Active embed dedness is where a TNC seeks out localized assets and incorporates them as a mat ter of choice within its operations Where such localized assets are widely available in different geographical locations then the power of such choice rests primarily with the TNC However the less widely available the assets or where access to them is controlled by the state the more likely the state is to have a greater degree of bargaining power over the terms on which the TNC can utilize them In such circumstances obligated embeddedness is likely to occur that is the TNC is forced to comply with state criteria in order to gain access to and use of the desired asset Obligated embeddedness therefore is most likely to occur where two conditions are satisfied First there must be a localized asset that is highly impor tant to a TNC this may include a natural resource a human resource andor a significant market and to which it needs access in order to achieve its business goals Second access to that resource must be controlled by the state within whose ter ritory the asset is located and the state must have the power to exert that control The extent to which a state feels the need to offer large incentives to attract a foreign investment or to retain an existing investment or is able to impose access 07Dicken4084Ch07indd 231 19102010 110746 AM or performance requirements will depend on its relative bargaining strength in any specific case Conversely the extent to which a TNC is able to obtain such incentives or to operate as it wishes will depend on its relative bargaining strength The outcome will depend on a number of factors On the one hand the price that a host country will ultimately pay is a function of the number of foreign firms independently competing for the investment opportunity the recognized measure of uniqueness of the foreign contribution as against its possible provision by local entrepreneurship public or private the perceived degree of domestic need for the contribution On the other hand the terms the TNC will accept are a function of the firms general need for an investment outlet the attractiveness of the specific investment opportunity offered by the host country compared to similar or other opportunities in other countries the extent of prior commitment to the country concerned eg an established market position Figure 76 sets out the major components of the bargaining relationship between TNCs and host countries Both possess a range of power resources that are their major bargaining strengths Both operate within certain constraints that will restrict the extent to which these power resources can be exercised The relative bargaining power of TNCs and host countries therefore is a function of three related elements the relative demand by each of the two participants for resources which the other controls the constraints on each which affect the translation of potential bargaining power into control over outcomes the negotiating status of the participants Figure 76 suggests that in general host countries are subject to a greater variety of constraints than are TNCs a reflection of the latters greater potential flexibility to switch their operations between alternative locations Nevertheless the extent to which a TNC can implement a globally integrated strategy is constrained by nationstate behaviour Where a company particularly needs access to a given location and where the host country does have leverage then the bargain that is eventually struck may involve the TNC in making concessions In general the scarcer the resource being sought whether by a TNC or a host country the greater the relative bargaining power of the controller of access to that resource and vice versa Part Two Processes of Global Shift 234 A nationstates ultimate sanction against the TNC is to exclude a particular for eign investment or to appropriate an existing investment The problem of course is that the whole process is dynamic The bargaining relationship changes over time as the bottom section of Figure 76 suggests In most studies of TNCstate bargaining the conventional wisdom is that of the socalled obsolescing bargain in which once invested fixed capital becomes sunk a hostage and a source of bar gaining strength The high risk associated with exploration and development diminishes when production begins Technology once arcane and proprietary matures over time and becomes available on the open market Through devel opment and transfers from FDI the host country gains technical and managerial skills that reduce the value of those possessed by the foreigner26 In this view after the initial investment has been made the balance of bargaining power shifts from the TNC to the host country in other words it moves to the right in Figure 76 But although this may well be the case in naturalresourcebased industries see Chapter 8 it is far less certain that this applies in those sectors in which technological change is frequent andor where global integration of opera tions is common In such circumstances the bargain will obsolesce slowly if at all and the relative power of TNCs may even increase over time27 Not surprisingly there are few detailed studies of TNCstate bargaining pro cesses outside the resource extractive sectors see the example of the Kazakhstan oil industry in Chapter 8 The participants regard them as being far too sensitive and possibly embarrassing A rare example is Seidlers study of Fords strategy to enter the Spanish market in the early 1970s28 This case demonstrates just how powerful a large TNC can be in persuading a hostcountry government to change its existing regulations The Spanish automobile market in the early 1970s was heavily protected Not only were tariffs on imports very high 81 per cent on cars 30 per cent on components but also cars built in Spain had to have 95 per cent local content In addition no foreign company could own more than 50 per cent of a company operating in Spain Such restrictions were very much in conflict with Fords own preferences for a Spanish operation Fords aim was not only to penetrate the local market but also to create an export platform from which to serve the entire European market As such it wanted the lowest possible import tariffs on components and a minimal level of local content so that it could source components from other parts of its transnational network Fords preferred policy was also to have complete ownership of its foreign affiliates On the other hand the Spanish government was very anxious to build up its automobile industry and especially to increase exports Two years of negotiations at the highest political level ensued a reflection of the new diplomacy in the global economy in which heads of TNCs talk directly to heads of government And Ford certainly did that across Europe The eventual agreement showed just how powerful Fords position was The fact that virtually 07Dicken4084Ch07indd 234 19102010 110746 AM TNCs and States 235 all other European governments were trying to entice Ford to locate in their countries gave the company substantial negotiating leverage On the other hand Ford regarded a Spanish location as vital to its future European operations although the Spanish government could not be sure of this Under the agreement finally signed virtually all of Fords demands were met In particular for Ford the tariff on imported components was reduced from 30 per cent to 5 per cent the local content requirement was reduced from 95 per cent to 50 per cent provided that twothirds of production was exported precisely what Ford wanted to do anyway and Ford was allowed 100 per cent ownership of its Spanish subsidiary But of course the benefits were not all one way In return Spain gained a massive boost to its automobile industry which was subsequently enhanced by the entry of other TNCs including General Motors As a result Spain became one of the worlds leading automobile producers see Chapter 11 However states are not always as weak as is often assumed Or at least in certain circumstances this is the case A prime example is China and its policy towards automobile firms29 The prospect of access to the worlds largest and fastestgrow ing market led many automobile firms to try to enter China But the Chinese government has complete control over such entry and has adopted a policy of limited access for foreign firms Here then we have the obverse of the usual situ ation Whereas in most cases TNCs play off one country against another to achieve the best deal in the Chinese case it is the state whose unique bargaining position enables it to play off one TNC against another Of course China is something of a special case But although some developing countries have few attractive pro ductive assets or locational advantages for which TNCs will compete with each other and as a result may not be able to play off one TNC against another equally there are many others who can play this game as they have at least some bargaining chips30 It is important therefore not to fall into the usual trap of assuming that the bargaining advantage always lies with the TNC and that the state is always in a weak position Neither should we assume that a states bargaining power remains unchanged The transitional economies of Eastern Europe illustrate this very clearly31 As highly centralized statecontrolled economies though to differing degrees before 1989 they were in a position to determine the terms on which TNCs could enter and operate within their economies With political liberaliza tion after 1989 came a headlong rush into neoliberal marketdriven economic policies This considerably reduced their relative bargaining power as individual states in relation to TNCs Western multinationals enjoyed more favourable terms of entry in Eastern Europe than in other capitalimporting regions during earlier phases of FDI The small size economic weakness and geopolitical vulnerability of the East European states prompted local officials to offer foreign investors unusually generous tax holidays and profits repatriation allowances The international 07Dicken4084Ch07indd 235 19102010 110746 AM Part Two Processes of Global Shift 236 economic conditions prevailing at the time of Eastern Europes opening further bolstered MNCs bargaining position The global ascent of economic liberalism simultaneously lowered national barriers to FDI and intensified bid ding for foreign investment among capitalimporting countries allowing Western companies to obtain localcontent waivers and other concessions from postcommunist governments32 However the increasing political integration of the Eastern European states into the EU with its particular regulations on the concessions and incentives that can be granted to TNCs has enabled those states to retrieve some of their bargaining power Fords experience in Hungary is a case in point The dramatic develop ments of 1989 thwarted the companys plan to use Ford Hungária as a trade balancing instrument while Hungarys subsequent convergence toward Western trade norms hindered Fords attempts to extract concessions from postcommunist governments33 But this was only possible because in effect the EU acted as a strong state Left alone the postcommunist Eastern European countries would have been relatively powerless As it is their degrees of bargaining freedom should not be overexaggerated As experience throughout Europe shows the intensity of competition between states for mobile investment is extremely high There are far more substitutable locations within Europe for potential investors to retain considerable bargaining strength TNCs and states therefore are continuously engaged in intricately choreo graphed negotiating and bargaining processes On the one hand TNCs attempt to take advantage of national differences in regulatory regimes such as taxation or performance requirements like local content On the other hand states strive to minimize such regulatory arbitrage and to entice mobile investment through competitive bidding against other states The situation is especially complex because while states are essentially territorially fixed and clearly bounded geographically a TNCs territory is more fluid and flexible34 Transnational production networks slice through national boundaries although not necessarily as smoothly as some would claim In the process parts of differ ent national spaces become incorporated into transnational production networks and vice versa Such territorial asymmetry translates into complex bargaining processes in which contrary to much conventional wisdom there is no unambiguous and totally predictable outcome TNCs do not always possess the power to get their own way as some writers continue to assert In the complex relationships between TNCs and states as well as with other institutions the outcome of a specific bargaining process is highly contingent States still have significant power visàvis TNCs for example to control access to their territories and to define rules of operation In collaboration with other states that power is increased the EU is an example of this So the claim that states are universally powerless in the face of the supposedly unstoppable juggernaut of the global corporation is nonsense the question is an empirical one 07Dicken4084Ch07indd 236 19102010 110746 AM Attempts at regulating transnational corporations In the case of foreign direct investment and transnational corporations there is no international body comparable to the WTO although the Uruguay Round included a set of traderelated investment measures TRIMS Within this framework some of the industrialized countries led by the US wish to prohibit or restrict a number of the measures listed in Figure 66 notably local content rules export performance requirements and the like TRIMS advocates argue that such measures restrict or distort trade Their opponents see such measures as essential elements of their economic development strategies They in turn wish to see a tightening of the regulations against the restrictive business practices of transnational corporations Similarly organized labour groups are generally opposed to measures that they feel will increase the ability of TNCs to affect workers interests or to switch their operations from country to country In fact there is a lengthy history of attempts to introduce an international framework relating to FDI and TNCs apart from those agreed bilaterally or within the context of regional trade blocs Part Two Processes of Global Shift 238 they had no part in formulating and that protected the interests of TNCs Even many OECD countries objected to rules that would harm their own interests Labor and environmentalists objected that MAI would give TNCs license to disregard workers interests and pollute the environment Many crit ics charged that no protection was provided against the evils committed by TNCs Even official American enthusiasm cooled when people realized that the MAI dispute mechanism could be used against the US and its TNCs36 The major dilemma in any attempt to establish a global regulatory framework for FDI and TNCs is the sharp conflict of interest inherent in the process involving TNCs states labour groups and CSOs Should the focus be on regulating the conduct of TNCs the viewpoint of most developing countries some developed countries labour and environmental groups or should it be concerned with the protection of TNCs interests Both TRIMS and the aborted MAI were stacked in favour of TNCs NOTES 1 Anderson and Cavanagh 2000 3 2 Wolf 2002 9 3 Gordon 1988 61 4 Pitelis 1991 5 Gilpin 1987 242 See also Lynn 2005 6 Stopford and Strange 1991 233 7 See Reich 1989 8 Doz 1986a provides an extensive discussion of these issues 9 Picciotto 1991 43 46 10 Yoffie and Milner 1989 11 Doz 1986a 2314 12 See Levy and Prakash 2003 13 Nixson 1988 379 14 Nixson 1988 380 15 Financial Times 8 September 2008 16 Financial Times 23 June 2009 17 UNCTAD 2005 223 18 Vernon 1998 40 19 Financial Times 3 February 2005 20 The study was conducted by Ernst Young and reported in the Financial Times 23 November 1995 21 Cited in the Financial Times 21 October 2008 22 Financial Times 6 May 2009 The Guardian 16 June 2009 23 Liu and Dicken 2006 24 Doz 1986b 39 25 Beck 2005 53 07Dicken4084Ch07indd 238 19102010 110746 AM TNCs and States 239 26 Kobrin 1987 61112 27 Kobrin 1987 636 28 Seidler 1976 29 Chang 1998b Liu and Dicken 2006 30 Chang 1998b 234 31 Bartlett and Seleny 1998 32 Bartlett and Seleny 1998 320 33 Bartlett and Seleny 1998 328 34 Dicken and Malmberg 2001 35 See Braithwaite and Drahos 2000 Chapter 10 Gilpin 2000 Chapter 6 Kolk and van Tulder 2005 36 Gilpin 2000 1845 07Dicken4084Ch07indd 239 19102010 110746 AM 07Dicken4084Ch07indd 240 19102010 110746 AM PART THREE THE PICTURE IN DIFFERENT ECONOMIC SECTORS 08Dicken4084Ch08 Part 3indd 241 19102010 110758 AM 08Dicken4084Ch08 Part 3indd 242 19102010 110758 AM Eight MAKING HOLES IN THE GROUND THE EXTRACTIVE INDUSTRIES CHAPTER OUTLINE Beginning at the beginning Production circuits in the extractive industries Global shifts in the extractive industries Oil Copper Volatile demand Technologies of exploring extracting refi ning distributing The centrality of state involvement in the extractive industries Nationalizing the assets Controlling prices A partial return to privatization Power games states and fi rms states and states Corporate strategies in the extractive industries Consolidation and concentration The oil industry The metal mining industries Organizational and geographical restructuring Resources reserves and futures Beginning at the beginning Everything we use to communicate move stay warm stay cool sit sleep cook and refrigerate comes from the raw material that humans extract from the earth each year1 In a very real sense the extractive industries represent the beginning of the begin ning the initial stage in the basic production circuit and in the web of global production networks that make up the global economy2 08Dicken4084Ch08 Part 3indd 243 19102010 110758 AM Part Three The Picture in Different Economic Sectors 244 Minerals excluding oil account for a small share of world production and trade Nonetheless their supply is essential for the sustainable development of a modern economy They are basic essential and strategic raw materials No modern economy can function without adequate affordable and secure access to raw materials3 The basis of the extractive industries is the notion of the natural resource materials created and stored in nature through complex biophysical processes over vast peri ods of time However natural resources are not in fact naturally resources An element or a material occurring in nature is only a resource if it is defined as such by potential users A resource therefore is both a sociocultural and a political con struction It is given meaning by its sociocultural context and given differential priorities through political choices4 Basically there must be an effective demand an appropriate technology and some means of ensuring property rights over its use If any of these conditions ceases to hold resources could unbecome5 The resources that form the basis of the extractive industries energy materials like oil as well as ferrous and nonferrous minerals like iron ore and copper are effectively nonrenewable They are fixed in overall quantity at least under known technological conditions The more we use today the less will be available for tomorrow Quite apart from their finiteness a key characteristic of extractive resources is that they are locationally specific They are where they are They have to be exploited at least initially where they occur although later stages of refining might well be located elsewhere In either case their use involves vast investment and expenditure not only on exploration extraction and processing but also on transportation infrastructures The most significant differences about the extractive production network relate in one way or another to the landed nature of assets on the one hand the naturebased character of extractive enterprises and the influence that the materiality of the resource exerts on the organization of production and on the other the territoriality of the resource in the sense of its embeddedness in the territorial structures of the nationstate Resources are closely bound to notions of sovereign territoriality and national identity6 This combination of finite quantities fixed locations and territorial embededdness creates the specific shape and developmental path of the extractive industries7 They help to explain why the extractive industries are so sensitive economically politically environmentally and even culturally why they are the focus of such intense conflict and bargaining between firms between states and between firms and states To a greater extent than most other industries the extractive industries are made up of a strong mix of private firms TNCs and stateowned enterprises SOEs They are also dominated by giant firms no fewer than nine of the 50 largest companies in the Financial Times Global 500 are oil or mining companies8 They are overwhelmingly producerdriven industries These industries then are at the heart of many of the most pressing and most controversial debates in the global economy As we saw in Chapter 2 the roller coaster trajectory of production and trade in the past 50 years has been closely 08Dicken4084Ch08 Part 3indd 244 19102010 110758 AM The Extractive Industries 245 related to sharp fluctuations in the supply and therefore the price of oil and other natural resources The race for resources has been a central component of the development of a global economy for centuries9 It still is The extractive industries are also at the centre of the development dilemma facing many resourcerich but deeply impoverished countries especially in Africa The paradox of the socalled resource curse will be examined in Chapter 16 Production circuits in the extractive industries As Figure 81 shows the extractive industries fall into three broad categories based upon the kind of minerals involved In this chapter we will focus primarily on two of these industries oil and copper Copper is one of the most important of the metallic metals industries accounting for a little under onefifth by value of world metallic mineral production10 Both oil and copper are employed in an enormous variety of end uses In the case of oil this includes final consumer demands for transportation and heating fuel as well as feedstocks for the chemical and related industries Copper on the other hand like most of the base and ferrous metals is overwhelmingly a producer commodity Copper is one of the oldest metals ever used Because of its properties singularly or in combination of high ductility malleability and thermal and electrical conductivity and its resistance to corrosion copper has become a major industrial metal Electrical uses of copper including power transmis sion and generation building wiring telecommunication and electrical and electronic products account for about three quarters of total copper use11 Figure 81 Classification of extractive industries Source based on UNCTAD 2007 Box III11 Electricity organic chemicalsplastics process fuel transportation Aerospace construction electronics engineering manufacturing steel making Jewellery monetary industrial Construction electricalelectronic engineering manufacturing Construction Ceramics chemicals foundry casting fillerspigments fuel gas iron steel metallurgy water treatment Jewellery industrial Coal gas oil uranium Iron ore niobium tantalum titanium Gold platinum silver Bauxitealuminium cobalt copper lead magnesium molybdenum nickel zinc Brick building stone cement clay crushed rock aggregate gypsum materials sand and gravel slate Bentonite industrial carbonates kaolin magnesia potash salt sand silica sulphur Diamonds gems Ferrous metals Precious metals Base metals Construction minerals Industrial minerals Precious stones Metallic minerals Energy minerals Nonmetallic minerals E N D U S E S 08Dicken4084Ch08 Part 3indd 245 19102010 110758 AM Part Three The Picture in Different Economic Sectors 246 Figure 82 outlines the basic production circuit for extractive industries At the most general level it is a relatively straightforward sequence of stages from explo ration through to final consumption although in fact it is a highly complex and contested process Something of that complexity is shown in Figure 83 which goes beyond the basic production circuit to depict the production of oil as a global production network of interfirm and firmstate relations that link nationalized oil companies resourceholding states and publicly traded transnational firms It reveals a number of lateralhorizontal relations not cap tured by the linear commodity chain12 Overall the production circuits in the extractive industries are highly capital and technology intensive involving primarily large firms or consortia of firms both privately and state owned Figure 82 The basic extractive industry production circuit Source based in part on Turner et al 1994 Box 164 Exploration Development Extraction Processing Distribution Consumption Transportation Transportation Transportation Identification of resource deposits Preparation of site for extraction Use of smelters to produce concentrates Estimation of size and geophysical characteristics Additional delineation of deposits Removal of resources from the ground Removal of waste material Figure 83 A global production network for oil Source based on Bridge 2008b Figure 3 Taxation health safety and environmental regulations State C Taxation health safety and environmental regulations State B Taxation health safety and environmental regulations State A resource holder production concession State A resource holder exploration licences State A Traders Wholesalers Retailers Individuals Institutional and corporate consumers Traders Wholesalers Retailers Individuals Institutional and corporate consumers Chemical manufacturers Supply chain management services Specialist suppliers eg coatings and pigments Construction decomissioning services Shipping operators Pipeline compressors and other prime mover suppliers Terminal operators Insurance and risk management services Construction fabrication Project management services Equity partners other oil firms Debt banks Transport and logistics services Fuel and equipment suppliers Staffing crewing and camp services Product sales eg to utilities Drill technology Seismic interpretation and other data services Demand forecasting Project management services Political risk services Consumption Consumption Petrochemicals and plastics Processing Fuels and lubricants Feedstock Refining Transportation Crude oil Production Exploration Process Product State Firm 08Dicken4084Ch08 Part 3indd 246 19102010 110758 AM The Extractive Industries 247 10500 5000 1000 100 Oil production thousand barrels per day 2007 1975 Figure 84 The changing geography of global oil production Source based on data in BP Statistical Review of World Energy 2008 Global shifts in the extractive industries Oil Between 1975 and 2007 world oil production grew by 46 per cent from 56 billion to 82 billion barrels Production of crude oil is quite widely spread geographically as Figure 84 shows But in many cases the quantity produced is relatively small In 2007 a mere 12 countries accounted for 68 per cent of the world total of which two Saudi Arabia and the Russian Federation produced onequarter of the total However major changes have occurred in the global map of oil produc tion since 1975 immediately after the first oil shock Important new producers have emerged the most significant being the Russian Federation China Mexico Canada Nigeria Norway and the UK together with new production centres in former Soviet states like Kazakhstan and Azerbaijan as well as in some African countries such as Angola So although the Middle East still accounts for 31 per cent of world oil production the world production map is much more complex than it was 30 years ago The geography of global oil production has undergone a quite radical change The new emphasis is on supply diversity security of supply arrangements and where possible the development of indigenous or regional availabilities As a result the world is now a patchwork of oil producing areas13 08Dicken4084Ch08 Part 3indd 247 19102010 110759 AM Part Three The Picture in Different Economic Sectors 248 The pattern of world trade in oil is shown in Figure 85 More than half of total oil imports go to Europe and the US with a further onefifth going to Japan and China In particular Chinas significance as an oil importer has increased enormously as its economy has grown at the dramatic rates discussed in Chapter 2 In the early 1990s China was the biggest exporter of oil in Asia today it is the fastestgrowing importer of oil in the world Much of that shift has involved Chinas sourcing of oil from Africa14 as we shall see in later sections For many of the worlds major oil exporters oil is by far the most important commodity in some cases constituting virtually the entire basis of the countrys export sector Figure 86 Copper World copper production has increased even more rapidly than that of oil during the past two decades by 76 per cent between 1988 and 2007 from 88 million tonnes to 155 million tonnes15 Such growth reflects the par ticular qualities of copper in a wide range of end uses see above and again the growth of China and its seemingly insatiable hunger for raw materials Figure 87 maps the world distribution of both mine production and refined Imports Exports 01 1 4 10 175 Million barrels per day Canada Mexico S C America US Europe North Africa Middle East Japan China Australasia West Africa E S Africa Former Soviet Union Figure 85 Patterns of world trade in oil Source based on data in BP Statistical Review of World Energy 2008 08Dicken4084Ch08 Part 3indd 248 19102010 110759 AM The Extractive Industries 249 Iraq Angola Algeria Libya Kuwait Nigeria Oman Qatar Venezuela Azerbaijan Saudi Arabia Iran Gabon Bahrain Kazakhstan Norway Russian Federation Ecuador UAE 0 10 20 40 80 60 100 30 50 90 70 Percentage of total merchandise exports Figure 86 Oil as a share of a countrys merchandise exports Source based on data in WTO 2009 Table II26 Figure 87 The geography of world copper production Source based on data in Brown et al 2009 28 30 5500 2500 1000 100 10 Copper production thousand tonnes Refined copper Mine production 08Dicken4084Ch08 Part 3indd 249 19102010 110800 AM Part Three The Picture in Different Economic Sectors 250 Table 81 The worlds leading exporters and importers of copper 2005 Value of exports Share Value of imports Share Exporter US000 Importer US000 Chile 11590400 193 China 9328506 160 Germany 5513485 92 US 7145349 122 Japan 3266764 54 Germany 4185263 72 China 2623647 44 Italy 4000215 69 Russian 2519643 42 France 3183164 55 Federation US 2231375 37 Taiwan 3107164 53 Peru 2130080 35 Republic of 2633385 45 Korea France 2094293 35 Hong Kong 1766526 30 China Canada 2043340 34 UK 1670048 29 Republic of 1982472 33 Thailand 1516392 26 Korea Source based on International Trade Centre Statistics 2009 wwwintracenorgtradestat sitc33dip682html The major exporters and importers of copper are shown in Table 81 In terms of exports as might be expected from the production figures Chile dominates with almost onefifth of world exports followed a long way behind by Germany The leading 10 exporters account for 60 per cent of the world total Copper imports are rather more concentrated the top 10 account for 66 per cent of world imports Here China 16 per cent and the US 12 per cent are by far the most important copper importers copper Ten countries produce more than fourfifths of mined copper Latin America including Mexico dominates accounting for almost onehalf of world production By far the biggest producer is Chile with 36 per cent of the world total Indeed Chiles share of world production doubled between 1988 and 200716 Copper production in Africa notably in Zambia and the Democratic Republic of Congo as well as in China has also grown signifi cantly Chile is also the worlds second biggest producer of refined copper with 14 per cent preceded by China 17 per cent and followed by Mexico 16 per cent The pattern of refined copper production reflects the fact that it incorporates about 20 per cent of copper scrap in its production such scrap being generated by major copper users This explains for example the presence of countries like Japan and Germany as major producers of refined copper only 08Dicken4084Ch08 Part 3indd 250 19102010 110800 AM The Extractive Industries 251 Volatile demand Welcome to the new world of runaway energy demand Financial Times 14 November 2007 Global oil demand to collapse Financial Times 10 December 2008 These two headlines separated by almost exactly one year capture the extreme volatility of the market for the extractive industries Periodic boom and bust are the norm Indeed the history of the world economy during the twentieth century as we saw in Chapter 2 was a rollercoaster ride whose vertiginous ups and downs were closely related to the commodity cycle Periods of strong economic growth intensify the demand for commodities periods of economic decline produce the opposite effect so that demand may collapse at least until the next upturn This means that the extractive industries are much more sensitive to the general state of the economy than most other sectors although the speed of adjustment to ups and downs in the cycle may not be immediate and this can cause problems of over and undercapacity Such massive swings in demand are of course reflected in massive fluctuations in prices Figure 88 shows how the prices of oil and metallic minerals fluctuated in the six decades since the 1940s in response to changing market conditions 1974 marked the end of the 30year golden period of strong world eco nomic growth and high demand for minerals that began after the Second World War From the first oil crisis in 19731974 until the early 1980s oil prices began to climb steeply Metal prices on the other hand began a longterm declining trend Crude oil prices also began to decline in real terms in 1985 The depressed mineral prices of the 1980s and 1990s had important consequences instead of being regarded as strategically impor tant to economic development oil and metals were increasingly treated as simple commodities It is only in recent years that the gradual decline in mineral prices has been reversed17 In fact this reversal especially in the case of minerals came with unexpected suddenness The first half of the 2000s especially after 2004 saw what were in effect gold rush conditions This acceleration in demand reflected in general terms the rapid overall growth of the global economy but it was especially driven by the vast increase in demand for resources from some developing countries most notably China Depiction of China as a ravenous dragon became common18 08Dicken4084Ch08 Part 3indd 251 19102010 110800 AM Part Three The Picture in Different Economic Sectors 252 There is no exaggerating Chinas hunger for commodities The country accounts for about a fifth of the worlds population yet it has swallowed over fourfifths of the increase in the worlds copper supply since 200019 In light of these new circumstances the predictions in 2007 were that prices would remain high and even accelerate The economic ascendancy of China India and other developing countries along with the resourceintensive stages of their current development phase could well result in a longrunning acceleration of commodity demand growth This can be seen as a new stage in international commodity markets with prices remaining at unprecedentedly high levels there are no indications of an impending world recession20 Of course this reflects Chinas increasingly significant role as an export producer of a whole range of metalintensive and energyintensive manufactured goods So much for prediction One year later the financial conflagration had resulted in a collapse of commodity prices The price of oil fell from 150 per barrel in July 2008 to below 40 a few months later The price of copper fell from more than 8000 per tonne in June 2008 to less than 3000 per tonne in June 2009 And although there has been some recovery in prices it is clear that the current bonanza is over at least for now Of course if history is the guide the process will occur again at some time in the future although we cannot know when Korean War Vietnam War Second Iraq War Entry of new oil producers Nationalizations Domination of the Seven Sisters cartel Excess metal capacity Privatizations andor opening up to FDI First oil crisis Second oil crisis Falling world demand Rising Asian demand Metals Oil 2000 1990 1980 1970 1960 1950 0 50 100 Real price index base year 2000 100 150 200 Figure 88 Fluctuations in the prices of oil and metallic minerals base year 2000 100 Source based on UNCTAD 2007 Figure III1 08Dicken4084Ch08 Part 3indd 252 19102010 110800 AM The Extractive Industries 253 and precisely how this will happen It is likely however that virtually all the growth in the demand for oil and many other commodities over the next 20 years will come from developing countries Of course these shifts in demand reflected in price fluctuations are not only the result of changes in the market for oil or metals Supply side changes especially those generated by changes in state policies and corporate strategies play a highly significant role as we shall see in subsequent sections Technologies of exploring extracting refining distributing The core of the extractive industries as Figure 82 shows is the sequence of stages from exploration through development extraction processing and distribution to consumption Each of these stages poses immense technological challenges The reason lies in the basic characteristics of the resourcebased industries alluded to earlier their finiteness and their locational specificity In general highly expensive sophisticated technologies have to be employed at all stages of the production circuit Building a large basemetals mine can cost over a billion dollars The magni tude of investments in the oil and gas industry is even greater Constructing a pipeline developing an oil deposit or revitalizing an ailing underinvested mineral industry can run into many billions of dollars21 As a consequence capital intensity is extremely high while labour intensity is low These industries employ few workers relative to their size For example the big gest nonstate oil company in the world ExxonMobil employs around 80000 workers The biggest metal mining company BHP Billiton employs 42000 In comparison the retailer WalMart employs 2100000 workers while the automo bile company Toyota employs more than 300000 The difference is especially dramatic if we compare sales per worker ExxonMobil 483 million BHP Billiton 143 million WalMart 180000 Toyota 730000 Firms in the extractive industries face three closely related technological chal lenges finding new sources of supply extracting the highest yield from these sources and getting them to the market Of course such challenges face firms in all industries But the extractive industries are unique in that they are faced with managing a depleting asset22 Unlike the agrofood industry for example see Chapter 9 a new crop cant be grown next year Once an oil well dries up or a copper mine becomes exhausted it cannot be regenerated although in some cases technological innovation enables some further extraction to occur 08Dicken4084Ch08 Part 3indd 253 19102010 110800 AM Part Three The Picture in Different Economic Sectors 254 New sources of supply must continuously be sought as existing sources become exhausted andor too expensive to exploit at prevailing market prices This is not unlike searching for needles in haystacks Immensely sophisticated techniques of geochemical geophysical and satellite remote sensing techniques are involved The exploration period may take up to 10 years and in many cases such investments turn out to be unsuccessful Even if the exploration is success ful and a new mine is developed and brought into production the investor still faces various technical risks market risks related to demand and price fore casts political risks eg changes in mining laws nationalizations and social and environmental risks23 In addition the time and investment needed to develop a new resource its gestation period can be very long indeed The situation is not unlike that in the pharmaceuticals industry where vast investments are made over many years in the hope that a drug breakthrough will occur In fact of course the majority fail and that is also true of the extractive industries In the actual process of extraction the raw materials tend to get more and more difficult to harvest as time goes on for example surface deposits of min erals are used up and people have to dig deeper the most pure ores are depleted and users must shift to more amalgamated sources etc This requires the application of bigger more powerful equipment new techniques etc24 A major problem therefore is that most of the easily accessible sources have already been exploited New resources almost invariably tend to be found in less accessible locations and also often in circumstances making their extraction extremely difficult and therefore costly The deeper the resource below the sur face the greater the problems involved The purity of a resource is an especially important factor The lower the degree of purity the greater the cost involved in extraction and processing to the point where they become uneconomic In the case of oil for example variations in the quality of crude include its density lighter grades are more highly valued than heavier grades because they contain a higher gasoline and kerosene fraction the lack of sulphur compounds a sweet oil is more highly valued than a sour oil because sulphur compounds require additional clean ing for transportation and refining the pouring point related to the wax or bitumen content and the presence of salt or metal vanadium nickel iron25 There is inevitably a connection between such explorative activity and market ie price conditions Periods of high prices for oil and minerals stimulate a wave of exploration and the bringing into use of what are in less favourable market conditions marginal supplies Conversely when prices fall especially when they fall very steeply and rapidly as happened in 2008 investors pull back from such risky ventures A notable example is the Canadian oil sands project 08Dicken4084Ch08 Part 3indd 254 19102010 110800 AM The Extractive Industries 255 After five years of frenetic building and activity a race to extract crude from vast tracts of the Canadian oil sands has abruptly stalled hit by a collapse in the price of a barrel of oil Until recently Canadas oil sands were the venue for one of the most spectacular races for profit of modern times The remote boggy landscape contains between 17tn and 25tn barrels of oil of which an estimated 173bn can be extracted using expensive hitech filtering technol ogy Canadas reserves are second only to Saudi Arabias and a year ago 60 projects were being constructed But since oil prices began a downward tumble energy companies have shelved more than US90bn worth of oil sands investment26 Boom and bust is the way the extractive world works and will continue to do so in the future no doubt Both exploration and extractionprocessing therefore involve very high sunk costs27 The same is also true of the distribution stage Again all industries face problems in getting their products to market But the particular charac teristics of the extractive industries especially their bulk and remoteness from markets generate the need for a massive scale of transportation infra structure that is virtually unique The tradeoff between increasing the scale of production and being able to transport the outputs is a central problem in these industries Massive investments in pipelines supertankers port facilities and the like are a prerequisite Not only are they costly but also they have a long gestation period They represent a very high sunk cost indeed not least because many of these facilities are highly specialized and not easily transferred to alternative uses The effects of such transience are graphically reflected in those places where the resource frontier has moved on leaving behind the relics of technology Few sights are as impressive as the massive port works openpit mines and 500mile railways developed to tap the natural resources of frontier regions or so bittersweet as the relic landscapes left behind in the wake of resource booms Abandoned mines idle processing facilities vacant warehouses empty ports disused railroads boardedup buildings and underemployed residents in once vibrant regions speak not only to the capricious nature of resource economies but also to the salience of rigidities in investments in extractive industries28 The centrality of state involvement in the extractive industries A basic argument of this book is that the state plays a major role in all global production networks However nowhere is the degree of state involvement as deep or as pervasive as in the extractive industries In these industries the state is absolutely central The reason of course lies in the unique territorial embeddedness 08Dicken4084Ch08 Part 3indd 255 19102010 110800 AM Part Three The Picture in Different Economic Sectors 256 of resources Access to such resources is controlled ultimately by the national state in which they are located As Figure 83 shows the state operates within an extractive GPN as both a regu lator of access taxation and health safety and environmental issues and an operator an actual producer This situation gives states potentially enormous power over how such resources are exploited How effective that power is and how it is exer cised of course depend very much on the nature of the state in question notably its strength both domestically and internationally and its political orientation This of course brings the state into sharp confrontation with private companies especially TNCs as well as with other states The history of the resource extractive industries therefore is one of continuously shifting power struggles between firms and states states and states and firms and firms Again although this is true of vir tually all industries it is most evident in the extractive industries However its precise form varies between different extractive industries especially between oil on the one hand and the metal mining industries on the other Nationalizing the assets The central problem facing all resourcerich states is how to exploit their resources to achieve the maximum gain when as we have seen the costs of find ing developing extracting processing and distributing the product can be astro nomically high Given that such a large proportion of the worlds extractive resources are located in poorer countries this poses immense problems To what extent can a state develop its own indigenous resources using domestic capital and knowhow How far must it depend on outside investment by foreign TNCs which will inevitably result in some loss of control Over time these problems have been approached in different ways In most cases the initial development of a countrys resource industry has depended on outside investment Indeed in the early twentieth century FDI went mostly into these industries reflecting the international expansion of firms that originated from the colonial powers The objective of TNCs in the extractive industries was to gain direct control over the mineral resources required as inputs for their growing manufacturing and infrastructurerelated industries During the Great Depression 1929 1933 the international expansion of oil companies continued unabated despite the crisis in other overseas investments29 However by the 1960s this situation had changed radically As former colonies gained independence after the Second World War and with the creation of the Organization of the Petroleum Exporting Countries OPEC many governments chose to nationalize their extractive industries resulting in a declining involvement of the TNCs that hitherto had been dominant30 08Dicken4084Ch08 Part 3indd 256 19102010 110800 AM The Extractive Industries 257 In fact nationalization in the extractive industries the complete transfer of ownership from a private firm to the state has a long history This is especially true in the case of the oil industry31 Outright nationalization of oil and gas first took place in the context of the Russian Revolution in 1917 This was followed by nationalizations in Bolivia 1937 1969 Mexico 1938 Venezuela 1943 Iran 1951 and Argentina Burma Egypt Indonesia and Peru in the 1960s In the 1970s nationaliza tions occurred in Algeria Iraq Kuwait Libya and Nigeria and there was a gradual increase in Saudi ownership of Aramco Such nationalizations have changed the global landscape of petroleum extraction and contributed to the emergence and subsequent strengthening of Stateowned firms32 A clear indication of such a change in the global landscape is provided by the prominent position of stateowned firms among the worlds largest oil companies see Table 82 Controlling prices The nationalization of oil production makes possible though far from inevitable collaboration between oil producing countries to control production levels and therefore prices The clearest example of course is that of OPEC the Organization of the Petroleum Exporting Countries OPEC was set up in 1960 as a reaction to the cut in the oil price made unilaterally by Standard Oil Its aim was to defend the price of oil more precisely to restore it to its 1960 level From here on the member countries could insist that the companies consult them on the pricing matters that so centrally affected their national revenues33 The original OPEC membership consisted of five oil producing countries Iran Iraq Kuwait Saudi Arabia and Venezuela A further seven countries subsequently joined Qatar 1961 Libya 1962 United Arab Emirates 1967 Algeria 1969 Nigeria 1971 Ecuador 1973 left and rejoined 2007 and Angola 2007 OPECs influence was limited until the outbreak of the 1973 ArabIsraeli War when it was the oil weapon wielded in the form of an embargo production cutbacks and restrictions on exports that altered irrevocably the world as it had grown up in the postwar period The embargo signalled a new era for world oil The international order had been turned upside down OPECs members were courted flattered railed against and denounced There was good rea son Oil was at the heart of world commerce and those who seemed to control oil prices were regarded as the new masters of the global economy34 Today although OPECs influence is much lessened in the light of new oil dis coveries elsewhere it remains highly significant and reminds us of the highly 08Dicken4084Ch08 Part 3indd 257 19102010 110800 AM Part Three The Picture in Different Economic Sectors 258 politicized nature of the oil industry In 2007 in fact OPEC controlled 43 per cent of total world production compared with a 49 per cent share in 1975 A partial return to privatization Nationalization has also been a strong trend in the metal mining industries For example the number of expropriations of foreign mining enterprises increased from 32 between 1960 and 1969 to 48 between 1970 and 197635 As in the oil industry this resulted in a squeeze on the private companies For example the share of the seven largest TNCs in copper mining outside the centrally planned economies fell from 60 in 1960 to 23 in 1981 as a result of nationalizations By the early 1980s the participation of TNCs in many developing countries had become limited to minority holdings and non equity agreements with Stateowned enterprises However many of the nationalizations undertaken in Africa and Latin America in the metal mining industry turned out to be failures36 As a result of such failures the emphasis has shifted towards a greater liberalization of the ownershipexploitation laws in many mining countries Between 1985 and the early 2000s more than 90 states introduced new laws or relaxed existing laws in order to attract foreign investment37 Widespread privatization often as part of a broader neoliberalization project became the norm By the early 2000s the privatization process in the metal mining industry worldwide apart from China had been more or less completed38 Power games states and firms states and states As we saw in Chapter 7 the power relationships between states and firms are highly dynamic and contingent In some cases the balance of power lies one way in other cases it lies the other way That balance tends to shift over time In Chapter 7 we met the term obsolescing bargain which refers to the situation in which once private capital is sunk in a fixed form the advantage tends to move away from the investor to the state which controls access to the resource Although this situation may not generally prevail in many sectors it certainly applies in the extractive sector A recent detailed study of the development of the oil industry in Kazakhstan39 provides evidence of how a state can learn how to renegotiate con tracts with a foreign investor in other words it shows how the balance of power can shift over time Kazakhstan achieved independence from being a Soviet republic in 1991 It was rich in oil but lacked the technology to develop its resource It needed foreign investors Like many other former Soviet republics and allies Kazakhstan rushed into the wholesale privatization of its assets primarily its resource extraction 08Dicken4084Ch08 Part 3indd 258 19102010 110801 AM The Extractive Industries 259 activities By 2002 around half of the FDI entering Kazakhstan was concentrated in the petroleum industry Onequarter of the countrys oil production originates from the Tengiz oilfield in the west It is a rich field but difficult to exploit it is the deepest high pressure deposit in the world with oil that emerges from the ground scalding hot at a very high pressure and laden with poisonous hydrogen sulfide which must be removed from the oil40 Such a challenging field required very sophisticated technology The US company Chevron had started negotiations with the Soviet government in 1990 After independence in 1991 the negotiations shifted to Kazakhstan a state with abso lutely no experience in such complex political bargaining In contrast Chevron one of the worlds biggest and oldest oil companies was a very old hand at this game Ten years after the contract was signed Kazakhstan attempted to renegotiate the terms based on the kinds of circumstances implied in the obsolescing bargain concept the agreement had been made the investments were sunk the oil was begin ning to turn a profit for the corporation and the state started to feel that the distribution of benefits were too much in favor of the MNC The country called for renegotiations41 Kazakhstan had already negotiated some improvements over a period of time but without a firm contractual basis It was this that was now being sought In such an event the renegotiations in question were not a simple affair and likely did not progress as Kazakhstan had predicted The renegotiations involved the financing arrangements for major gas processing and recycling projects designed to reduce pollution as well as for projects to increase production at the TengizChevroil venture Looking back it may seem sur prising that Chevron would shut down its operations in protest of the rene gotiations Yet initially it did the result of Chevrons following through on its threat and being taken by surprise that Kazakhstan indeed demanded renegotiations After recalculating its costs expected value and strategic play and given the strategy revealed by the States move Chevron reversed its decision after just two months TengizChevroils operations were resumed in January of 2003 with Chevron agreeing to some revisions in the contrac tual terms42 On the basis of this learning experience Kazakhstan subsequently managed to introduce a series of regulatory measures for its oil industry as a whole renego tiations with other companies more stringent rules for foreign investors a reversal of overgenerous VAT exemptions power to cancel a contract that did not meet its economic expectations introduction of a new oil export duty and better envi ronmental provisions including the banning of all gas flaring Eventually in 2002 the state set up its own National Oil Company to ensure a more active role in its extractive sector 08Dicken4084Ch08 Part 3indd 259 19102010 110801 AM Part Three The Picture in Different Economic Sectors 260 This example is one of statefirm rivalry But given the strategic importance of extractive resources for all states these industries are also characterized by a high degree of statestate rivalry This is especially true of the major users of resources the established industrialized countries and the newer fastgrowing countries of Asia For those countries possessing a substantial resource base of their own like the US for example a major aim is to sustain as much of that resource as possible for strategic reasons whilst importing resources to meet their needs In this latter case there is a strong incentive to attempt to control access to resources located overseas through either stateowned or private firm investment In other words it is in the resource extractive industries that direct statestate competition is most evident Currently the most obvious example concerns the involvement of both the US and China in the scramble for oil and other minerals in Africa through direct or indirect government participation The US and China are competing to secure access for the oil riches of Africa Both the American and Chinese governments were important in paving the way for American and Chinese oil interests in expanding in Africa The US government used diplomatic instruments economic incentives and military aid the largest portion of US military aid to Africa was aimed at Nigeria and Angola While the US government assisted private US firms in obtaining oil concessions for oil exploration and production the Chinese gov ernment focused instead on securing oil supplies through bilateral agree ments As the most notable example Sinopec a Chinese stateowned oil company acquired oil concessions in Angola on the back of a US2 billion oilbacked credit from Chinas Eximbank in 2004 to rebuild the countrys railways government buildings schools hospitals and roads The Angola example demonstrates how China has adopted an aidforoil strategy43 Interstate rivalry for resources is also apparent in international trade disputes Again it is not surprising that the most recent cases involve China In mid 2009 the US and EU initiated action in the WTO against China for its alleged restric tions on exports of key materials such as silicon coke and zinc China imposes restrictions including minimum export prices and tariffs of up to 70 on a range of raw materials of which it is a major producer The EU claims these not only break general WTO rules on world trade but specific promises China made when it joined the organization in 2001 becoming a fully fledged player in global markets44 Corporate strategies in the extractive industries Consolidation and concentration The oil industry The top ten companies shown in Table 82 account for around 40 per cent of world oil production No fewer than four of the top five and 12 of the worlds 20 08Dicken4084Ch08 Part 3indd 260 19102010 110801 AM The Extractive Industries 261 largest oil producers are fully or majority state owned the result of the widespread nationalizations discussed in the previous section This is in stark contrast to the situation that prevailed before the early 1970s Until the 1970s a few major TNCs from the US and Europe dominated the international oil industry In 1972 8 of the top 10 oil producers were privately owned including the socalled Seven Sisters These were fully integrated oil companies active in the extraction and transportation of oil as well as in the production and marketing of petroleum products45 In order to compete on what the private oil companies see as a very uneven play ing field there has been a great deal of consolidation through merger and acquisi tion as well as a proliferation of collaborative ventures between private firms and also between private firms and stateowned companies Today five megacompanies Table 82 The worlds largest oil companies State Total Rank Rank ownership production 2005 1995 Company Home country million barrels 1 1 Saudi Aramco Saudi Arabia 100 41488 2 3 Gazprom Russian Federation 51 36085 3 3 NIOC Iran Islamic Republic 100 18105 4 5 ExxonMobil US 17257 5 4 Pemex Mexico 100 16662 6 13 BP UK 15726 7 6 Royal Dutch Shell UKNetherlands 14827 8 7 CNPCPetroChina China 100 11196 9 33 Total France 9976 10 12 Sonatrach Algeria 100 9118 11 8 Petróleos de Venezuela 100 9026 Venezuela 12 9 Kuwait Petroleum Kuwait 100 8973 Corp 13 16 Chevron US 8169 14 23 Abu DhabiNational United Arab Emirates 100 7949 Oil Co 15 11 Lukoil Russian Federation 7811 16 40 ConocoPhillips US 7554 17 20 Petrobras Brazil 56 7496 18 18 Abu Dhabi Co United Arab Emirates 40 7109 Onshore Oil Operator 19 22 Nigerian National Nigeria 100 6977 Petroleum Co 20 51 TNKBP Russian Federation 6918 Source based on UNCTAD 2007 Table IV8 08Dicken4084Ch08 Part 3indd 261 19102010 110801 AM Part Three The Picture in Different Economic Sectors 262 dominate the private oil sector ExxonMobil BP Royal Dutch Shell Total and Chevron The private oil companies therefore are increasingly being squeezed by the growing power of the national companies and by dwindling reserves and pro duction in accessible and mature basins outside OPEC countries The supermajors have been struggling to replace their proven reserves and expand production46 At the same time the capital intensity of production refining and transportation reinforces the position of the major companies and raises the already high barriers to entry47 The metal mining industries Historically the metal mining industries have been highly fragmented but this is changing rapidly as a smaller number of very large companies control an increas ing share of world production Worldwide today there are more than 4000 metal mining firms mostly engaged in exploration and extraction Most of the 149 majors are TNCs the majority of which have production facilities covering mining smelting as well as refining These companies account for some 60 of the total value at the mining stage of all nonenergy minerals produced The degree of con centration in the metal mining industries increased significantly between 1995 and 200548 The top 10 metal mining companies shown in Table 83 produce around one third of total world output Whereas the oil industry is now dominated by national companies the degree of state ownership in metal mining is significantly less Only one of the top 10 mining companies the Chilean company Codelco is fully state owned and only one other the Brazilian company Vale has significant state involvement This is a consequence as we saw in the previous section of the widespread adoption of privatization policies by many national resource holders in recent years At the same time there has been a wave of mergers and acquisitions in the metal mining industries This was undoubtedly stimulated by the surge in com modity prices that occurred in the mid 2000s see Figure 88 In 2006 alone the value of mergers and acquisitions in these industries was 55 billion Two of the biggest acquisitions in that year were of Inco Canada by the Brazilian company Vale and of Falconbridge Canada by Xstrata the Swiss mining company The pace accelerated in 2007 and included Rio Tintos acquisition of the alumina producer Alcan and the attempted hostile acquisition of Rio Tinto by BHP Billiton This latter case turned out to be highly contentious and was abandoned in 2008 largely because of the collapse in commodity prices This situation was made especially complex because the Chinese stateowned company Chinalco attempted to double its equity stake in Rio Tinto in order to stop the BHP Billiton takeover What would have been Chinas biggest overseas investment was acrimoni ously prevented by Australian pressure The disagreements were exacerbated by the 08Dicken4084Ch08 Part 3indd 262 19102010 110801 AM The Extractive Industries 263 proposal of BHP and Rio Tinto to form an iron ore joint venture Again we see the immensely political nature of the extractive industries Talks also began in 2009 on a possible merger between Xstrata and Anglo American to create a rival to BHP Billiton and Rio Tinto Notwithstanding the sharp drop in acquisition and merger activity that began in 2008 The fragmented structure of mining is slowly disappearing The industry is getting more and more polarised to the one side there are the large established mining TNCs controlling a major share of global metal production and on the other side are the junior exploration companies without any pro duction only blue sky hopes of future production There is a lack of medium and small sized producers which can grow organically and become major producers with time These companies are important in that they concentrate on smaller deposits which often have good grades but which are discarded by the majors49 Organizational and geographical restructuring The geography of the extractive industries is of course basically constrained by the distribution of the territorially embedded resources on which they are based together with the need to transport outputs at each stage of the production circuit particularly to the final market It is also in the case of the oil industry strongly influenced by the ownership of the firms involved In general most of the state owned firms have a very restricted geography mostly limited to their home ter ritory In contrast the production spaces of the private companies are globally extensive However some state companies have begun to develop more extensive geographies CNPC for example has operations in 14 foreign locations Kuwait Table 83 The worlds largest metal mining companies State share of Rank Rank ownership world 2007 1995 Company Home country production 1 6 Vale Brazil 12 52 2 4 BHP Billiton Group Australia 46 3 1 Anglo American PLC UK 43 4 2 Rio Tinto PLC UK 40 5 5 Codelco Chile 100 34 6 11 Freeport McMoran US 33 7 7 Norislk Nickel Russian Federation 27 8 8 Xstrata PLC Switzerland 24 9 14 Barrick Gold Corp Canada 23 10 22 Grupo Mexico Mexico 16 Source based on Ericsson 2008 Table 1 UNCTAD 2007 Table IV4 08Dicken4084Ch08 Part 3indd 263 19102010 110801 AM Geographies of oil production by some major companies Distribution of exploration production and refiningsmelting projects by leading mining companies Part Three The Picture in Different Economic Sectors 266 A similar trend towards the increasing importance of specialist service suppliers is also evident in the metal mining industries The growing role of such suppliers is being driven by the reorganization of global mining production and technological rejuvenation of the industry with continued improvements in exploration mining and mineral processing Suppliers are focused on specific niches in which they have a globally dominant position Examples include large international consulting firms that integrate engineering project management procurement and construction activities such as Kvaerner Norway Hatch Canada and Bechtel Group US mediumsized specialized engineering consulting companies such as Bateman South Africa SRK Consulting South Africa and AMC Consultants Australia and small to mediumsized mining and geological software provid ers such as Maptek Australia53 Resources reserves and futures The dilemma facing all extractive industry producers whether state owned or privately owned is that as extractors of nonrenewable resources they necessar ily consume their resource base during production54 Hence there is a continuous search for new sources of supply and for new techniques that enable the extraction of materials from less and less pure deposits The big question of course is the extent to which the world is running out of viable resources On this issue views are highly polarized On the one hand there is the Malthusian view that resource exhaustion is inevitable the only question is the timescale over which such exhaustion will occur On the other hand there is the view that new technologies of explora tion leading to discoveries of new reserves better means of exploitation leading to more efficient use of the resource including recycling and the development of appropriate substitutes will put off the dreadful day Such polarization of views is reflected clearly in the current arguments about peak oil the asser tion that oil production is about to peak and then move into inexorable decline55 The problem is that there are so many variables at work that it is extraordinarily difficult to assess the extent of future reserves of minerals All the estimates of future reserves are based on assumptions A small change in one of the variables whether on the demand or the supply side can drastically change the predictions Figure 811 provides a framework known as a McKelvey box for understand ing the complex relationships between reserves and resources The reserves category includes all geologically identified deposits that can be economically recovered and is subdivided into proved probable and possible reserves on the basis of geological certainty All other deposits are labelled resources either because they have not yet been discovered or because their 08Dicken4084Ch08 Part 3indd 266 19102010 110801 AM The Extractive Industries 267 exploitation is not currently feasible technical and economic problems are inhibiting their extraction Thus resources are continuously reassessed in the light of new geologic knowledge scientific and technical progress and changing economic and political conditions Known resources are therefore classified on the basis of two types of information geologic or physical chemical characteristics grade quality tonnage thickness and depth of material in place and financial profitability based on costs of extraction and marketing at a given point in time56 Identified Resources Undiscovered Resources those whose location grade quality and quantity are known or estimated from specific geologic evidence This includes economic and subeconomic components and can also be subdivided on geologic certainty grounds into measured proved indicated probable and inferred possible that part of the reserve base which could be economically extracted or produced at the time of determination measured plus indicated assumed continuity of data estimates not supported by samples or measurements undiscovered resources that are similar to known mineral bodies and that may reasonably be expected to exist in the same producing district or region under analogous geologic conditions undiscovered resources that may occur either in known types of deposit in favourable geologic settings where mineral discoveries have not been made or in types of deposit as yet unrecognized for their economic potential size shape depth and mineral content of the resource are well established geologic data not as comprehensive as for measured but still probably good enough to estimate the characteristics of the deposits the existence of which are only postulated comprising deposits that are separate from identified resources Demonstrated Resources Hypothetical Resources Speculative Resources Inferred Resources Measured Resources SUBECONOMIC Indicated Resources ECONOMIC RESERVES RESOURCES Increasing degree of geological assurance chemical composition concentration orientation and extent of deposits plus constraints Increasing degree of economic feasibility prices costs technology Figure 811 McKelvey box framework for resources and reserves Source adapted from Turner et al 1994 Box 161 This way of looking at resources and reserves is essentially technoeconomic But there are also environmental ecological and geographical dimensions57 that relate to the impact of continued resource exploitation on sustainable development and the effects of resource extraction on the places where it occurs and of transporta tion between places of extractionproduction and consumption We will return to these issues in Chapters 14 and 15 In a sense overriding all of these considerations however is the fact that the limits to resources are essentially socially and there fore politically determined Choices have to be made for example as to how much money should be thrown at finding and extracting increasingly difficult resources or over what is the acceptable degree of environmental and ecological damage The disastrous oil leakage in the Gulf of Mexico in 2010 demonstrated the potential scale of environmental damage posed by attempts to extract oil from very difficult physical locations It will surely not be the last example The future 08Dicken4084Ch08 Part 3indd 267 19102010 110801 AM Part Three The Picture in Different Economic Sectors 268 shape of the extractive sectors therefore will be determined not by natural limits but by social choice58 NOTES 1 Emel et al 2002 377 2 Smith 2005 makes this argument in his plea for research on global commodity chains to take the extractive sector more seriously 3 UNCTAD 2007 83 4 See Bridge 2009 5 Hudson 2001 301 6 Bridge 2008b 413 7 See for example Bunker and Ciccantell 2005 Bridge 2008b Yergin 1991 8 The Financial Times Global 500 Financial Times 30 May 2009 9 Bunker and Ciccantell 2005 10 UNCTAD 2007 Table III1 11 USGS 2009 1 12 Bridge 2008b 400 13 Odell 1997 321 14 Council on Foreign Relations 2008 wwwcfrorgpublication9557 Frynas and Paulo 2006 15 Brown et al 2009 25 16 Brown et al 2009 25 17 UNCTAD 2007 88 18 The Economist 15 March 2008 19 The Economist 15 March 2008 20 UNCTAD 2007 9091 emphasis added 21 UNCTAD 2007 92 22 Bridge 2008b 403 23 UNCTAD 2007 92 24 Smith 2005 152 25 Bridge 2008b 404 26 The Guardian 7 February 2009 27 Barham and Coomes 2005 28 Barham and Coomes 2005 160 29 UNCTAD 2007 99 30 UNCTAD 2007 99 31 Yergin 1991 32 UNCTAD 2007 115 33 Yergin 1991 523 34 Yergin 1991 588 613 633 35 UNCTAD 2007 108 36 UNCTAD 2007 1078 37 Bridge 2004 407 08Dicken4084Ch08 Part 3indd 268 19102010 110801 AM The Extractive Industries 269 38 UNCTAD 2007 108 39 Hosman 2009 The following section draws from this analysis 40 Hosman 2009 19 41 Hosman 2009 19 42 Hosman 2009 20 43 Frynas and Paulo 2006 229 2389 44 The Guardian 24 June 2009 45 UNCTAD 2007 115 46 International Energy Agency 2009 10 47 Bridge 2008b 408 48 UNCTAD 2007 109 49 Ericsson 2008 11415 50 UNCTAD 2007 111 51 Bridge 2008b 3978 See also UNCTAD 2007 113 52 Bridge 2008b 400 408 53 UNCTAD 2007 Box IV3 p 113 54 Bridge 2004 407 55 See for example the debate between Strahan 2007 and Clarke 2007 56 Turner et al 1994 222 224 57 Emel et al 2002 3838 58 Gavin Bridge personal communication 08Dicken4084Ch08 Part 3indd 269 19102010 110801 AM Nine WE ARE WHAT WE EAT THE AGROFOOD INDUSTRIES CHAPTER OUTLINE Transformation of the food economy the local becomes global Agrofood production circuits Global shifts in the agrofood industries Consumer choices and consumer resistances Transforming technologies in agrofood production Global cool chains Industrialization of food production and the shift towards biotechnology What about the workers The role of the state Regulating agrofood industries Subsidizing and protecting agrofood industries the major focus of trade confl ict A new phenomenon state land grabs Corporate strategies in the agrofood industries Concentration and consolidation Strategies of combining global brands with local products Changes in organizational and geographical architectures Big Food and Big Retail two sides of the same coin Transformation of the food economy the local becomes global The production of food is the most basic of all human needs Like the activities discussed in the previous chapter it is based upon the extraction of materials from the natural environment In principle food production is a renewable activity although overproduction soil erosion and water shortages can in effect make agriculture impossible under certain conditions Having changed relatively slowly 09Dicken4084Ch09indd 270 19102010 35051 PM The AgroFood Industries 271 over long periods of time1 the production distribution and consumption of food have been transformed during the past four decades They have become increasingly industrialized2 In addition although for millions of people basic subsistence is still the norm and starvation is always imminent for millions of others food has become as much a statement about lifestyle as about survival Abundance amidst scarcity is a glaring paradox of todays world3 In some respects therefore the modern agrofood industries may seem little different from other manufacturing industries But despite the industrialization of much food production this greatly oversimplifies what are highly complex and geographically differentiated activities The basic fact remains that food production is fundamentally different from other manufacturing industries in one particular way it is literally grounded in biophysical processes The role of biology in plant and animal growth is key on a farm unlike a factory it is the biological time necessary for plant and animal growth that dictates the work schedule In addition the landbased character of farm production poses severe constraints to industrialization because land is a fixed and limited resource and because land markets are deeply colored by localized social conditions farmers cannot easily or quickly adjust their invest ment in land4 Food production remains an intensely local process bound to specific climatic soil and often sociocultural conditions At the same time certain kinds of local pro duction notably highvalue foods have become increasingly global in terms of their distribution and consumption For the affluent consumer with access to the over flowing cornucopias of supermarket shelves the seasons have been displaced by permanent global summertime PGST5 But such apparently idyllic circumstances for affluent consumers have a dark and contentious side Producing food for a global market requires huge capital investment and gives immense power to the transnational food producers and the big retailers It creates serious problems as well as opportunities for food suppliers as they become increasingly locked into or out of transnational agrofood production networks Global food production and distribution create huge environmental disturbances in terms of excessive exploitation of sensitive natural ecosystems the application of chemical fertilizers and pest controlling agents the increasing attempts to genetically modify seeds plants and even animals and to patent life and the trans portation of highvalue foods HVFs over vast geographical distances These processes make agrofood an intensely sensitive industry raising the fundamental question of who owns nature6 It is at the centre of the continuing acrimonious arguments within the WTO to agree a development round in the Doha trade round see Chapter 17 Cutting across trade issues are those relating to food safety and to the ethics of genetic modification GM of seeds plants and animals In the past few years for example there have been several serious food safety scares BSE mad cow dis ease foot hoof and mouth disease avian flu and swine flu Such outbreaks have 09Dicken4084Ch09indd 271 19102010 35051 PM Part Three The Picture in Different Economic Sectors 272 a huge impact on agrofood trade and therefore on the livelihoods of farmers growers and distributors They create massive fluctuations in consumer buying patterns often out of ignorance At the same time there is widespread scepticism and considerable fear of genetic modification Both food safety and GM help to stimulate consumer resistance to the products of the global agrofood industries and to reinforce demands for a return to local sourcing of organically grown products Without doubt the agrofood industries have become a battleground with several fronts between producers and producers between producers and consumers between producers and governments not least because agrofood is one of the most heavily regulated industries and between governments These contentious issues were greatly exacerbated in 20068 when food prices surged and millions more people became food insecure7 Agrofood production circuits Production circuits in the agrofood industries are immensely varied8 In the case of traditional commodities like grains the circuit is relatively simple though more intricate than in the past In the case of highvalue foods however which are the primary focus of this chapter the situation is far more complex For that reason we provide several examples here Figure 91 shows the highly complex structure of the US chicken broiler production circuit This is an industry which has become increasingly domi nated by very large integrated producers From a producers perspective a major advantage of integrated chicken production is that it facilitates the coor dination of chicken raising processes which are subject to intrinsic biological lags It isnt possible to speed up the assembly line as can be done in automo biles It is however as much a justintime system as that in automobile pro duction At the same time integration gives closer control over product quality and food safety Figure 92 displays the fresh fruit and vegetable production circuit between the producing countries of Kenya and Zimbabwe and the consumer markets of Europe particularly the UK Its focus is more on the distribution and marketing functions of these agrofood production circuits and their coordination and gov ernance In particular it sets out the different ways of coordinating transnational production networks discussed in Chapter 5 Figure 518 and associated text The key point to make about the fruit and vegetable production circuit is that it is driven by the large supermarket chains rather than by the producers of the crops themselves Figures 91 and 92 both depict conventional agrofood production circuits However there are other alternative circuits which involve the production of organic food andor the involvement of various kinds of noneconomic actors 09Dicken4084Ch09indd 272 19102010 35051 PM The AgroFood Industries 273 Rendering Feed Mill Hatchery Hatchingegg farms CONTRACT GROWERS Broiler growout CONTRACT GROWERS Processing plants Flock service Hatchingegg farms COMPANY Broiler growout COMPANY Further processing Uniform genetic stock Eggs Breeder Breeder feed Breedereggs Broiler chicks Feed Waste Live broilers Ready to cook National Broiler Council Consulting and ancillary industries Biotechnology companies University and state extension and RD Grower organizations Flock service Finance and credit Ancillary industries Equipment manufacturers Distributors Export market Pet food and renderers Further processors Foodservice restaurants and institutions Government and others Domestic food market Retail grocery stores Processors Further processing Processors Research companies Processed chicken INTEGRATOR Figure 91 The US chicken production circuit Source based on Boyd and Watts 1997 Figure 84 notably fair trade organizations9 The driving forces underlying the development of some alternative food networks are the increasing concerns with food quality and food safety and concerns for fairer treatment of farmersgrowers in develop ing countries see later in this chapter Such networks redistribute value through the network against the logic of bulk commodity production reconvene trust between food producers and consumers and rearticulate new forms of 09Dicken4084Ch09indd 273 19102010 35051 PM The fresh vegetable production circuit The AgroFood Industries 275 Administration by cooperatives of premium to establish medical agricultural and educational services May or may not pay extra individual farmers for organically certified product No premium for social programmes to Cooperatives buy from producer for contract price which includes fair trade and organic premium with differential for quality Buying high quality Buys centrally or from farm gate if sourcing difficult Takes variable quality offers cash in hand All aware of commodity market prices but specifically exporting cooperative and UK fair trade organization close contracts cooperative aims to keep costs within fair trade contract prices Aims to keep cost of physicals down when buying particularly in relation to fluctuating commodity prices Organic production encouraged and enhanced Growing strategies oriented to crop maximization and direct or indirect encouragement of industrial growing practices Either Fair Trade Marked or marked Fairly Traded May be certified organic May be certified organic Marketing explicitly with reference to the social conditions of farmers May also be organic certified and marketed Brandrelated and niche marketing not concerned with social and environmental conditions Producer Producer Premium Premium a A fair trade coffee network b A commercial coffee network Buying strategy Buying strategy Relation to market Relation to market Bean Bean Certification Certification Marketing Marketing Cooperative Dealers Exporting cooperative Commercial company UK fair trade organization Consumer purchase Consumer purchase Figure 93 Alternative agrofood production circuits fair trade and commercial coffee Source based on Whatmore and Thorne 1997 Figure 112 Global shifts in the agrofood industries In this chapter our concern is with the highvalue segments of agricultural production and trade We will focus in this section on three examples chicken fresh fruit and vegetables and coffee Chicken production has become an immensely complex highly integrated agrofood industry Figure 91 At the global scale it is dominated by three coun tries the US China and Brazil which together account for almost half the world total Figure 94 Until very recently the US was also the worlds leading exporter 09Dicken4084Ch09indd 275 19102010 35051 PM Part Three The Picture in Different Economic Sectors 276 of chickens but it has been overtaken by Brazil In 1997 Brazils chicken exports were less than a third those of the US But production has taken off since 2000 growth averaged 230 per cent the past two years and today Brazil exports to 127 different countries and controls 36 per cent of the world share14 Fresh fruit and vegetable production is also heavily concentrated at the global scale Figure 95 China 38 per cent of the world total is by far the worlds biggest producer although much of this production is consumed domestically India is far behind at 9 per cent followed by the US 45 per cent and Brazil 34 per cent However the composition and pattern of trade in fruits and veg etables have changed markedly during the past two decades15 Export growth rates of traditional products eg oranges canned pineapples canned mushrooms concentrated orange and apple juices were very low Nontraditional products grew fastest Some commodities mangoes frozen potatoes singlestrength orange and apple juices fresh mushrooms garlic sweet corn prepared or pre served and avocado achieved or were close to doubledigit growth rate in their exports16 The geography of global trade in fruits and vegetables is strongly regionalized Not only are Europe and North America the leading importers of such products along with Japan they are also substantial exporters Both regions contain a variety of climatic conditions conducive to certain kinds of fruit and vegetable production the Mediterranean rim in the case of Europe Mexico and the Caribbean in the case of North America Figure 96 shows the origins of imports 16000 8000 4000 1000 100 Chicken meat production thousand tonnes Figure 94 Global production of chickens Source FAO Statistical Yearbook 2009 Table B11 09Dicken4084Ch09indd 276 19102010 35052 PM The AgroFood Industries 277 of fruits and vegetables to the worlds 30 leading importers Quite apart from the intraregional trade flows to the highestincome countries of North America Europe and Japan the role of the Southern Hemisphere countries is especially significant Unlike the banana producing countries for which this single product accounts for almost 90 per cent of their fresh fruit exports the Southern Hemisphere countries produce and export an increasing variety of products for consumption in the affluent markets of the Northern Hemisphere 90 50 10 1 Fruit production million tonnes 450 75 25 10 1 Vegetable production million tonnes Figure 95 Global production of fruits and vegetables Source FAO Statistical Yearbook 2009 Tables B6 B7 09Dicken4084Ch09indd 277 19102010 35053 PM Part Three The Picture in Different Economic Sectors 278 These countries have taken advantage of the seasonal differences to expand their exports particularly for many temperateclimate fruits more than half of the fresh fruits exported by the Southern Hemisphere countries were temperateclimate fruits such as grapes apples and to a much lesser extent pears About twothirds of apples exported by the Southern Hemisphere countries came from Chile and New Zealand while Chile and Argentina were the dominant suppliers for grapes and pears In addition to fresh fruits the group of Southern Hemisphere countries is a major supplier for fruit juices accounting for nearly onethird of the import value for juices purchased by the worlds top 30 importers Brazil accounted for nearly threefourths of the regions juice exports while Argentina shipping mainly apple and grape juices was the second largest exporter in the region 11 per cent of the exports17 351 141 61 77 322 EU NAFTA Asia Others Southern Hemisphere 32 15 Middle East Banana exporting countries d Fruit and vegetable juices 409 170 225 75 52 EU NAFTA Asia Others Southern Hemisphere 52 17 Middle East Banana exporting countries c Processed fruits and vegetables 552 234 74 70 41 26 04 EU NAFTA Asia Others Southern Hemisphere Middle East Banana exporting countries b Fresh vegetables 314 131 61 68 191 32 203 EU NAFTA Asia Others Southern Hemisphere Middle East Banana exporting countries a Fresh fruits Figure 96 Origins of imports of fruits and vegetables to the worlds 30 leading importers Source based on Huang 2004 Figure 22 09Dicken4084Ch09indd 278 19102010 35053 PM The AgroFood Industries 279 Finally Figure 97 maps global exports of coffee As coffee aficionados will know there are two major types of coffee bean arabica beans grown at higher altitudes and more difficult to grow and robusta beans grown on low lands in the humid tropics In general arabica beans are regarded as being of higher quality though as always it is not quite as simple as this Four countries generate 66 per cent of total coffee exports Brazil 32 per cent of which 94 per cent is arabica Vietnam 18 per cent all robusta Colombia 10 per cent all arabica and Indonesia 7 per cent 87 per cent robusta The pattern of production and trade in highvalue foods therefore combines elements of global regional and local scales Globally the emergence of Southern Hemisphere producers basing their advantage on their seasonal complementarity with the temperate markets of the Northern Hemisphere generates massive flows of longdistance trade Regionally the existence of areas of more exotic production within the major regional markets of North America Europe and East Asia has led to strong intraregional trade flows of highvalue foods Locally the increasing interest in alternative food networks especially those which focus on local often organic production has created much shorter movements of agrofood products Consumer choices and consumer resistances For most of human history people have had to struggle to obtain enough food to survive Only a very tiny proportion of the population could afford to obtain the Coffee exports 20089 60kg bags 31500000 17500000 5000000 1000000 100000 Arabica Robusta Coffee exporting countries Figure 97 Exporters of coffee Source International Coffee Organization data 2009 09Dicken4084Ch09indd 279 19102010 35054 PM Part Three The Picture in Different Economic Sectors 280 more exotic foods from distant places That is of course still the case today for millions of people in the poorest countries and for some people in affluent coun tries But as incomes have risen for many through economic growth and with the associated urbanization of the population demand for food has changed dramati cally In developed economies consumers now spend only around onetenth of their income on food compared with onethird 50 or 60 years ago However foods unique nature has made it uniquely central to human social life and therefore a carrier of historically constructed meanings both intimate and political These meanings in turn enter into food markets at a variety of levels Different groups and societies ideas of food purity and danger of the proper meal and the proper treatment of farmland and livestock of govern ments responsibility to protect producers and consumers from food risks mean that food is never free of the meanings that make it the subject of bread riots trade wars and media scares18 These factors make the relationship between food production and consumption more complex than is often assumed What we choose to eat has become a far more intricate process a mix of taste culture religion health concerns ethical position and lifestyle as well as disposable income On the one hand food producers strive to produce and market foods that will attract the largest number of consumers and enhance profits whilst on the other hand consumers themselves have widely varying food agendas In the affluent consumer markets of North America Europe and parts of East Asia it is the changing patterns of demand and consumption rather than the overall level of food consumption that are especially important Increasing affluence stimulates a desire for greater choice in food products As a result but also of course driven by the marketing strategies of the transnational food producers the market for food has become highly segmented At one level this is reflected in the huge diversity of products sold through the major supermarkets and especially their provision of allyearround perishable foods from across the globe It is reflected in the rapid growth of new food prod ucts for example the chilled convenience food market It is reflected in the ever changing dietary fashions of the affluent in their search for the route to beauty and long life It is reflected too in the development of the specialist lifestyle drinks markets for example the latte revolution driven by Starbucks colonization of much of the world19 At the same time however there is increasing consumer resistance to many of the food products being sold through the big supermarkets as well as to the more traditional providers of fast food In early 2006 for example McDonalds announced that it was actually going to close a significant number of its outlets in the UK McDonalds of course has long been the focus of much criticism for its allegedly unhealthy products culminating in the movie Supersize Me In some countries though not all there is widespread opposition to GM foods 09Dicken4084Ch09indd 280 19102010 35055 PM The AgroFood Industries 281 and to the use of nonorganic production methods In the case of GM foods there is considerable difference in consumer attitudes between the US where GM crops tend to be more acceptable and Europe where there is greater resistance20 A European Commission public opinion survey in 2001 found that 80 per cent of those surveyed did not want GM food and 95 per cent wanted the right to choose21 There are also pressures to relocalize food production both to rely more on local sources and also to stimulate and protect areas of local production of key products Such resistances derive from a combination of concern over environ mental damage and fears about the safety of foods grown using what are increas ingly regarded as suspect or ethically unacceptable methods For example fresh supermarket food is predicated on a new naturedefying order where every conceivable fruit and vegetable grown anywhere is available all the time PGST permanent global summertime may look good but in the name of consumer choice and public health the irregularity and diversity that is part of the natural order has been eliminated not to benefit consumers but to fit the way our big food retail ers like to do business In essence this means sourcing vast quantities of easytoretail longshelflife standard varieties grown to rigid size and cos metic specifications that can be supplied 365 days a year22 There has been significant recent growth in the ethical consumer movement in the agrofood industries23 For example some 7 million farmers and workers in around 60 developing countries are now covered by the Fairtrade charitable scheme which pays a guaranteed price covering basic costs and a surplus to rein vest in further development Fairtrade is especially active in such foods as coffee see Figure 93 tea bananas and chocolate although the proportion of total world trade in these products covered by Fairtrade agreements remains small for example around 5 per cent of the UK banana market24 Nevertheless according to the Fairtrade Foundation global consumption of Fairtrade products grew by 47 per cent between 2006 and 2007 Set against these kinds of consumer resistance we have to recognize that such movements are at least in part facilitated by the choices of the affluent consumer While there is no doubt that demand is growing from consumers for food whose quality and geographical provenance are regarded as being superior to food from the largescale sources for most people the overwhelming need is still for enough food to survive For every enlightened consumer pursuing her organic food or for the lifestyler drinking his designer coffee there are many for whom such foods are out of reach For people working long hours or for the elderly the availability of convenience foods is a major benefit The fact that such foods may not be especially healthy is another issue Clearly therefore demand for and consump tion of food represent an extremely complex set of processes As we shall see in subsequent sections of this chapter this has major implications for the changing 09Dicken4084Ch09indd 281 19102010 35055 PM Part Three The Picture in Different Economic Sectors 282 technologies of food production for state regulatory policies and for the strategies of the transnational food producers Transforming technologies in agrofood production Global cool chains Traditionally food production was a relatively simple process Of course techno logical innovations in crop growing and animal husbandry have been significant throughout human history For example without the important agricultural inno vations of the eighteenth and nineteenth centuries the Industrial Revolution simply could not have occurred Equally without the developments in transporta tion and communications discussed in Chapter 4 longdistance movement of agricultural products would not have been possible These together with innova tions in refrigeration and foodfreezing technologies the development of what have been called global cool chains transformed the availability of a much wider range of agricultural products over vast geographical distances25 One of the most widely quoted indicators of globalization is the distance over which the food in our shopping basket or on our dinner table has travelled For example a basket of 20 fresh foods bought from major UK retailers was found to have clocked up a total of 100943 miles26 On the other hand longdistance movement of agricultural produce also makes possible the continued existence of many traditional producers through their access to a larger market including that of Fairtrade production The carbon footprint per pound of food of the biggest container ships is significantly lower than that of much local sourcing27 The rapid growth in world trade in fresh foods depends critically on the use of controlled atmosphere CA technologies to move fragile and perishable products over long distances without destroying their freshness28 Technologies of fresh food pres ervation are of course greatly enhanced by the use of air freight to transport lowweight highvalue exotic foods to distant affluent markets Industrialization of food production and the shift towards biotechnology The technologies of agrofood production have been transformed by their indus trialization and most recently through the introduction of biotechnologies Such developments are intimately related to the increasing role of very large agrofood corporations in all aspects of food production We will look specifically at the corporate dimension in a later section of this chapter Here our concern is with the increasing importance of biotechnologies in food production 09Dicken4084Ch09indd 282 19102010 35055 PM The AgroFood Industries 283 The application of industrially produced chemicals to agricultural production fertilizers to stimulate higher crop yields pesticides to inhibit disease and insect damage has been common for many decades The development of newer varieties of crops has also been a continuing process The socalled Green Revolution of the 1960s and 1970s was the most significant combination of such practices an attempt to solve the food problems of poor countries through the development of new varieties of basic crops such as wheat rice and maize using fertilizers pesticides and irrigation The Green Revolution was in many ways a precursor of what has become the most controversial aspect of agrofood production genetic modification GM As before the objective is to improve plants resistance to disease and to herbi cides to increase yields and to improve nutritional value This is done by chang ing basic genetic structures and producing new varieties of seeds29 Such GM techniques are immensely complex and costly They involve massive levels of capital expenditure on a scale that can only be afforded by the big biotechnology and agrofood companies Not least they encourage the patenting of what had hitherto been regarded as public goods the seeds needed to produce the next generation of crops This is the patenting of life itself Traditionally a farmer would set aside some seeds from one year for use in the following year GM seeds on the other hand belong to the seed company which produces terminator seeds that cannot be reproduced by the user who has to purchase the next years seeds from the seed company Whereas the application of biotechnologies is relatively recent and mainly applied in the early stages of the agrofood production circuit the use of chemical additives in food products themselves has been common for some time One of the results of the increasing industrialization of food production was a loss of some of the desirable qualities of taste texture colour and so on To counteract these changes and to enhance the attractiveness of food products producers have devel oped a bewildering variety of food additives preservatives antioxidants emulsifi ers flavourings colourings One calculation is that some 4500 different flavouring compounds are available to food manufacturers and that 90 per cent of additives are purely cosmetic30 What about the workers The impacts of these technological transformations in how food is produced and how far and how quickly it can be transported are immense In addition to their effect on what people eat and the potential effects on their health they also impact greatly on those people who work in agriculture The proportion of the labour force working on the land has fallen markedly especially in devel oped countries The industrialization of agrofood processes has in effect shifted the locus of much of the work from the field to the factory or to the packaging plant The seasonal rhythms of agricultural work have been displaced 09Dicken4084Ch09indd 283 19102010 35055 PM Part Three The Picture in Different Economic Sectors 284 for many by the rhythms of the food processing and packaging assembly lines To that extent many workers in the agrofood industries are more like workers in automobile or electronics production engaged in lean and flexible production than farmers31 Because all governments are heavily involved in regulating their food industries for health and safety reasons see next section the working conditions in process ing and packaging plants are more tightly monitored than is the case in some other industries such as clothing The work itself may be mindnumbingly bor ing and repetitive but so too are many other jobs in todays society and not just in manufacturing think of telephone call centres Of course wide variations in working conditions exist especially between developed and developing countries despite the ubiquitous involvement of the big supermarket chains in sourcing from such plants But not all jobs in food processing and packaging are permanent or fulltime Agrofood is probably the largest user of casual labour of all modern industries Indeed these industries depend fundamentally on a huge floating labour force of workers who are employed only when the producer needs them and who are often organized by subcontractors or gangmasters Since the supply of such labour invariably exceeds demand wages are extremely low and working hours very long The majority of such workers are migrants with virtually no bargaining power and often very little protection from abuse The seasonality of agricultural processes creates vast periodic movements of migrant workers within and across borders32 In the US the majority of these workers are Hispanic especially Mexican in Europe they come predominantly from Eastern Europe or from North Africa An Oxfam report on American agriculture provides graphic details of what the report terms sweatshops in the fields Farmworkers are among the poorest if not the poorest laborers in the US farm labor is also one of the most dangerous jobs in America At work farmworkers suffer higher rates of toxic chemical injuries than workers in any other sector of the US economy with an estimated 300000 suffering pesti cide poisonings each year They also suffer extremely high rates of workplace accidents Farmworkers are much more likely to have temporary jobs Just 14 of all workers in crop agriculture are employed full time in yearround posi tions while fully 83 work on a seasonal basis 56 of farmworkers in crop agriculture are migrant workers travelling more than 75 miles to get a job Thirty percent of migrant workers or 17 of all crop workers are charac terized as followthecrop migrants moving yearround like those portrayed in John Steinbecks The Grapes of Wrath Farmworkers in general and immigrant farmworkers in particular have low levels of education Their literacy and communication skills in English are especially limited 09Dicken4084Ch09indd 284 19102010 35055 PM The AgroFood Industries 285 Finally yet perhaps most significantly these immigrant workers typically lack work authorization Given the vulnerabilities of their legal status US farmworkers tend to face widespread workplace and human rights abuses and are rarely able to take the risk of challenging abuses when they occur33 While some of these characteristics of the agrofood workforce are far from new there is little doubt that they have intensified as the industrys production circuits have become more tightly controlled by larger and larger producers and buyers The role of the state The state plays an immensely important role in the agrofood industries which are among the most highly regulated heavily subsidized and vigorously protected of all economic activities Regulating agrofood industries A vast array of government agencies and departments operates to oversee various parts of the agrofood industries for example the UK Department of Environment Food and Rural Affairs and the Food Standards Agency the US Department of Agriculture and its Food and Drug Administration A primary focus of such regu latory activity is the issue of food safety a problem greatly exacerbated by the growth of international trade in food Before the 1970s as much as 90 per cent of world food production was consumed in the country in which it was produced34 That situation has changed dramatically As a result national food regulatory meas ures have become increasingly embedded in international codes such as the Codex Alimentarius set within the Food and Agricultural Organization and the World Health Organization This consists of over 200 standards forty codes and guidelines for food production and processing maximum levels for about 500 food additives and 2700 maximumresidue limits for pesticide residues in foods and food crops35 A striking feature of regulatory policies in these industries is the extent to which they are deeply intertwined with the strategies of the major food producers The biggest funder of the establishment of the Codex Alimentarius Commission was not the US state but the US food industry Indeed the Codex has become one of the more industrydominated international organizations36 In other words there is a substantial amount of private regulation in the agrofood industries sanctioned by national governments A major problem facing food safety regulators is the continuing proliferation of new products that cross the boundaries between food and medicine the development of 09Dicken4084Ch09indd 285 19102010 35055 PM Part Three The Picture in Different Economic Sectors 286 socalled functional foods or nutriceuticals which claim to improve various aspects of health37 Even within the EU there are national variations in regulatory practices This is seen most clearly in the context of the food safety scares that have occurred from time to time and also in the GM food controversy Such cases invariably create conflict between the state within which the disease originates and its export markets leading to trade boycotts and disputes over the efficacy of safety measures The case of GM food is potentially the biggest source of difference between states and one that spills over into trade disputes especially between the US and the EU The US position is that GM foods are not only safe but also vital to increasing food supply in poor countries Driven by consumer resistance see earlier the EU has taken a more restrictive position Although it lifted its sixyear moratorium on GM food in 2004 and allowed limited approvals of GM products several EU states continue to ban them There is also a proliferation of nationally specific regulations governing the extent to which foreign food retailers are permitted to operate For example it has been quite common for countries to restrict entry of foreign food retailers Although this practice has declined in recent years the rules of operation in national retail markets continue to differ substantially The US has the most lenient regulatory system towards retailing The Japanese retail market is far more heavily regulated although Japan has revised the LargeScale Retail Store Law which had been a major obstacle to the growth of large retail stores Certainly the law had discouraged major foreign retailers from trying to enter the Japanese market India also operates a highly restrictive policy although it has begun to relax some restrictions on the entry of foreign retailers In Eastern Europe although retailing has been opened up there is considerable opposition to the spread of foreign owned supermarkets Subsidizing and protecting agrofood industries the major focus of trade conflict For reasons that lie deeply embedded in national emotions as well as in the need to guarantee a secure food supply for its citizens most countries have adopted policies to nurture sustain and where felt necessary protect their agrofood indus tries from external competition Such policies include the trade measures shown in Figure 65 as well as direct financial support subsidies for domestic farmers Figure 98 shows that agricultural subsidies are heavily concentrated in particular countries More than 90 per cent of the dollar value of agricultural support in OECD countries is provided by the European Union which alone provides about half Japan the US and the Republic of Korea38 09Dicken4084Ch09indd 286 19102010 35055 PM The AgroFood Industries 287 For example both Japan and Korea have adopted highly protectionist policies towards their rice industries which have deep cultural meanings as well as dietary significance In Europe the French in particular regard the rural economy as sacro sanct In the US farming remains a national obsession a reflection of the countrys desire for food security as well as the emotional connotations of the development of the national space in the nineteenth century Subsidies to US farmers began in the 1930s under the New Deal programme The EUs Common Agricultural Policy CAP has long absorbed the largest single share of the EUs total budget and has as a result become a source of dis satisfaction for several member states The CAP has become increasingly contro versial not only within the EU itself but also in the context of the WTO trade negotiations The CAP was reformed most recently in 2003 when the level of subsidy to farmers was separated from production a practice which had led to notorious cases of overproduction in the past Now subsidy is linked to compli ance with environmental food safety and animal welfare standards and part of the process of transforming the CAP from a sectoral policy of farm community sup port to an integrated policy for rural development39 In some member states Austria Denmark Finland the Netherlands Sweden and the UK further radical reform of the CAP is regarded as essential The issue of agricultural subsidies has become possibly the biggest bone of contention in the current WTO negotiations especially in the context of the 0 25 50 US billions 75 100 EU US Japan Korea Switzerland Norway Canada Figure 98 Agricultural subsidies Source WTO data 09Dicken4084Ch09indd 287 19102010 35055 PM Part Three The Picture in Different Economic Sectors 288 Doha development round It is often pointed out for example that the average subsidy per cow in the EU is more than the 2 per day on which half the worlds population has to live whilst US farm subsidies allow farmers to export wheat at 28 per cent less than it costs to produce corn at 10 per cent less and rice at more than a quarter less than cost price40 We will discuss the WTO negotiations more fully in Chapter 17 Financial subsidization of some or all agricultural production continues to be common in many countries although there has been some move ment within OECD countries The average support to agricultural producers fell from 37 per cent of the gross value of farm receipts in 198688 the beginning of the Uruguay Round to 30 per cent in 200305 however while the 7 percentage point decline in support is progress the amount of support increased over the same period from 242 billion a year to 273 billion41 But despite the general reduction in tariffs and subsidies many agricultural prod ucts remain heavily protected to the detriment especially of poor countries A new phenomenon state land grabs Fears over future food and fuel shortages have led in recent years to the emer gence of a new phenomenon land grabbing that is statesupported actions to acquire agricultural land in foreign countries42 A 2009 report estimated that an area half the size of Europes farmland was targeted in the last six months at least 30m hectares is being acquired to grow food for countries such as China and the Gulf states who cannot produce enough for their populations The land grab is being blamed on wealthy countries with con cerns about food security Some of the largest deals include South Koreas acquisition of 700000 ha in Sudan and Saudi Arabias purchase of 500000 ha in Tanzania India has lent money to 80 companies to buy 350000 ha in Africa At least six countries are known to have bought large landholdings in Sudan one of the least foodsecure countries in the world Other countries that have acquired land in the last year include the Gulf states Sweden China and Libya Those targeted include not only fertile countries such as Brazil Russia and Ukraine but also poor countries like Cameroon Ethiopia Madagascar and Zambia43 Corporate strategies in the agrofood industries The exploitation of agricultural resources across the world by companies based in developed countries has a very long history 09Dicken4084Ch09indd 288 19102010 35056 PM The AgroFood Industries 289 Early examples of TNC involvement in agricultural production include FDI in the nineteenth and twentieth centuries by companies based in Japan Europe and the US primarily to produce cash and food crops such as cotton rubber sugar and others The history of foreign investment in agriculture is actually even older and goes back to the early colonial era from the sixteenth century onwards when foreign expansion by European powers to the developing countries of today was largely motivated by the search for natural resources combined with cheap labour by indentured workers or slaves44 Concentration and consolidation The massive transformation of the agrofood industries that has occurred during the past few decades is inexorably bound up with the increasing dominance of very large transnational firms This is apparent at all stages in the production cir cuit from seeds through growing processing and retailing What was historically a highly fragmented set of industries although some parts were always more concentrated than others has become one in which a relatively small number of giant transnational firms shapes what food is produced how it is produced who produces it and how it is marketed and distributed to final consumers Figure 99 lists the 10 leading companies in the world in four agrofood indus tries seeds pesticides food and beverage manufacture food retailing Global seed production is dominated by European five and US three firms In fact US dominance has increased following Monsantos acquisition of Seminis in 2005 to 180621 104151 72970 58753 55966 52082 50556 49651 49483 45397 US France UK Germany Germany US UK Germany Germany Germany WalMart Carrefour Tesco Schwarz Group Aldi Kroger Ahold Rewe Group Metro Group Edeka 1 2 3 4 5 6 7 8 9 10 m sales 2007 Top 10 food retailers 83600 39474 37241 28857 26985 26900 26500 25000 24219 19975 Switzerland US US UKNetherlands US US US US France US Nestlé Pepsi Co Kraft Foods CocaCola Unilever Tyson Foods Cargill Mars ADM Co Danone 1 2 3 4 5 6 7 8 9 10 m sales 2007 Top 10 food beverage companies 7458 7285 4297 3779 3599 2369 1895 1470 1209 1035 Germany Germany US US US Israel Australia Japan Japan Switzerland Bayer Syngenta BASF Dow AgroSciences Monsanto DuPont Makhteshim Agan Nufarm Sumitomo Chemical Arysta Lifescience 1 2 3 4 5 6 7 8 9 10 m sales 2007 Top 10 pesticide companies 4964 3300 2018 1226 917 702 524 396 391 347 US US Switzerland France US Germany Germany Japan Denmark Japan Monsanto DuPont Syngenta Groupe Limagrain Land OLakes KWS AG Bayer Crop Science Sakata DLFTrifolium Taikii 1 2 3 4 5 6 7 8 9 10 m sales 2007 Top 10 seed companies Figure 99 Dominant firms in the global agrofood industries Source based on data in ETC Group 2008 09Dicken4084Ch09indd 289 19102010 35056 PM create the worlds largest seed company US firms also dominate food and beverage production although the worlds biggest food manufacturer Nestlé comes from one of the smallest European countries Switzerland while the fifth largest is the UKNetherlands company Unilever In global food retailing on the other hand eight of the top 10 are European and only two are American including by far the largest WalMart According to one agrofood industry observer Twothirds of the world seed market is controlled by the leading 10 companies Almost 90 per cent of the world pesticide market is controlled by the leading 10 firms Twentysix per cent of the world packaged food market is controlled by the leading 10 firms The leading 100 global food retailers account for 35 per cent of total world grocery sales The top three produce half of the total revenues of the top 10 Most of this increased concentration in the agrofood industries is the result of merger and acquisition Indeed these have been among the most takeoverintensive industries in recent years as firms have striven not only to acquire a wider portfolio of brands as well as to drive out competition for their own existing brands but also to extend their reach into new geographical markets Much of this activity has been driven by the increased financialization of the leading firms the prioritization of objectives to boost shareholder value in the strategic management of large corporations Virtually all the leading food companies have followed a similar trajectory varying of course according to their specific company history Among the more important examples in recent years was the US tobacco company Philip Morris which transformed itself through a whole series of acquisitions In 1985 Philip Morris acquired General Foods in 1988 it acquired Kraft Foods in 1989 these were combined to form Kraft General Foods the largest food company in the US in 2000 it acquired Nabisco Holdings of the US and integrated Nabisco brands into Kraft Foods worldwide in 2007 the entire Kraft Foods business was sold and became the worlds third largest food company and in 2010 Kraft controversially acquired the major UK company Cadbury Among the diversified food companies Unilever acquired Brooke Bond in 1984 to make it the worlds leading tea company in 2000 the company acquired the US food company Bestfoods as well as Ben Jerrys ice cream in 2007 Unilever acquired the Buavita vitality drinks brand in Indonesia and Inmarko the leading ice cream business in Russia The more narrowly specialized food companies have also grown through acquisition as well as through organic growth no pun intended Tyson Foods for example the worlds biggest poultry company began its expand or expire strategy in 1963 by acquiring the Garrett Poultry Company of Arkansas and then made 19 further acquisitions between 1966 and The AgroFood Industries 291 1989 In 1995 Tyson purchased Cargills US broiler operations and has subsequently made acquisitions in other food companies outside poultry By 2001 Tyson was the worlds largest processor and marketer of not only chicken but also red meat with the acquisition of beef and pork powerhouse IBP Inc47 Acquisition and merger have also been important factors in the growth of the major transnational food retailers One of the biggest deals was WalMarts acqui sition of the British supermarket chain Asda for almost 11 billion and its acqui sition of the German chain Wertkauf and the Japanese company Seiyu Because of national regulatory restrictions the major food retailers have often had to enter foreign markets through joint ventures with local partners Examples include Tescos alliance with Samsung in Korea Strategies of combining global brands with local products The agrofood industries are dominated by the drive to introduce develop and sustain branded products It is through branding that firms strive to convince con sumers that there is something special in terms of quality reliability safety and so on about the foods they are purchasing The degree of product differentiation through branding is probably greater in the agrofood industries than in most other industries Each of the leading agrofood companies has a vast portfolio of brands serving different market segments Nestlé for example has around 8000 brands in up to 20000 variants48 Such brand portfolios are excessive most have evolved through acquisition and merger as we have seen One important strategy being pursued by all the leading food companies therefore is to rationalize their brand portfolio usually by selling some of the brands to other firms By 2001 for example Unilever had reduced its number of brands from 1600 to 900 and the process continues Obviously the aim has to be to sell each brand to the largest number of con sumers The ideal from a producer viewpoint would be brands that sell every where without any need for modification But agrofood markets are not like that as we have seen A major problem for the big agrofood producers therefore is in creating global brands in circumstances where much food consumption is still very strongly influenced by local tastes and preferences A distinction must of course be made between the manufacture of a product for a global market based on large scale production plants serving geographically extensive markets and the way that product is actually sold to the local consumer A product may be sold overtly as a global brand like Coke or Pepsi but it may also be sold under a more local label and packaging even if the product itself is the same everywhere While some food companies do market their products as global brands others are less inclined to do so Nestlé for example dismisses the idea of global brands 09Dicken4084Ch09indd 291 19102010 35056 PM Part Three The Picture in Different Economic Sectors 292 There is a tradeoff between efficiency and effectiveness in global brands Operational efficiency comes from our strategic umbrella brands But we believe there is no such thing as a global consumer especially in a sector as psychologically and culturally loaded as food As a result Nestlé retains its brand strength by using very strong local brands49 The increased consumer interest in food health and safety has important implica tions for food producers strategies Capitalizing on the enhanced interest in local and organic foods becomes increasingly important All the big food companies have to deal with these market changes They are doing so in various ways for example by acquiring local companies and by retaining their brand identities rather than rebranding them with the new corporate identity Nestlé for example announced its intention to accelerate the evolution of Nestlé from a respected trustworthy Food and Beverage Company to a respected trustworthy Food Nutrition Health and Wellness Company50 Note the very significant change of emphasis This shift in priority towards healthy products has become virtually universal among the large food companies Unilever boasts about how it is bringing Vitality to life and has launched the Unilever Health Institute a centre of excellence in nutrition health and vitality51 Likewise Kraft Foods has a health and wellness strategy52 Changes in organizational and geographical architectures Traditionally the major food manufacturers expanded overseas by setting up or acquiring operations in each of their major geographical markets The existence of highly protected domestic food markets together with the idiosyncracies of local consumer tastes made each national market distinctive As a result the lead ing transnational food producers established organizational structures that were strongly multinational with all the characteristics shown in Figure 5953 The agro food industries therefore are the clearest example of the globallocal tension discussed in Chapter 5 Because the traditional organizationalgeographical struc tures are less and less effective all the major food producers are engaged in large scale reorganization programmes Two examples help to illustrate these processes Nestlé currently has operations in 80 countries and employs 250000 In announcing its intention to transform itself into a Food Nutrition Health and Wellness Company the company recognized that this has implications that go beyond products and brands Nestlé is changing from a decentralized multinational company to a global and ultimately a global multifocal company54 In fact Nestlé has been involved in substantial geographical reorganization for some time as its actions within South East Asia reveal55 With the increasing 09Dicken4084Ch09indd 292 19102010 35056 PM The AgroFood Industries 293 liberalization of agrofood trade within ASEAN Nestlé progressively rationalized its multidomestic operations there in the early 1990s it had more than 40 facto ries in the region Under the centres of excellence programme the company established such centres for production of breakfast cereals in the Philippines chocolate and confectionery in Malaysia nondairy creamer in Thailand soya sauce in Singapore and instant coffee in Indonesia Such developments formed part of the companys broader reorganization pro gramme at the global scale In the 1990s the company dramatically expanded its intrafirm trade of final products Because many Nestlé products sell under globally recognised brand names and are manufactured according to globally consistent recipes there is a certain footlooseness in the intrafirm trade patterns of the company56 Unilever like Nestlé has long operated a decentralized multinational strategy but it too has made strenuous efforts to create a more efficient and responsive global structure In the late 1990s Unilever operated around 300 food factories with a presence in virtually every country in the world The acquisition of Bestfoods brought in a further 70 factories in 60 countries In its Path to Growth strategy of the late 1990s and in the subsequent One Unilever programme Unilever has drastically rationalized and reorganized its entire production and supply chain activities Its two major divisions Food and Home and Personal Care Products have been combined into one category The focus on a much smaller number of brands see above has involved closing a large number of plants in favour of con centrating production on around 150 key sites together with a further 200 sites for manufacturing local marketleading or nationally profitable products These kinds of organizational and geographical restructuring are typical of all the major multibrand food producers although with variations in detail from one company to another They involve a very strong macroregional dimension to the organization of the production network as in Figure 514c Recent research on European food production networks indicates that global firms had launched a restructuring process aimed at developing large macroregional factories specialized by product lines and serving the entire region with the objective of generating scale economies and productivity increases These macroregional factories had been progressively replacing traditional national factories through continuous restructuring and cost cutting programmes involving plant closures and layoffs at the national level for example in the early 2000s Nestlé launched its own version of a macro regional production system in ice cream distinguishing between global factories that would perform initial production stages for global or macro regional markets and finishing factories in which products would be adapted to local markets The adoption of global strategies in marketing and production entailed a centralization of support functions such as sourcing aimed at controlling and coordinating the activity of local buyers57 09Dicken4084Ch09indd 293 19102010 35056 PM Part Three The Picture in Different Economic Sectors 294 Big Food and Big Retail two sides of the same coin These developments in the strategies of the major transnational food producers have to be seen within the context of the retailing systems through which their products are sold One of the most significant developments in the agrofood industries in fact has been the evolving symbiotic relationship between the big food producers and the big supermarket chains Big Food and Big Retail are really two sides of the same coin Big global food manufacturers need big supermarket chains to get their products on to the shelves and our big supermarkets need big food processors Mass produced food that can be churned out over and over again in vast uniform quantities made by a handful of big manufacturers who jump to the big retailers tune processed food lends itself to supermarket retailing it gives them the ability to put a standard regular product into every store nationwide a prod uct that does not require any specialist handling Industrial food lends itself to the supermarkets heavily centralised highly mechanical distribution systems58 This is an arena of continuous power struggles in which power lies increasingly with the big transnational food retailers And there is no doubt that the biggest food retailers have become increasingly transnational after being essentially domestically oriented for most of their histories59 However they vary considerably in the extent of their transnationalization Figures 910 911 The biggest food retailers are not invariably the most transnational as the case of WalMart shows The worlds biggest food retailer is ranked ninth in terms of international sales as a share of its total sales Figure 911 maps the distribution of stores of three of the leading transnational food retailers There are some significant differences between them in the specific geography of their overseas activities but all share a common characteristic a very strong focus on their home region WalMart has 54 per cent of its stores in the US and 73 per cent in North America when Canada and Mexico are included However WalMart continues to pursue an aggressive transnationalization strategy At present its overseas stores are concentrated in East Asia China Japan although it disposed of its Korean stores Latin America Brazil Chile Argentina and Central America where it acquired a substantial equity stake in the regions largest retailer from Ahold In contrast WalMarts only base in Europe at the moment is in the UK Its attempts to establish a presence in Germany failed largely because of its inability to under stand the fundamental differences between the German and US retail food mar kets However WalMart has plans to expand aggressively into Eastern Europe and especially Russia The French company Carrefour has 54 per cent of its stores in its home market and 91 per cent in Europe Elsewhere it has a significant presence in Latin America primarily in Argentina and Brazil and in East Asia However Carrefour 09Dicken4084Ch09indd 294 19102010 35056 PM The AgroFood Industries 295 has a policy of getting out of countries in which it cannot become one of the top three retailers60 It withdrew from Japan and Mexico and sold its stores in the Czech Republic and Slovakia to Tesco At the same time it has bought Tescos Taiwan operations Significantly Carrefour has no stores in North America having failed to transfer its hypermarket model to the US The UK retailer Tesco has grown extremely rapidly in recent years It now totally dominates the UK grocery market where almost 60 per cent of its stores are located This makes it like WalMart in the US a target for strong opposition from different interest groups Tesco is pursuing a very aggressive but geograph ically focused transnationalization strategy based on expansion in East Asia 22 per cent of its stores and Eastern Europe 16 per cent Interestingly Tesco has no stores in Western Europe apart from Ireland Its recent buying and selling deals with Carrefour are part of this strategy strengthening Tescos position in Eastern Europe In East Asia Tescos major store concentrations are in Thailand Japan China and Korea where it initially entered through a joint venture with Samsung61 Having stayed out of the US Tesco has recently set up a chain of convenience stores known as Fresh and Easy initially on the West Coast It also planned to enter the highly protected Indian market through collaboration with a local enterprise but this has stalled Overall therefore there has been very considerable growth in the transna tional operations of some of the leading retail chains But such expansion has 0 20 40 International sales as a percentage of total sales 60 80 Ahold Metro Carrefour Auchan Lidl Schwarz Aldi Rewe Tesco WalMart Figure 910 Variations in the transnational scope of leading food retailers Source based on material supplied by Neil Coe 09Dicken4084Ch09indd 295 19102010 35056 PM Part Three The Picture in Different Economic Sectors 296 Tesco Carrefour WalMart 4500 2500 200 1000 10 Number of stores Figure 911 The global geographies of leading transnational food retailers Source company reports 09Dicken4084Ch09indd 296 19102010 35056 PM The AgroFood Industries 297 not been problemfree as the selloffs listed above demonstrate The use of local partners within a joint venture often helps to avoid the problems of misunderstanding local market conditions But even joint ventures are not without their difficulties especially if the foreign partner fails to learn from the knowledge embedded in the local partner It is also the case that while the strength of most of the leading retailers is based on their high levels of profitability in their home market their returns on international operations are often far lower So the transnationalization of food retailing is far from being a straightforward or unproblematic process Competing headtohead with local firms is particu larly difficult in this sector A major problem is that of identity Because food retailing has traditionally been very much a domestic activity there is little knowl edge of foreign retail store brands as opposed to product brands For many cus tomers outside the US for example WalMart is a totally unknown quantity The same applies to nonFrench residents knowledge of Carrefour or nonUK resi dents awareness of Tesco Yet building up a respected and trusted brand identity takes a long time Meanwhile local competition remains in most cases a very serious problem for transnational food retailers Geographical expansion of the store network is one dimension of food retailers strategies A second dimension is from whom and from where its products are sourced The big retail chains have vastly increased the geograph ical extensiveness of their sourcing systems as well as exerting increasing power and influence over their suppliers As in the case of clothing Chapter 10 the major retailers have come to dominate their supply networks forcing suppliers to meet their increasingly stringent demands on price delivery and quality There is a great deal of criticism of the treatment of suppliers by the big super markets although suppliers are often afraid to object out of fear of losing their contracts An investigation of the accounts of transnational food retailers claimed that they gain huge financial benefits simply by delaying payments to their suppliers stock is turned into cash at the checkout counters long before suppliers have to be paid In effect suppliers have acted as surrogate bankers how ever the burden is not shared equally the most powerful manufacturers are able to shunt the burden of increased trade debt down the supply chain life is very much tougher for smaller suppliers who do not have the luxury of their burden down the line62 It is also increasingly common practice for the big supermarket chains to ask the major food producers to pay for preferred status63 As the big food retailers have increased their direct presence in foreign coun tries especially in the emerging market economies they have also drastically changed the geography and organization of the sourcing networks both for their local stores and for their entire network64 Typically the degree of centralization 09Dicken4084Ch09indd 297 19102010 35057 PM Part Three The Picture in Different Economic Sectors 298 of procurement has greatly increased When a transnational retailer establishes operations in a specific country one of its first actions is to replace a per store procurement system with the distribution centre DC model used in established markets Each DC may have responsibility for a particular range of products or a particular territory65 The second aspect of the changing procurement practices of transnational retailers is the changing balance between global and local sourcing On the one hand transnational retailers have increased levels of global sourcing for their home markets On the other hand there are the supply chain impacts that result from the retailers establishing store operations within the various markets The foreign subsidiaries of retailers such as Tesco Ahold and Carrefour commonly source over 90 of products from within the country contra accounts of the continuing rise of global sourcing local sourcing may actually increase over time as the supply base develops and retailers therefore import fewer products66 However the recent strategic shift of WalMart towards a more global sourcing system reflects what may become an increasingly common practice WalMart intends a drive to cut billions of dollars from its supply chain by combining its store purchasing across national frontiers in a fresh stage of the globalization of its business It is shifting to direct purchasing of its fresh fruit and vegetables on a global basis rather than working through supplier companies67 NOTES 1 Kiple 2007 2 Bonanno et al 1994 Roberts 2008 Ward and Almås 1997 Watts and Goodman 1997 Weiss 2007 Wilkinson 2002 3 McMichael 2007 218 4 Page 2000 245 emphasis added 5 Blythman 2004 Chapter 11 6 ETC Group 2008 7 ETC Group 2008 5 8 In addition to the cases discussed here see Neilson and Pritchards 2009 analysis of the tea and coffee chains in South India 9 Raynolds 2004 Whatmore and Thorne 1997 Whatmore et al 2003 10 Whatmore et al 2003 389 11 Ponte 2002 examines the conventional coffee production circuit at a global scale 12 Sonnino and Marsden 2006 183 13 Sonnino and Marsden 2006 183 14 wwwnewfarmorginternationalnews120104121604brchickenhtml 09Dicken4084Ch09indd 298 19102010 35057 PM The AgroFood Industries 299 15 This section draws heavily on Huang 2004 16 Huang 2004 3 17 Huang 2004 78 10 11 18 Freidberg 2004 1011 19 See Ponte 2002 20 Munro and Schurman 2009 21 Quoted in Paul and Steinbrecher 2003 173 22 Blythman 2004 76 77 23 See Blowfield 1999 Hughes et al 2008 Leclair 2002 24 The Guardian 8 March 2006 25 Friedland 1994 223 26 The Guardian 10 May 2003 27 Murray 2007 28 Huang 2004 19 29 Whatmore 2002 131 30 Millstone and Lang 2003 31 Raworth and Kidder 2009 32 Phillips 2009 33 Oxfam 2004 23 7 8 34 Grigg 1993 236 35 Braithwaite and Drahos 2000 401 36 Braithwaite and Drahos 2000 401 37 Wilkinson 2002 338 38 World Bank 2008b 97 39 Sonnino and Marsden 2006 192 40 US Institute for Agriculture and Trade Policy quoted in The Observer 3 July 2005 41 World Bank 2008b 97 42 UNCTAD 2009 128 43 Vidal 2009 24 44 UNCTAD 2008 105 45 ETC Group 2008 46 Palpacuer and Tozanli 2008 81 47 Tyson Foods Inc website wwwtysonfoodsinccom 48 Financial Times 22 February 2005 49 Nestlé CEO quoted in the Financial Times 22 February 2005 50 Nestlé company website wwwnestlecom emphasis added 51 Unilever company website wwwunilevercomaboutusourhistory 52 Kraft Foods company website wwwkraftfoodscompanycombrandshealthandwellness 53 For cases in the agrofood industries see Pritchard 2000a 2000b 2000c 54 Nestlé company website wwwnestlecom 55 Pritchard 2000a 2524 56 Pritchard 2000a 253 57 Palpacuer and Tozanli 2008 823 58 Blythman 2004 xvii 73 59 Coe and Wrigley 2009 Wrigley and Lowe 2007 60 The Economist 16 April 2005 09Dicken4084Ch09indd 299 19102010 35057 PM Part Three The Picture in Different Economic Sectors 300 61 Coe and Lee 2006 62 Financial Times 7 December 2005 63 Financial Times 30 March 2006 64 Coe and Hess 2005 Durand 2007 Reardon et al 2007 65 Coe and Hess 2005 464 66 Coe and Hess 2005 463 67 Financial Times 4 January 2010 09Dicken4084Ch09indd 300 19102010 35057 PM Ten FABRICATING FASHION THE CLOTHING INDUSTRIES CHAPTER OUTLINE Changing rules The clothing production circuit Global shifts in the clothing industries Changing patterns of consumption Production costs and technology Labour Variations in labour costs Characteristics of the labour force and conditions of work Technological change The role of the state and the MultiFibre Arrangement An international regulatory framework the MultiFibre Arrangement Corporate strategies in the clothing industries A highly fragmented industry but increasing retailer dominance Changing relationships between buyers and suppliers Strategies of US European and East Asian companies US firms European firms East Asian firms Regionalizing production networks in the clothing industries East Asia North America Europe 10Dicken4084Ch10indd 301 19102010 35120 PM Part Three The Picture in Different Economic Sectors 302 Changing rules On 1 January 2005 the clothing industries entered a new era The special inter national framework which had regulated virtually all trade in the industries for four decades the MultiFibre Arrangement MFA ceased to exist Trade in clothing as well as in textiles was no longer to be subject to import quotas This represented a massive change in the rules of the game Cries of anguish emanated from developed country producers fearing annihilation through competition from developing country producers especially in Asia and most of all from China On the other hand developed country retailers were more sanguine viewing with enthusiasm the prospect of being able to buy their garments more cheaply But it was not only developed country producers that feared the repercussions of the MFA abolition Many developing countries had been able to survive in these industries only because they had some degree of quota protection Without that they too feared the Chinese dragon In fact the clothing industries exemplify many of the intractable issues facing todays global economy particularly the trade tensions between developed and developing economies It is not difficult to see why Millions of workers are officially employed worldwide in the clothing industries in addition to count less unregistered workers employed both in factories and in their own homes These industries were the first to take on a global dimension because of the low barriers to entry to clothing production in the 1970s they epitomized the so called new international division of labour1 These industries continue to be important sources of employment in the developed economies employing many of the more sensitive segments of the labour force females and ethnic minorities often in tightly localized communities In developing countries the industries employ predominantly young female workers in conditions that sometimes recall those of the sweatshops of nineteenthcentury cities in Europe and North America The clothing production circuit The clothing industries form part of a larger production circuit involving textile production in which each stage has its own specific technological and organiza tional characteristics and particular geographical configuration Figure 101 The clothing industries are far more fragmented organizationally than textiles and far less sophisticated technologically They are also industries in which outsourcing is espe cially prominent Very often the design and even the cutting processes are performed quite separately from the sewing process the latter being particularly amenable to outsourcing The garments industries produce an enormous variety of often rapidly changing products to a very diverse and often unpredictable consumer market 10Dicken4084Ch10indd 302 19102010 35120 PM The Clothing Industries 303 Increasingly it is the distributors of garments particularly the retailers which have come to play the dominant role in shaping the organization and the geography of the clothing industries These are strongly buyerdriven industries2 Figure 102 suggests a generalized sequence of development through which individual producing countries appear to have passed Six stages are shown Figure 101 The clothing production circuit Flows of materials and products Flows of information including customer orders Yarn preparation spinning Fabric manufacture weaving knitting dyeing finishing Complexity varies by type of consumer market Pattern making Grading Nesting and marking Cutting Sewing of Basic garments Fashion basic Fashion garments Inspecting pressing packing Buyers Retailers Variation by income age and fashion orientation Fabric production Natural fibres Synthetic fibres Design Preparation Production Ancillary suppliers eg zips buttons trimmings Distribution Consumption garments Substantial reduction in employment and number of production units Decline both relative and in some sectors absolute Further development and sophistication of fibre fabric and clothing production Output of textiles and clothing continues to increase but employment declines Increased capital intensity and specialization Fullscale participation in international trading system Substantial trade surpluses Facing increased international competition Severe problems of competition Substantial trade deficits Simple fabrics and garments manufactured from natural fibres Production of clothing for export Mostly standard items or those requiring elaborate craft techniques Increase in quantity quality and sophistication of domestic fabric production Expansion of clothing sector with upgrading of quality Development of domestic fibre manufacturing Production oriented to domestic market Net importers of fibre fabric and clothing Export of clothing to developed country markets on basis of low price Much increased international involvement in export of fabric clothing and even of synthetic fibres Type of production Trade characteristics Figure 102 An idealized sequence of development in the textiles and clothing industries 10Dicken4084Ch10indd 303 19102010 35120 PM Part Three The Picture in Different Economic Sectors 304 beginning with the embryonic stage typical of the least developed countries through to the maturity and decline of the older industrialized countries together with the type of production likely to be characteristic of each stage The sequence is a useful summary of what has happened so far but like all such sequential models it should not be regarded necessarily as being predictive of what will happen in the future Although many countries have passed through some or all of these stages the precise path of development depends upon a number of factors that together produce the specific geographical patterns of these industries Global shifts in the clothing industries The low barriers to entry into clothing manufacture make it one of those activi ties accessible to virtually any country even at low levels of economic development Because of its continuing labour intensity the map of employment Figure 103 provides a useful indicator of global clothing production Asia dominates the world map China is now the worlds biggest producer employing some 27 mil lion workers followed a long way behind by Indonesia India Japan Vietnam and Thailand Outside Asia clothing production is highest in Mexico the US and Brazil in the Americas in Italy in Western Europe in Romania and Poland in no data 2658 1000 250 10 Employment in clothing thousands Figure 103 Employment in the global clothing industries Source calculated from UNIDO International Yearbook of Industrial Statistics 2005 ILO 2005 10Dicken4084Ch10indd 304 19102010 35120 PM The Clothing Industries 305 Figure 104 Leading clothing exporters 2000 and 2007 Source based on WTO 2009 Chart II8 0 10 5 Percentage of world clothing exports 15 20 25 30 35 2007 2000 China Hong Kong EU 27 United States Turkey Mexico India Indonesia Bangladesh Vietnam Rest of world Eastern Europe in the Russian Federation There has indeed been a major global shift in the clothing industries away from the oldestablished producers towards newer ones in the developing world Such geographical shifts are even more apparent when we look at patterns of trade Asia dominates exports generating more than 50 per cent of the world total Figure 104 shows the leading clothing exporters in terms of their share in 2000 and 2007 Chinas share of world clothing exports almost doubled between 2000 and 2007 in 1980 China generated a mere 4 per cent of world clothing exports The EU has maintained its position but this aggregate figure includes intraregional exports and also masks significant geographical shifts within the EU see below In terms of clothing imports the most striking feature is the spectacular increase in the US share In 1980 16 per cent of the world total went to the US in 2007 its share was 24 per cent about the same as the extraEU The net result is that both the US and the EU have huge trade deficits in clothing The US deficit amounts to 81billion that of the EU to 60billion Between 2000 and 2007 imports of Chinese clothing to the US accelerated by 18 per cent per year and to the EU by 21 per cent per year Growth of clothing imports from smaller East Asian countries grew even more spectacularly US clothing imports from Vietnam for example increased by 35 per cent between 2006 and 2007 In contrast US clothing imports from Mexico fell by 15 per cent between 2006 and 2007 Such spectacular shifts appear to be related to Chinas accession to the WTO and to the abolition of the MFA in 2005 see later section 10Dicken4084Ch10indd 305 19102010 35120 PM Part Three The Picture in Different Economic Sectors 306 Changing patterns of consumption At the most basic level clothing satisfies one of the most fundamental human needs But beyond that basic level demand for clothing becomes more discretion ary and subject to a whole variety of complex social and cultural forces including peoples desires to express themselves through their choice of clothing Clothing can be a highly symbolic good suggestive of certain selfperceptions and external selfprojections Such variables as income age social status gender ethnicity and so on play very important roles It is a market full of uncertainty and volatility Much of the business of producing and selling clothing therefore depends upon firms abilities to predict or to influence what consumers wish to buy Clothing can be divided into three major types basic garments fashionbasic garments and fashion garments Figure 105 The fastest growth is occurring in the fashionbasic segment3 The major general determinant of both the level of demand and the composition of demand in terms of these three basic categories is the level and distribution of personal income Since personal incomes are so very unevenly distributed geographically at the global scale see Figure 51 it is the affluent parts of the world including the newly affluent consumers in East Asia that largely determine the level and the nature of the demand for gar ments It is in these markets that demand for fashionbasic clothing is growing most rapidly Figure 105 shows that 45 per cent of the dollar volume of US clothing sales is in the basic product category while the remaining expenditure is split more or less evenly between fashion and fashionbasic products On the other hand the generally low incomes in developing countries clearly restrict the size of their domestic garment markets and produce a consumer focus on the Figure 105 Composition of demand for different clothing categories in the US Source based on Abernathy et al 1999 Figure 11 Fashion garments 28 Fashion basic garments 27 Basic garments 45 10Dicken4084Ch10indd 306 19102010 35120 PM The Clothing Industries 307 basic segment although with aspirations among many consumers to move into the fashionbasic segment The conventional economic wisdom is that beyond the level of basic neces sities demand for clothing increases less rapidly than the growth of incomes This poses a major problem for clothing manufacturers and retailers they need to stimulate demand through fashion change they need to shift consumer demand away from lowmargin basic garments to highermargin garments Enormous expenditure goes into promoting fashion products and creating designer labels Designer labelling is basically a device to differentiate what are often relatively similar products and to cater to and to encourage the seg mentation of market demand for garments Such a practice covers a very broad spectrum of consumer income levels from the exceptionally expensive to the relatively cheap Consumer behaviour in the clothing industries is not just about fashion choice It is also about concerns that some producers and retailers are utilizing dubious labour practices to reduce costs Some segments of the clothing industry and some highprofile retailers have become the target of largescale antisweatshop cam paigns Consumer resistance has come to be a major feature of these industries4 As a result of pressure from groups such as Oxfam from labour unions and from other antisweatshop groups the major clothing companies have given undertak ings to monitor the operations of their suppliers and subcontractors to remove illegal practices especially employment of child labour The major UK retailers have promised to end contracts with firms that contravene their guidelines Similarly in the US leading clothing firms including Nike Liz Claiborne Nicole Miller L L Bean and Reebok subscribe to a voluntary code of conduct to eliminate domestic and overseas sweatshop conditions and to back the Fair Labor Association However new cases of labour exploitation in subcontracting factories con tinually appear in the media The process of monitoring and detection is dif ficult It is even more difficult to monitor the practice of homeworking which again tends to be highly exploitative of the most disadvantaged groups who work at home for minimal rates of pay and no benefits But in an indus try as fragmented and organizationally complex as clothing this is an immense task Codes of conduct are awfully slippery Unlike laws they are not enforceable5 Despite such confusion and continuing evasion of such codes by some companies there is no doubt that some progress has been made in improving conditions in these industries although problems certainly remain A recent initiative known as Better Factories Cambodia for example linked to the ILO and supported financially by such companies as Nike Reebok Levi Strauss WalMart and HM is being heralded as a model initiative in the industry These issues of company codes of conduct will be discussed in more depth in Chapter 17 10Dicken4084Ch10indd 307 19102010 35120 PM Part Three The Picture in Different Economic Sectors 308 Production costs and technology In clothing manufacture capital intensity is generally low labour intensity is generally high the average plant size is small and the technology is relatively unsophisticated These characteristics contrast markedly with other parts of the textilesclothing production circuit as Figure 106 shows Figure 106 Variations in production characteristics between major components of the textilesclothing production circuit Low High Medium Small Simple High Low High Large Sophisticated Average size of production unit Capital intensity Labour intensity Material costs Technology Garments Textiles Fibres synthetic Production characteristics Labour Variations in labour costs Labour costs are the most significant production factor in the clothing indus tries Figure 107 shows just how wide the labour cost gap can be between different producer countries The spread is enormous and appears to be getting wider The highly uneven geography of labour costs and the increased ability of manufacturers to take advantage of such differences because of improve ments in the speed and relative costs of transportation and communications drives most of the locational shifts in the clothing industries The major advan tage of lowlabourcost producers lies in the production of basic items which sell largely on the basis of price rather than in fashion garments in which style is more important The difference between the two is one of rate of product turnover Fashion garments have a rapid rate of turnover reflecting the idiosyn crasies of particular markets Geographical proximity to such markets is vital and this helps to explain the survival of many developed country clothing manufacturers It also partly explains the relative advantage of lowcost coun tries located close to the major consumer markets of the US eg Mexico the Caribbean Europe eg Central and Eastern Europe the Mediterranean rim and Japan the Asian countries We will return to this regional situation in the final section of this chapter 10Dicken4084Ch10indd 308 19102010 35120 PM The Clothing Industries 309 Characteristics of the labour force and conditions of work Some 80 per cent of the workers in the clothing industries are female6 A sub stantial proportion of the labour force is also relatively unskilled or semiskilled The specific sociocultural roles of women in particular their family and domes tic responsibilities also make them relatively immobile geographically A further characteristic of the clothing workforce in the older industrialized countries is that a large number tend to be immigrants or members of ethnic minority groups This is a continuation of a very long tradition The early clothing indus tries of New York London Manchester and Leeds in the late nineteenth and early twentieth centuries were major foci for poor Jewish immigrants Subsequent migrants from other origins have also seen the industry as a key point of entry into the labour market The participation of Italians and Eastern Europeans in both the US and the UK has been followed more recently by the largescale employment of blacks Hispanics and Asians in the US and by nonwhite Commonwealth immigrants in the UK The history of these industries is one of appalling working conditions in sweat shop premises At least in the clothing industries of the developed economies such conditions are now relatively rare factory and employment legislation have seen to this But the sweatshop has certainly not disappeared from the clothing indus tries of the big cities of North America and Europe The highly fragmented and often transitory nature of much of the industry makes the regulation of such Figure 107 Hourly labour costs in the clothing industries 2008 Source Werner International 0 10 20 30 40 Switzerland Belgium Austria Japan France Germany Australia Ireland Italy Greece Spain United Kingdom United States Israel New Zealand Portugal Taiwan Czech Rep South Korea Uruguay Poland Estonia Latvia Slovakia Argentina Lithuania Turkey Brazil Morocco South Africa Colombia Mexico Tunisia Peru China coastal Bulgaria Thailand Malaysia China inland Egypt India Indonesia Vietnam Pakistan Bangladesh US per operatorhour 10Dicken4084Ch10indd 309 19102010 35121 PM establishments extremely difficult The result has been a major resurgence of clothing sweatshops in some big Western cities In the rapidly growing clothing industries of the developing countries the labour force is similarly distinctive Employment tends to be geographically concentrated in the large burgeoning cities and in the export processing zones The labour force is overwhelmingly female and predominantly young Many workers are firstgeneration factory workers employed on extremely low wages and for very long hours a sevenday week and a 12 to 14hour day are not uncommon Employment in the clothing industry in particular tends to fluctuate very markedly in response to variations in demand Hence a very large number of outworkers is used women working as machinists or handsewers at home on low piecework rates of pay Such workers are easily hired and fired and have no protection over their working conditions Many are employed in contravention of government employment regulations Yet there is no shortage of candidates for jobs in these fastgrowing industries in some developing countries Factory employment is often regarded as preferable to un or underemployment in a povertystricken rural environment A factory job does provide otherwise unattainable income and some degree of individual freedom Often the wages earned are a crucial part of the familys income and there is much family pressure on young daughters to seek work in the city clothing factories or in the EPZs Technological change Both the cost of production and the speed of response to changes in demand are greatly influenced by the technologies used Technological innovation can reduce the time involved in the manufacturing process and make possible an increased level of output with the same size or even smaller labour force As global competition has intensified in the clothing industries the search for new laboursaving technologies has increased especially among developed country producers Two kinds of technological change are especially important those that increase the speed with which a particular process can be carried out those that replace manual with mechanized and automated operation The nature of the clothing production process means that the potential for such innovation varies very considerably between the different stages shown in The basic reason is the nature of the production process itself where twodimensional materials ie cloth that is rather soft and limp in nature are subjected to a series of individual labourintensive handlingassembly steps culminating in a product which then fitsdrapes a threedimensional human body Hence most of the recent technological developments in the industry including those based on microelectronic technology have been in the nonsewing operations grading laying out and cutting material in the preassembly stage and in warehouse management and distribution in the postassembly stage The application of computercontrolled technology to these operations can achieve enormous savings on materials wastage and greatly increase the speed of the process for example the grading process may be reduced from four days to one hour computercontrolled cutting can reduce the time taken to cut out a suit from one hour to four minutes But these developments do not reach the core of the problem The sewing and assembly of garments account for 80 per cent of all labour costs in clothing manufacture So far only very limited success has been achieved in mechanizing and automating the sewing process Current technological developments in the manufacture of clothing are focused on three areas Increasing the flexibility of machines to enable them to recognize oddly shaped pieces of material pick the pieces up in a systematic manner and align the pieces on the machine correctly whilst also being able to sense the need to make adjustments during the sewing process Addressing the problem of sequential operations particularly the difficulty of transferring semifinished garments from one work station to the next while retaining the shape of the limp material Developing the unit production system to deliver individual pieces of work to the operator on a conveyor belt system This greatly reduces the amount of wasted production time spent by the operator on unbundling and rebundling work pieces The handling process has been estimated to take up to 60 per cent of the operators total time The drive to introduce such new technologies has been stimulated by very lowcost competition from developing countries But cost reduction is not the only benefit derived from the new technologies At least as important if not more so are the time savings that result from automated manufacture This has two major benefits Speeding up the production cycle reduces the cost of working capital by increasing the velocity of its use It becomes possible for the manufacturer to respond more quickly to customer demand In addition electronicpointofsale EPOS technologies permit a direct realtime link between sales reordering and production As the production circuit has become increasingly buyer driven these ITbased innovations have become extremely important They not only permit very rapid response to sales and demand at the point of sale but also enable the buyer firm to pass on the costs of producing and holding inventory to the manufacturer These technological developments when combined with the pressures exerted by the big buyers to be faster and more flexible see below create enormous stresses on supplier firms and consequently on the labour force Part Three The Picture in Different Economic Sectors 314 regarded as a deliberate dragging of feet by the worlds two largest textiles and garments markets In response European and US producers argued that develop ing countries needed to be more positive in increasing access to imports into their own domestic markets Finally on 1 January 2005 the MFA was abolished But of course this was not the end of the story Both the US and the EU set up monitoring procedures and negotiated new import quotas with China which lasted until the end of 2008 Inevitably most of the concern voiced by both developed and developing country clothing producers has focused on China which appears to be the most likely beneficiary of MFA abolition In a preliminary assessment in mid 2005 the ILO found that Bangladesh Sri Lanka Cambodia and Indonesia have been able to increase their market shares while Pakistan and Thailand have been able to main tain theirs13 The more recent experience of Cambodia also suggests that with the exception of the EU market the increasingly competitive environment created by the abolition of the MFA did not undermine expansion of the industry prior to the onset of global recession in 200814 Indeed the fact that the final phaseout of quotas in 2008 coincided with the global recession which severely dampened down clothing exports has made it even more difficult to assess the longterm impact of the abolition of the MFA on the global clothing industries15 Corporate strategies in the clothing industries A highly fragmented industry but increasing retailer dominance The clothing industries are relatively rare instances of globally significant indus tries that are important in many developing countries rather than in just a few But although vast numbers of mostly small developing country firms are involved in clothing production the industrys globalization has been driven primarily by developed country firms Indeed it is paradoxical that a significant proportion of the clothing imports that are the focus of such concern in developed countries are in fact organized by the international activities of those very countries own firms But the processes and strategies involved are both complex and dynamic One fundamental point needs to be made the globalization of the clothing indus tries cannot be explained simply as a relocation of production in search of low labour costs Other factors are involved including in particular orientation to specific markets The manufacture of clothing is heavily fragmented and far less dominated by large firms than textiles Even in this archetypal smallfirm industry however large firms are becoming increasingly important Only they can afford to invest in the new technologies and to build a worldwide brand image based on mass advertising 10Dicken4084Ch10indd 314 19102010 35121 PM Part Three The Picture in Different Economic Sectors 316 dominated largely by the mass market retailers demand was for long production runs of standardized garments at low cost As the market has become more differ entiated and more frequent fashion changes have become the rule manufacturers have been forced to respond far more rapidly to retailer demands Under such cir cumstances the time involved in meeting orders becomes as important as the cost Two to four fashion seasons each year was once an industry standard for gar ment retailing now the norm is six to eight and the Spanish retailer Zara has led the move toward a model that puts out twelve seasons a year Quick response means shorter production lead times that is the period from when the order is received to when the garments must be shipped off to the market these lead times are falling significantly in step with the shorter seasonal cycles Fashion is fickle buyers typically demand rapid response flexibility from suppliers Lead firms are placing orders for smaller initial batches of garments and then following up with rapid reorders for styles that sell well18 This basic shift in the structure of marketing is having repercussions through out the clothing industries and influencing both the adoption of new tech nologies and also corporate strategies as we shall see in later sections of this chapter Although relatively few retail chains are themselves manufacturers of garments they are very heavily involved in subcontracting and outsourcing arrangements The production circuit in these industries is becoming trans formed into a buyerdriven circuit Figure 108 shows how the modern lean manufacturerretailer system differs from the traditional system In the new system deliveries of newreplenishment items are very frequent based on real time sales information Rather than large consignments of garments much smaller quantities are delivered as needed little if any backup stock is held by the retailer Shipments are for the most part direct from manufacturer to retailer The boundary between production and retailing therefore is becoming increasingly blurred as the power within the production circuit shifts further towards the buyers including the department stores mass merchandisers discount chains and fashionoriented firms as well as the specialized buyers Precisely how these organize the sourcing of their garments varies according to the position they occupy within the market The demise of the MFA see above seems likely to have a considerable impact on the number and location of suppliers being used by the large buyers Industry sources claim that large retailers and manufacturers such as Gap JC Penney Liz Claiborne and WalMart that once sourced from 50 or more countries will source from only 1015 countries when quotas no longer con strain their sourcing decisions19 The 2008 recession has accelerated this trend the number of suppliers serving the US clothing market fell by 70 per cent in 2008 as buyers focused their purchasing more selectively20 10Dicken4084Ch10indd 316 19102010 35121 PM The Clothing Industries 317 Figure 108 Changing relationships between garments manufacturers and retailers Source based on Abernathy et al 1999 Figures 31 41 Apparel plant 1 Retail store 1 Apparel plant 2 Retail store 2 Retail store 3 Manufacturers distribution centre warehouse Retailers distribution centre cross docking Apparel plant n Retail store n Apparel manufacturer Retailer Frequent storespecific shipments Direct store delivery Ongoing replenishment orders Apparel plant 1 Retail store 1 Apparel plant 2 Retail store 2 Manufacturers distribution centre warehouse Retailers distribution centre warehouse Apparel plant n Retail store n Apparel manufacturer Retailer Bulk large shipments Low frequency retail order Orders Orders Product flow Information flow b Lean retailingapparel supplier relations a Traditional retailingapparel supplier relations Strategies of US European and East Asian companies US firms The strategies developed by US clothing firms to cope with the intensified com petition of the 1970s and 1980s were either to focus on the leading edge of the fashion market or to cut costs and raise productivity The larger US firms increased their level of offshore processing using suppliers in developing countries Several strategic mixes have been used by those clothing firms that compete in mass mar kets but on the basis of brand names supported by extensive advertising A good example is the jeans manufacturer Levi Strauss Even by the late 1970s Levi Strauss was spending 50 million a year on worldwide advertising But increasingly it faced the problem of how to adapt to the demographic change which was altering the size of its traditional market segment of 15 to 24yearolds without moving too far from its core product the denim jean One strand of Levi Strausss global strategy was to develop its own branch fac tories in Western and Eastern Europe Latin America and Asia At its peak Levi 10Dicken4084Ch10indd 317 19102010 35121 PM Part Three The Picture in Different Economic Sectors 318 Strauss employed directly some 40000 workers worldwide of whom 28000 were in North America 7000 in Europe and 2000 in Asia But in the late 1980s the company began to make massive cuts in its operations in the US and Europe and to shift more of its operations to lowercost locations In 1998 the company closed 13 of its plants in the US and four in Europe shedding 7400 jobs The fol lowing year 1999 Levi Strauss closed half of its remaining 22 US factories and eliminated 30 per cent of its US labour force almost 6000 jobs At the same time the company reduced the proportion of its production manufactured inhouse to 30 per cent in 1980 Levi Strauss had manufactured 90 per cent of its own production21 In 2002 a further six manufacturing plants were closed in the US with the loss of more than 3000 jobs Finally in 2003 the company announced the closure of its last four remaining North American manufacturing and finishing plants with a loss of a further 2000 jobs22 Levi Strauss therefore has become an entirely offshore producer It has at the same time entered into licensing agreements with other firms including Li Fung see below which will sell its own Levibranded tops directly to US retailers23 Levi has also very reluctantly had to agree to supply WalMart some thing it had resisted for a long time fearing it would devalue the brand Retailer power won once again European firms The adoption of offshore production strategies by European clothing firms has been most pronounced among German and British companies Already by the 1970s around 70 per cent of all the then West German clothing firms including some quite small ones were involved in some kind of offshore production Roughly 45 per cent of the arrangements involved international subcontracting a further 40 per cent involved varying degrees of equity participation by German firms in local partners The German fashion company Hugo Boss provides a good example Faced with high domestic production costs Hugo Boss has long used offshore subcon tractors In 1989 Boss acquired an American garments producer Joseph Feiss of Cleveland Ohio In 1991 Hugo Boss itself was acquired by Marzotto the Italian textiles and clothing group In addition to sourcing an increasing propor tion of its garments overseas the company also moved strongly into retailing through franchising its brand name in around 200 stores worldwide According to its German chairman we are no longer a productionoriented company Today we are a company with a strong emphasis on creativity and design marketing and logistics24 Similarly the leading British clothing companies have developed a strong focus on offshore production and subcontracting Until very recently Italian firms were the major exception to this strong shift of production to lowcost foreign locations by European producers Italy is the only major European country whose clothing industries have continued to 10Dicken4084Ch10indd 318 19102010 35121 PM The Clothing Industries 319 perform relatively well in the teeth of intensive global competition In general Italian producers have pursued a strategy of product specialization and fashion orientation with the aim of avoiding dependence upon those types of garment most strongly affected by lowcost competition This has involved mainly small firms in a decentralized production system capitalizing on the traditional reputa tion of specific towns or regions such as Como Prato and the like More recently however some Italian firms have established international licensing or production agreements for highfashion and designerlabel products Armani for example is now using some Chinese firms although the company claims that most of its production remains in Italy As a result the localized Italian clothing districts are undergoing major change25 The bestknown Italian company to have developed an especially distinctive strategy of course is Benetton26 Benetton sees itself not as a manufacturer or retailer of garments but as a garments services company But it very much sells itself as an Italian company franchising 6000 stores around the world Whereas most European firms shifted much of their production to Asia most of Benettons garments were until recently still manufactured in Europe mostly in Italy but not by Benetton itself The company used around 500 subcontractors for its actual production many of which are located in the Veneto region of northeast Italy27 This system gave it considerable flexibility in responding to changing demand for its garments Benetton itself performed only those functions mainly design cutting dyeing and packing considered crucial to maintain quality and cost efficiency For a long time Benetton was the only major European clothing firm in the fashionbasic sector to have retained its manufacturing operations in a higher cost European location rather than relocating to lowcost Asian locations It did so by producing a relatively limited range of garments but differentiating them primarily on the basis of colour Most of the others including the Swedish company HM have followed the Asian route However a much newer cloth ing company Zara made spectacular progress by producing fast fashion a wide range of fastchanging fashionbasic garments from its domestic produc tion base Zara owned by the Spanish company Inditex is located in La Coruña in north west Spain the traditional focus of the Iberian textile industry At Inditexs heart is a vertical integration of design justintime production delivery and sales Some 300 designers work at the firms head office Fabric is cut inhouse and then sent to a cluster of several hundred local cooperatives for sewing Production is deliberately carried out in small batches to avoid oversupply While there is some replenishment of stock most lines are replaced quickly with yet more new designs rather than more of the same This helps to create a scarcity value The result is that Zaras produc tion cycles are much faster than those of its nearest rival Swedens Hennes 10Dicken4084Ch10indd 319 19102010 35121 PM Part Three The Picture in Different Economic Sectors 320 Mauritz HM An entirely new Zara garment takes about five weeks from design to delivery a new version of an existing model can be in the shops within two weeks In a typical year Zara launches some 11000 new items compared with the 2000 to 4000 from companies like HM or Americas giant casualfashion chain GAP28 In other words not only has Zara used a manufacturing model long ago jettisoned by the major US and European garments companies that is producing most of its garments inhouse but also it operates within a highly volatile part of the fashionbasic sector of the industry Zara achieved dramatic results by combining highly efficient production and distribution logistics with a continuous monitor ing of the fashion scene In 2008 Zaras parent company Inditex overtook The Gap to become the worlds largest clothing retailer29 However more recently the geography of Zaras production network has become more diverse According to Inditex in 2006 64 of the groups production was carried out in Europe and neighbouring countries while 34 was carried out in Asia Products with a greater fashion component were manufactured in the groups own factories or by suppliers whose processes are significantly integrated with the groups dynamics China seems to account for 12 of Zaras pro duction less than that of its rivals but still considerable for a firm with the reputation of being an anomaly to globalization Today Zara stores are full of garments made in India Pakistan Bangladesh Sri Lanka and Indonesia And the supply chains of Zara also include Morocco Bulgaria Lithuania and Turkey30 A similar situation exists in the case of Benetton which aimed to produce 80 per cent of its clothing items outside Italy mostly in Hungary Croatia and Tunisia by 2007 This compares with 60 per cent in 2004 and around half that five years earlier31 These shifts towards greater nondomestic sourcing have also occurred in the UK firm Marks Spencer MS which built its entire reputation on developing extremely close relationships with domestic rather than foreign suppliers32 MS was involved with these suppliers in every aspect of the manufacturing process from fabric selection to design and finishing Because the suppliers tended to be longestablished financially sound wellequipped and techni cally developed firms they were also able to provide strong design input into the MS lines MS required its suppliers to refrain from bidding for work from other retailers thus allowing MS exclusive access to their design and technological competencies33 However the intensification of competition through the 1990s forced MS either to abandon some of its established UK suppliers or to put pressure on 10Dicken4084Ch10indd 320 19102010 35121 PM The Clothing Industries 323 Malaysia and Mauritius and subsequently in Indonesia and Sri Lanka to get round quota restrictions As the clothing industry in East Asia has matured and especially in response to shifting market conditions its organization has acquired a particular geometry that of triangle manufacturing The essence of triangle manufacturing is that US or other overseas buy ers place their orders with the NIE manufacturers they have sourced from in the past who in turn shift some or all of the requested production to affiliated offshore factories in lowwage countries eg China Indonesia or Guatemala These offshore factories can be wholly owned subsidiaries of the NIE manu facturers jointventure partners or simply independent overseas contractors The triangle is completed when the finished goods are shipped directly to the overseas buyer Triangle manufacturing thus changes the status of NIE manufacturers from established suppliers for US retailers and designers to middlemen in buyerdriven commodity chains that can include as many as 50 to 60 exporting countries Triangle manufacturing is socially embedded Each of the East Asian NIEs has a different set of preferred countries where they set up their new factories These production networks are explained in part by social and cultural factors eg ethnic or familial ties common language as well as by unique features of a countrys historical legacy38 078 078 498 498 494 494 5122 5122 005 005 473 473 1041 1041 10 10 606 606 062 062 028 028 036 036 Trade flows are in billions of dollars Proportional to total value of exports Intraregional exports North America North America 1103bn 763 internal 1103bn 763 internal Europe Europe 1224bn 813 internal 1224bn 813 internal Asia Asia 18097bn 215 internal 18097bn 215 internal Latin America Latin America 1248bn 135 internal 1248bn 135 internal Figure 109 Global trade network in clothing Source calculated from WTO 2009 Table A10 10Dicken4084Ch10indd 323 19102010 35121 PM The Clothing Industries 325 America in order to qualify for dutyfree access This provided a stimulus for the development of a more integrated industry within North America Thus through NAFTA apparel and textile manufacturers are acquiring the freedom and flexibil ity to create duty and quota free transborder production networks that best suit their individual needs41 Because Mexicos comparative advantage lies in clothing production while the US comparative advantage lies in textile manufacture synthetic fibre production and retailing a clear division of labour has emerged The combination of the NAFTA and the benefits of geographical proximity together with low production costs have stimulated many clothing firms in the US to source more of their gar ments from Mexico The precise form of this geographical division of labour is still evolving Traditionally Mexicos clothing industry was dominated by maquiladora produc tion simple sewing of garments made from imported fabrics and using extremely cheap labour see Figure 222 In other words it was dominated by the very basic operations in a vertically integrated system coordinated and regulated by US manufacturers and retailers Although this is still the dominant mode of operation there are signs of rather more sophisticated arrangements in which Mexican firms perform some of the higherlevel functions in the production chain There is some evidence of the development of fullpackage production in which selected local manufacturers are responsible for the entire process of clothing production Figure 1010 shows an example of this development in the Torreón district of Siete Leguas JC Penney Textile mills Textile mills Wrangler US lead firms United States Wrangler de México OMJC Aalfs Libra Kentucky Lajat The Gap Textile mills Fullpackage manufacturers Joint ventures US subsidiaries Fullpackage networks orders Assembly networks cut parts Assembly plants Subcontractors Mexico Manufacturer Marketer Retailer Figure 1010 Development of fullpackage garments production in Torreón Mexico Source based on Bair and Gereffi 2001 Figure 2 10Dicken4084Ch10indd 325 19102010 35122 PM Part Three The Picture in Different Economic Sectors 326 Coahuila in northern Mexico However even this most developed fullpackage cluster in Mexico has experienced significant declines in both production and employment in recent years42 At the same time the geographical pattern of clothing production within Mexico itself is changing There appears to be a significant shift in southern California sourcing from the western border region to central Mexico and to a lesser extent the northern states excluding the border cities and the Yucatan peninsula The central states of Guanajuato Puebla Tlaxcala and the greater Mexico City area fig ure prominently as new production sites Also included is the west coast state of Jalisco located due west of Mexico City43 Major reasons for the relative shift away from the border are that labour costs in the interior of Mexico tend to be lower than along the border while the quality of production tends to be higher There is also a much lower rate of labour turn over away from the border zone The rapid growth of Mexico as a local source of clothing imports into the US has had significant implications for the Caribbean Basin producers to whom the level of preferential access to the North American market under NAFTA is denied In particular the Caribbean countries must still pay import duty on the value added in the clothing assembly process a contentious issue for these producers However with the abolition of the MFA the huge shadow of China hangs over the North American clothing industries Chinas share of US clothing imports had already once again overtaken those of Mexico by 2003 two years before the end of the MFA and by 2005 Chinese clothing imports into the US were more than three times greater than Mexicos Clearly within the North American clothing market the battle between low production costs and market proximity is still being waged Europe Europe is the most highly integrated regional market in the world and its clothing industries are no exception44 Historically most European clothing production was located in the leading European economies themselves notably France Germany Italy and the UK During the past three decades however the clothing industries of these countries have experienced massive decline and restructuring Some of this has been caused of course by the rise of the low cost Asian producers But much of the restructuring is the result of the geo graphical reconfiguration of clothing production within what might be called greater Europe the EU27 together with nonmember countries in Eastern 10Dicken4084Ch10indd 326 19102010 35122 PM The Clothing Industries 327 and Central Europe ECE the CIS and the Mediterranean rim In Europe of course the high level of politicoeconomic integration embodied in the EU is a critical influence Through the 1980s and 1990s European clothing production networks became geographically more extensive but within an expanded regional context This is a situation created by the intersection of the changing sourcing strategies of cloth ing firms and the changing political agreements with ECE and Mediterranean countries some of which became or will become in the future members of the EU It is a pattern with some clear geographical consistencies but also with considerable dynamism as some supplier countries lose their dominance and others emerge As in the case of Mexico and the Caribbean countries the advantages of geo graphical proximity in the clothing industries of Europe in terms of their effect on speed of delivery can offset lower production costs at more distant locations It takes 22 days by water to reach the UK from China while products from Turkey can take as little as five days to arrive45 Of course both sets of forces oper ate The continued attraction of lowcost sourcing of garments is shown most graphically by Chinas increased share of the EU clothing market from 14 per cent in 1995 to 30 per cent in 2005 and rising with the abolition of the MFA as we have seen Thus although a substantial proportion of the EUs sourcing of clothing still takes place in Asia the countries on the immediate geographical periphery of the EU have become tightly integrated into the production networks of European clothing manufacturers and the purchasing networks of European retailers This process of regionalization of European clothing production networks became increasingly common from the early 1980s when Outward Processing Trade OPT provisions were introduced by the EU These established import quotas between the EU and individual countries in Eastern and Southern Europe Such provisions facilitated significant patterns of production relationship between EU clothing firms both producers and retailers and clothing manufacturers in lowercost countries nearby German firms were especially heavily involved in such activities Overall more than 80 per cent of all West German garment imports manufactured under subcontracting arrangements came from the former East Germany Poland Hungary Romania Bulgaria and the former Yugoslavia46 Conversely Italian producers until very recently continued to keep production at home However this has changed though less drastically as we saw earlier Similar trends have occurred among the clothing manufacturers and retailers in the other EU countries often with distinctive geographical sourcing patterns with preferred supplier countries The regional reconfiguration of the clothing industries in Europe therefore can be summarized as follows47 10Dicken4084Ch10indd 327 19102010 35122 PM The Clothing Industries 329 4 See for example Klein 2000 Ravoli 2005 5 Klein 2000 430 6 See the contributions in Hale and Wills 2005 7 Ross 2002 8 Detailed accounts of technology in the clothing industries are provided by Abernathy et al 1999 OECD 2004 Chapter 4 9 OECD 2004 139 10 Raworth and Kidder 2009 11 See Hoekman and Kostecki 1995 Chapter 8 ILO 2005 Nordås 2004 OECD 2004 Ravoli 2005 12 Hoekman and Kostecki 1995 209 13 ILO 2005 13 14 Beresford 2009 366 15 See Bair 2008 for a discussion of some of the issues involved 16 Hurley 2005 Figure 51 17 The increasingly significant role of the retailers in the clothing industries is discussed by Abernathy et al 1999 2004 Appelbaum 2008 Gereffi 1999 Taplin 1994 18 Raworth and Kidder 2009 174 19 Appelbaum 2008 71 20 Financial Times 10 December 2008 21 Financial Times 23 February 1999 22 Financial Times 26 September 2003 23 Financial Times 20 August 2003 24 Financial Times 9 January 1996 25 Dunford 2006 26 Jarillo 1993 Schary and SkjøttLarsen 2001 provide accounts of Benettons operations 27 Schary and SkjøttLarsen 2001 103 28 The Economist 18 June 2005 29 The Guardian 12 August 2008 30 Tokatli 2008 34 31 Financial Times 23 July 2004 32 Tokatli et al 2008 33 Tokatli et al 2008 265 34 Tokatli et al 2008 266 268 35 Schary and SkjøttLarsen 2001 3834 36 The following examples come from Appelbaum 2008 numbers in parentheses refer to pages in that work 37 Gereffi 1996 1999 and Khanna 1993 provide detailed analyses of the changing industry in Asia Dicken and Hassler 2000 analyse Indonesian clothing networks within East Asia 38 Gereffi 1996 978 39 See Abernathy et al 1999 2004 Bair 2002 2006 Bair and Gereffi 2003 Gereffi and Memedovic 2004 Gereffi et al 2002 Kessler 1999 40 Bair 2006 Table 2 10Dicken4084Ch10indd 329 19102010 35122 PM Part Three The Picture in Different Economic Sectors 330 41 Kessler 1999 569 42 Bair 2006 2240 43 Kessler 1999 584 44 Bair 2006 Begg et al 2003 Palpacuer et al 2005 Smith et al 2005 2008 45 Financial Times 30 August 2005 46 Fröbel et al 1980 47 Begg et al 2003 numbers in parentheses in the following list refer to pages in that work 48 Smith et al 2008 Table 1 49 Smith et al 2008 304 10Dicken4084Ch10indd 330 19102010 35122 PM Eleven WHEELS OF CHANGE THE AUTOMOBILE INDUSTRY CHAPTER OUTLINE All change The automobile production circuit Global shifts in automobile production and trade Changing patterns of consumption Technological change in the automobile industry From mass production to lean production Changing the product the search for cleaner more effi cient cars The role of the state Protection and stimulation Environmental regulation Corporate strategies in the automobile industry Concentration and consolidation Changing relationships between automobile assemblers and component manufacturers Contrasting transnationalization strategies of the major automobile producers The US big two Japanese producers European producers Korean Indian and Chinese producers Regionalizing production networks in the automobile industry Europe North America East Asia All change The 2008 global financial crisis hit the automobile industry with cataclysmic force Other than the financial services sector itself see Chapter 12 no other 11Dicken4084Ch11indd 331 19102010 35147 PM 332 Part Three The Picture in Different Economic Sectors major industry attracted such highprofile attention in the turmoil Former behemoths of the industry faced bankruptcy extensive corporate restructuring began to occur especially in North America Governments injected massive finan cial assistance into the automobile industries within their territories to try to stem huge job losses and to ride out the crisis All of this in what Peter Drucker once called the industry of industries1 The internal combustion engine was so to speak the major engine of growth until the mid 1970s and is still seen as a key contributor to industrial development The industrys significance lies both in its scale and in its linkages to many other manufacturing industries and services Around 8 million people are employed directly in automobile production If we add those involved in selling and servicing vehicles we reach a total of up to 20 million workers Not only this Its products are responsible for almost half the worlds oil consumption and their manufacture uses up nearly half the worlds output of rubber 25 of its glass and 15 of its steel2 The global automobile industry is made up of very large corporations which have increasingly organized their activities on transnationally integrated lines In so doing they engage very closely sometimes collaboratively sometimes conflictually with national governments themselves anxious to establish nurture or enhance automobile production within their territories It is not surprising therefore to find that competitive bidding for investment is endemic in this industry It is also an industry in which after decades of dominance by firms from developed economies new global players from India from China from South Korea have arrived on the scene The industry of industries is beginning to look very different from the apparently stable picture of a few decades ago Change is indeed in the air The automobile production circuit The automobile industry is essentially an assembly industry It brings together an immense number and variety of components At the centre of the automo bile production circuit Figure 111 is the complex set of relationships between the assemblers of vehicles and the suppliers of components which account for between 50 and 70 per cent of the cost price of the average car3 As Figure 111 shows there are three major processes prior to final assembly the manufacture of bodies of components and of engines and transmissions which may be performed by the assemblers as part of a vertically integrated 11Dicken4084Ch11indd 332 19102010 35147 PM 333 The Automobile Industry Figure 111 The automobile production circuit Design Components manufacture Bodies Manufacture and stamping of body panels Body assembly and painting Components Manufacture of mechanical and electrical components eg instruments steering components carburettors braking systems etc Manufacture of wheels tyres seats windscreens exhaust systems etc Engines and transmissions Forging and casting of engine and transmission components Machining and assembly of engines and transmissions Final assembly Distribution Tied outlets of car manufacturers Independent distributors Consumption Variation by income age tastes and preferences First tier suppliers Second tier suppliers Third tier suppliers Steel and other metals Rubber Electronics Plastic Glass Textiles Major supplying industries Flows of materials and products Flows of information including customer orders sequence However there is a strong trend towards the deverticalization of automobile production as assemblers pass more responsibility to the suppliers Figure 111 shows just three tiers of suppliers although there can be more4 The firsttier suppliers supply major components systems direct to the assem blers and have significant research and development and design expertise Secondtier suppliers generally produce to designs provided by the assemblers or by the firsttier suppliers while thirdtier suppliers provide the more basic components In essence the automobile industry is a strongly producerdriven industry as opposed to the predominantly buyerdriven nature of the clothing industries The intensely transnational nature of automobile production renders the concept of national automobile industries virtually meaningless although governments like to believe otherwise All are connected to a great or lesser degree and in multifari ous ways to the larger transnational production networks which are in a continuous state of flux The old idea that a countrys automobile industry followed a general ized developmental sequence starting with local assembly of vehicles from a full kit of component parts and moving through to fullscale manufacture of automobiles is no longer an accurate picture of reality 11Dicken4084Ch11indd 333 19102010 35147 PM Part Three The Picture in Different Economic Sectors 334 10000 5000 1000 2500 100 Automobile production thousands Figure 112 Global production of passenger cars Source calculated from OICA International Organization of Motor Vehicles Manufacturers statistics 2009 Global shifts in automobile production and trade For a good many years the map of automobile production remained fairly stable But that is changing Figure 112 shows that current production is very strongly concentrated geographically Not surprisingly the three major regions North America Europe and Asia contain around 90 per cent of total production However the level of concentration is even higher almost twothirds of global production is concentrated in just seven countries Of these Japan is by a large margin the worlds leading automobile producer 188 per cent followed by China 128 per cent Germany 105 per cent the US 72 per cent South Korea 66 per cent Brazil 49 per cent and France 41 per cent Todays global production map is the outcome of some profound develop ments over the past four decades as new centres of production have emerged and as older centres have declined in importance Figure 113 Initially by far the most dramatic development was the spectacular growth of the Japanese automobile industry Most recently it has been the remarkable growth of the 11Dicken4084Ch11indd 334 19102010 35147 PM The Automobile Industry 335 Chinese automobile industry5 There has also been significant growth of auto mobile production in Spain Mexico South Korea Brazil India Russia and the emerging market economies of Eastern Europe Conversely the former domi nant producer the US has seen its share of world automobile production fall dramatically Between 2007 and 2008 of course there was a dramatic decline in auto mobile production as the credit crunch suddenly took hold US and Canadian car production fell by almost 20 per cent Japans and Italys by a little over 20 per cent Frances by 15 per cent South Koreas by 7 per cent and the UKs by 6 per cent Conversely Brazils output grew by 8 per cent Chinas by 5 per cent and Indias by 3 per cent Such differential growth reflects a deeper shift in automobile production growth to a number of developing countries A high level of geographical concentration is also evident in the pattern of automobile trade Figure 114 But in this case there are also huge differences in the balance of trade On the one hand the US has an automobile trade deficit of Japan China Increased shares South Korea Spain Brazil Mexico India Canada United States Decreased shares Germany France Italy 1960 2007 United Kingdom 0 10 20 Percentage of world total automobile production 30 40 50 Figure 113 Major changes in the relative importance of automobile producing countries Source calculated from MVMA World Motor Vehicle Data OICA statistics 2009 11Dicken4084Ch11indd 335 19102010 35147 PM Part Three The Picture in Different Economic Sectors 336 112 billion on the other Japan has an automobile trade surplus of almost 160 billion In summary an industry dominated in 1960 by the US and to a much lesser extent Europe was transformed initially during the 1970s and 1980s by the spectacular growth of Japan as a leading automobile producer This was reflected in terms of growth of production in Japan itself of Japanese exports to the rest of the world and of the increasing proportion of Japanese automobile production located abroad The recent emergence of China as a major producer of automo biles may soon be enhanced by its increasing importance as an exporter of cars In 2005 for the first time China exported more cars than it imported its sights set on breaking into the North American market6 At the same time other potentially important new centres of automobile production are emerging nota bly in India and Russia More broadly the industry has become increasingly concentrated in the three major global regions of North America Europe and East Asia Much of this reconfiguration of global automobile production is 0 25 50 75 100 125 150 175 200 225 Trade in automotive products billions Exports Imports EU 27 Japan US Canada South Korea Mexico China Turkey Brazil Thailand Russia Figure 114 The worlds leading exporters and importers of automobiles Source WTO 2009 Tables II60 II61 11Dicken4084Ch11indd 336 19102010 35148 PM Part Three The Picture in Different Economic Sectors 338 automobile manufacturers therefore are pinning their hopes on continuing high levels of growth in demand elsewhere especially in Asia Eastern Europe and Latin America Of these it is in Asia that the major growth is expected to occur Whereas the number of vehicles per 1000 population in the US is almost 800 in India it is only 18 and in China it is around 25 The potential for growth is obvious This can be seen already especially in the cities of China where automobile sales have grown at such a phenomenal rate that it is now the largest automobile market in the world In most developing countries the demand is primarily for small cheap cars but among the increasingly affluent segments of the population demand for large luxury cars is growing at remarkable speed While SUVs may have gone out of fashion in the US in China their sales continue to grow apace They like such luxury marques as Mercedes or BMW are significant aspirational goods among the newly rich The slow growth in demand for automobiles in the mature markets is more than merely cyclical There are deeper secular or structural characteristics in these markets that limit future growth in car sales Rapid growth in demand is associated with new demand But as a market matures and automobile ownership levels approach saturation more and more car purchases become replacement pur chases In the mature automobile markets today some 85 per cent of total demand for automobiles is replacement demand Such demand is generally slower growing and also more variable because it can be postponed Even as consumers in China India and other emerging economies proudly take delivery of their first vehicle many Americans Europeans and Japanese are coming to the conclusion either that they no longer want or need a car or that they can hold on to their existing model for longer In America the aver age age of tradeins has soared to 75 months at the end of last year from 62 months in the final quarter of 2006 Another factor constraining future demand for cars is paradoxically their improving quality Vehicles do not rust or break down as they used to most can be driven for many years allowing recessionspooked drivers to delay replacing their current vehicles8 The third characteristic of todays automobile market is its increasing segmentation and fragmentation as affluent consumers demand different types of vehicle for dif ferent purposes or want more sophisticated specifications as the demographic profile of consumer markets changes and as emerging customers demand basic lowcost cars The need to respond to an increasingly diverse set of customers generated a large proliferation of segments and models the number of different vehicle models offered for sale in the US market alone doubled from 1980 11Dicken4084Ch11indd 338 19102010 35148 PM The Automobile Industry 339 to 1999 reaching 1050 different models in 2000 In addition to the different models there is also a myriad of features that can be added to each of the models9 Taken together the volatile and geographically uneven nature of demand for and consumption of automobiles creates huge problems for the manufacturers In particular the continuing problems of excess capacity facing many of the compa nies result in changes in both how vehicles are manufactured and also where they are manufactured Technological change in the automobile industry From mass production to lean production The basic method of manufacturing automobiles changed very little between 1913 when Henry Ford introduced the moving assembly line and the early 1970s It was the mass production industry par excellence This certainly brought the automobile within the reach of millions of customers To do so however the industry had to produce a limited range of standardized products at huge produc tion volumes around 2 million vehicles per year to obtain economies of scale together with a very high level of worker specialization It was the antithesis of craft production Figure 413 automobile workers were cogs in the continuously running assemblyline machine This situation changed dramatically in the early 1970s Highly efficient and costcompetitive Japanese automobile firms led by Toyota totally trans formed the automobile industry What had appeared to be a stable techno logically mature industry based on wellestablished technologies and organization of production entered a phase of change not unlike the first transformation in the early twentieth century when a mass production system displaced craftbased production The basis of this second transformation was the displacement of mass production techniques by a system of lean production see Figure 413 Within the broad framework of lean production systems two of the most significant technological developments are related to the architecture of the vehicle The first is the increasing use of shared platforms between different vehicle models Hitherto each model produced by an individual manufacturer aimed at different market segments was distinctive not only on but also below the surface By using a smaller number of common platforms it is possible to share many components 11Dicken4084Ch11indd 339 19102010 35148 PM Part Three The Picture in Different Economic Sectors 340 across what are on the surface very different vehicles often in different price segments of the market So one of the paradoxes of the modern automobile industry is that although the number of models has increased such diversity is based on a much smaller number of platforms Beauty it seems really may only be skin deep as far as automobiles are concerned Platform sharing has become the norm among most automobile manufacturers For example VW reduced the number of platforms used in its Audi Seat Skoda and VW models from 16 to four although recently VW appeared to be moving away from this practice10 GM reduced its number of platforms from 25 to eight and used the same platform for seven vehicles across four of its brands11 Among Japanese producers Nissan reduced its number of platforms from 24 to five Toyota from 20 to seven The second significant technological development linked to vehicle architec ture is the modularization of certain components and the development of com ponent systems see Chapter 5 In the case of automobiles a module is a group of components arranged close to each other within a vehicle which constitute a coherent unit A component system is a group of components located through out a vehicle that operates together to provide a specific vehicle function Braking systems electrical systems and steering systems are examples12 A modu lar and systembased architecture has become the norm although it is not as easy to implement in the automobile industry as in some other industries such as electronics13 Many of the most significant developments in the technology of automobile manufacture and of the automobiles themselves are based upon the increasing use of electronics The modern car has become completely dependent on electronics for engine management satellite navigation suspension controls and a raft of other enhancements from memory seats to rainactivated windscreen wipers The next big step in the integration of electronics in the vehicle is the connection of all computers on a vehicle intranet which will provide a simple and flexible installation with a minimum of wiring it is believed that electronics will con tinue to grow in all cars accounting for more than 30 of a vehicles value in the executive class to around 20 in 3door hatchbacks14 However the very rapid introduction of complex electronic systems into vehi cles poses problems for an industry whose expertise is in different areas Not only does this make automobile manufacturers more dependent on electronics and software suppliers but also the electronics in the car bring six or seven times more faults than normal mechanical parts15 Problems of reliability and their impact on brand image have become important again as in earlier stages of technological change The increased complexity of vehicle production produces huge pressures on materials costs which have escalated in price in recent years 11Dicken4084Ch11indd 340 19102010 35148 PM The Automobile Industry 343 Every major automobile producing country but especially the US and European countries invested massive funds to try to save their industries from extinction as the firms lobbied strenuously for support The amount of money involved was astronomical in the billions Several governments including the US Germany France and the UK implemented a cash for clunkers scheme whereby consumers could receive a lump sum to trade in their older cars for new ones The auto assistance packages inevitably altered the relationship between gov ernments and producers at least temporarily This was especially so in the US where in order to receive government aid GM and Chrysler were forced to agree to draconian restructuring measures As one headline put it the US auto industry was forced to opt for the unthinkable supervision by the government But because of the transnationally integrated nature of automobile production and the fact that the major producers have operations in many countries action or inac tion by one government has massive implications for other governments The most egregious example involved the attempts by GM to restructure its European operations by selling a controlling interest to another firm Because GMs major European plants were in its Opel division based in Germany the German govern ment offered a huge amount of financial assistance This immediately raised con cerns amongst other European governments that GMs German plants and jobs would be favoured at the expense of those in the UK Belgium and Spain Politicians and trade union leaders expressed growing fears over Germanys plan to provide billions of euros in loan guarantees for the restructuring of GMs Opel unit warning that the planned rescue was protectionist The furore threatened member states commitment to the single market because of concerns that restructuring at Opel will be driven by political rather than purely commercial considerations21 As it turned out GM ultimately decided against selling its European operations but still bargained with EU governments for state aid At the same time Renault was under pressure from the French government to retain production of the Clio in France instead of moving it to Turkey Other EU governments argued that such pressure could contravene EU regulations on state aid22 Environmental regulation The state is also heavily involved through environmental and vehicle safety poli cies each of which has profound implications for the design technology and materials used in cars and therefore in their cost Complying with changes in legislation can be especially problematical where it involves fundamental design changes Legislation to control noxious emissions from automobile engines has become increasingly stringent But such measures vary enormously from country to country The EU has introduced legislation that will cut carbon emissions by 11Dicken4084Ch11indd 343 19102010 35148 PM Part Three The Picture in Different Economic Sectors 344 19 per cent by 2012 by insisting on tight controls on engine efficiency In the US the Obama administration announced national limits on car exhaust emissions aimed at cutting CO2 by 30 per cent by 2016 At the same time the US govern ment will make billions of dollars available in cheap loans to auto manufacturers to build a new generation of fuel efficient including electric vehicles A more recent development within the EU is policy towards endoflife vehi cles Here the EU has issued a directive under which automobile manufacturers would have to cover the cost of recycling the vehicles they have manufactured It is estimated that the annual cost of this operation in Europe will be around 21 billion euros Manufacturers will have to ensure that recyclable components account for 85 per cent of each vehicles weight Also in the EU significant changes are being implemented to the permitted relationships between manufac turers and distributors in an attempt to increase competition Corporate strategies in the automobile industry Concentration and consolidation From being an industry in which virtually every major producing country had large numbers of nationally based firms the automobile industry is now domi nated by a small number of transnational producers Table 111 At the same time the seemingly permanent dominance of the US Big Three has been destroyed by the rise in particular of Japanese and European firms As Figure 115 shows it has been the spectacular emergence of Japanese firms notably Toyota Nissan and Honda that has created the biggest changes although an unexpected recent development has been the very rapid emergence of the Korean firm Hyundai Table 111 ranks the leading automobile assemblers by the number of passenger cars produced The most important single development is that GM has finally been displaced from its longtime number one position to number three The consolidation of large numbers of automobile producers into a much smaller number of large TNCs is the result of successive waves of merger and acquisition over many years as well as the organic growth of some individual producers During the 1990s for example both GM and Ford acquired firms in the luxury market segments Saab in the case of GM Jaguar Land Rover and Volvo in the case of Ford BMW acquired the British company Rover In 1999 the French company Renault acquired 44 per cent of the equity in the Japanese firm Nissan and also bought the South Korean firm Samsung But the biggest acquisi tion by far was of the American firm Chrysler by the Germanowned Daimler Benz in 1998 In 2000 DaimlerChrysler acquired 34 per cent of Mitsubishi 11Dicken4084Ch11indd 344 19102010 35148 PM The Automobile Industry 345 Motors In 2002 GM acquired the Korean assets of the bankrupt Korean firm Daewoo Similar consolidation and concentration trends have occurred in the compo nents industries as leading companies have tried to develop positions as global suppliers Both Delphi and Visteon were formerly inhouse component divisions of GM and Ford respectively before being hived off Both have experienced seri ous problems of surviving as independent companies Delphi filed for Chapter 11 bankruptcy protection in 2005 As with the assemblers much of the continuing consolidation among suppliers is being driven by mergers and acquisitions Several of these consolidations were relatively shortlived BMW for example quickly divested itself of Rover More dramatic though not unexpected was the breakup of the DaimlerChrysler marriage in 2007 But the 2008 crisis resulted in even bigger changes GM contemplated selling its entire European operation Rank by production 1 2 3 4 5 6 7 8 9 10 11 12 13 14 GM GM GM GM GM GM GM GM GM GM Ford Ford Ford Ford Ford Ford Ford Ford Ford Ford Honda Honda Honda Honda Honda Honda Honda Honda Honda Honda Hyundai Hyundai Hyundai Hyundai Hyundai Hyundai Suzuki Suzuki Kia Kia Toyota Toyota Toyota Toyota Toyota Toyota Toyota Toyota Toyota Toyota Nissan Nissan Nissan Nissan Nissan Nissan Nissan Nissan Nissan Nissan 1970 1982 1994 2003 2008 GM GM Ford Ford Toyota Toyota 1960 Figure 115 The rise of Japanese and Korean automobile manufacturers Table 111 The world league table of automobile manufacturers 2008 Headquarters No of passenger Rank Company country cars produced 1 Toyota Japan 7768633 2 Volkswagen Germany 6110115 3 GM US 6015257 4 Honda Japan 3878940 5 Ford US 3346561 6 PeugeotCitroën France 2840884 7 Nissan Japan 2788632 8 Hyundai South Korea 2435471 9 Suzuki Japan 2306435 10 Renault France 2048422 Source based on OICA statistics 11Dicken4084Ch11indd 345 19102010 35148 PM Part Three The Picture in Different Economic Sectors 346 Opel to a CanadianRussian consortium led by the Canadian auto parts firm Magna International but finally pulled back GM sold its Swedish luxury brand Saab and also its Hummer brand Ford sold its JaguarLand Rover business to the Indian company Tata in 2008 and also sold Volvo to the Chinese firm Geely Chrysler having gone into Chapter 11 bankruptcy has been merged into an alli ance with the Italian firm Fiat The significant point about these changes is that they have been dictated by the US government as an essential condition of its huge financial assistance package Consolidation continues in the industry quite apart from these enforced changes VW for example has acquired a 20 per cent equity stake in the Japanese firm Suzuki primarily to expand its presence in the Asian smallcar market PeugeotCitroën plans to buy a stake in Mitsubishi Motors23 However not all growth has been through acquisition and merger The worlds most successful automobile company Toyota has grown entirely organically Apart from scooping up Daihatsu to get smallcar engineering and engines years ago Toyota has con centrated solely on improving its own offering with a relentless focus on effi ciency costcutting and a flood of new variations of successful models brought to market at an increasingly rapid rate24 In addition to these changes in ownership and control all the worlds automo bile manufacturers are deeply embedded in collaborative agreements with other manufacturers In recent years there have been about 100 new alliances in the automobile industry per year The majority of these are manufacturing joint ventures indicating the high degree of globalization in this sector25 In fact the automobile industry is a veritable spiders web of short and longterm technical and marketing alliances in a continuous state of flux One example is the new strategic partnership between Daimler Renault and Nissan26 Technology joint ventures continue to be especially important for all automobile manufacturers because of the huge cost of producing new cars and components Changing relationships between automobile assemblers and component manufacturers The fundamental driving force behind consolidation amongst automobile com ponent manufacturers is the increasing pressure being exerted by assemblers to deliver quickly justintime to deliver at lower cost on a continuous basis and to raise the quality of components Such pressures are manifested in two important ways One is the pressure on suppliers to take on more of the design research and risk of developing component modules and systems The second is the pressure on suppliers to locate geographically close to assembly plants27 11Dicken4084Ch11indd 346 19102010 35148 PM The Automobile Industry 347 Taken together such pressures have resulted in a massive decline in the number of supplier companies In 1990 there were some 30000 suppliers in North America and 10000 by the year 2000 and there is a predicted further decline to between 3000 and 4000 by the year 2010 Fords 2000 strategy envisaged reducing its total number of component suppliers in North America by more than 50 per cent over 10 years from more than 2000 to less than 1000 Of that 1000 a mere 180 companies would be awarded around twothirds of the orders Amongst European firms PeugeotCitroën has reduced its suppliers from 900 to less than 500 BMW from 1400 to 600 In turn the major component suppliers themselves are reducing the number of their suppliers Visteon for example announced that it would in future do business with only two or three companies in each segment of business for the next five years28 The effects of the 2008 crisis have undoubtedly accelerated this reduction in suppliers One headline termed this the living dead among supply chains29 Meanwhile the incessant pressure on suppliers to reduce their prices to the assem blers continues unabated and seems to be increasing Toyota Motors expects to pay 30 per cent less for many components by the time it rolls out new models for 2013 the price cuts demanded of suppliers were the largest in the companys recent history30 But there are risks as the disastrous experience of Toyota demonstrated when it had to recall several million cars in early 2010 because of faulty components involving a number of its models As part of the process of supplier consolidation the precise roles played by sup pliers are changing The supply system is becoming more functionally segmented In place of the myriad of specialist raw materials and component suppliers four major strategies seem to be evolving as Figure 116 shows The raw material and compo nent specialist strategies are of course not new What is new is the emergence of other categories of supplier notably the standardizers and the integrators both of which have significantly greater design and manufacturing responsibilities and have a different kind of relationship both with assemblers and also with their own sup pliers This latter characteristic is especially significant in the case of the integrators As a consequence the overall supply chain of the automobile industry is being transformed Figure 117 shows one possible trajectory The relatively simple tiered hierarchy that has developed in recent years is metamorphosing into a structure in which the connection between tier 1 suppliers and the assemblers is being mediated by a new layer of module and system integrators what some analysts term a tier 05 to signify its closer relationship with the assemblers These suppliers are also more powerful because carmakers can no longer design certain modules by themselves There has been a spectacular rise in suppliers production and research capacities31 At the same time the major suppliers have been drasti cally redrawing their own production map 11Dicken4084Ch11indd 347 19102010 35148 PM Part Three The Picture in Different Economic Sectors 348 Interiors Doors Chassis Product design and engineering Assembly and supply chain management capabilities Global A company that designs and assembles a whole module or system for a car Integrator Tyres ABS ECU Research design and engineering Assembly and supply chain management capabilities Global A company that sets the standard on a global basis for a specific component or system Standardizer Stampings Injection moulding Engine components Research design and process engineering Manufacturing capabilities in varied technologies Brand image Global for tier 1 Regional or local for tiers 2 and 3 A company that designs and manufactures a component tailored to a platform or vehicle Component specialist Steel blanks Aluminium ingots Polymer pellets Material science Process engineering Local Regional Global A company that supplies raw materials to the OEM or their suppliers Raw material supplier Types of components or systems Critical capabilities Market presence Focus Figure 116 Supplier strategies in the automobile industry Source based on Veloso and Kumar 2002 Table 1 Now Future Assembler Assembler 250 Tier 1 suppliers 50 module system integrators Tier 05 suppliers Tier 2 suppliers 100 Tier 1 suppliers Tier 2 suppliers Tier 3 Tier 4 commodity suppliers and contractors Tier 3 Tier 4 subcontractors Figure 117 The changing structure of the automobile supply chain Source based on ABNAMRO 2000 10 11Dicken4084Ch11indd 348 19102010 35148 PM The Automobile Industry 349 Taking one example between 2001 and 2006 the French supplier Valeo closed 59 sites opened 29 new sites sold 26 locations and acquired 13 units32 In effect organizationally distant relationships have been replaced by much closer relationships Much greater degrees of organizational interdependence between auto mobile manufacturers and components suppliers have developed Relationships with key suppliers have become longer term At the same time the need for suppliers especially firsttier suppliers of complex modules and systems to locate geograph ically close to their customers has intensified The intensified drive to shorten the time involved in vehicle production means that justintime supply has become the norm in the automobile industry Even so enormous diversity persists in the geog raphy of supplierassembler relationships a mixture of long and shortdistance arrangements reflecting the path dependency of present patterns on those that evolved in earlier periods This is especially the case for second and thirdtier com ponent suppliers Geographical change tends to be incremental rather than radical However in the case of firsttier suppliers especially modular suppliers there is no doubt that profound changes are occurring in the geography of their relation ships with their customers The most developed situation involves their colocation in socalled industrial condominiums a small group of the automakers direct suppliers are physically installed within the walls of the automakers plant and participate in a share of the plants infra structure costs These suppliers generally supply the automaker with systems usually more complex systems with difficult logistics or that facilitate postpon ing diversification of the product and increase its customization potential on a justintime basis right next to the assembly line but do not participate in the vehicles final assembly line The final assembly is done by the automaker33 Whether or not these assembly lines of the future become accepted practice remains to be seen Certainly it is much harder to introduce such revolutionary practices in the oldestablished manufacturing heartlands of the automobile industry It is significant that most of the existing cases are located well away from traditional automobile manufacturing areas Brazil has been a favoured location A diluted version of the industrial condominium more common in Europe is the supplier park complexes that bring suppliers together in close proximity to one another contiguous to the assembly site a contiguity that is sometimes materialized through the overhead tunnels that connect the various plants34 Clearly profound changes are occurring in the nature of the assemblersupplier relationship driven primarily by the time price and technologydesign pressures exerted by the assemblers on suppliers Suppliers have been driven to consolidate and to take on enhanced roles That in turn changes the balance of power between assemblers and the megasuppliers upon which the assemblers now depend for a much larger part of their business So although in general the assemblers have more bargaining power than the suppliers there are clear exceptions to this those mega suppliers which have developed particularly valuable capabilities and which are able to provide a global supply service to their geographically dispersed customers 11Dicken4084Ch11indd 349 19102010 35148 PM Part Three The Picture in Different Economic Sectors 350 Contrasting transnationalization strategies of the major automobile producers In view of the kinds of technological and competitive pressures facing all auto mobile producers it is not surprising to find that their strategies have some simi larities However they are far from being identical The big producers remain creatures of their specific histories as noted in Chapter 5 firms develop a strategic predisposition built up over time which leads them to favour some kinds of approaches rather than others For example some firms have preferred to grow organically some have grown mainly by merger and acquisition whilst others have grown through a varying mixture of the two They also remain creatures of their particular geographies Where they come from where they are still headquartered matter a lot in terms of the precise ways in which they pursue their objectives see Chapter 5 In this section therefore we look very briefly at the contrasting ways in which the major automobile producers have transnationalized and especially at current developments in their strategies In the final section we will focus on the regionalized patterns of automobile production Table 112 summarizes the transnational profiles of the leading US Japanese and European producers The US big two GM and Ford dominated the world automobile industry for decades This was mainly of course due to the massive size of the North American market for Table 112 Transnational profiles of leading automobile producers foreign as of total Company TNIa Employment Assets Sales US Ford 514 548 462 531 GM 485 598 413 445 Japanese Honda 823 888 752 829 Nissan 621 510 589 763 Toyota 519 385 539 632 European Fiat 645 591 614 729 Volkswagen 569 467 488 753 Renault 531 515 400 678 South Korean Hyundai 279 93 290 453 aTNI is the average of three ratios foreign assets to total assets foreign sales to total sales foreign employment to total employment Source calculated from UNCTAD 2009 Table A19 11Dicken4084Ch11indd 350 19102010 35148 PM The Automobile Industry 351 cars In addition however they were the first automobile firms to transnationalize their production initially and logically in Canada and then in Europe Ford built its first European manufacturing plant in Manchester in 1911 subsequently replaced in 1931 by the massive integrated plant at Dagenham near London and spread into France and Germany GM expanded transnationally through acquir ing existing companies in both Canada and Europe Opel in Germany Vauxhall in the UK These early transnational ventures were triggered by the existence of protective barriers around major national markets as well as by the high cost of transporting assembled automobiles from the US Subsequently both Fords and GMs transna tional strategies were concerned initially with expanding and integrating and then with rationalizing their operations on a global scale Figure 118 shows the broadly similar geography of Fords and GMs transnational activities although they reached their current positions by rather different routes The biggest single difference between GMs and Fords global operations is GMs massive involve ment in China where Ford is weak But as Table 112 shows overall Ford is more transnationalized than GM Indeed GM is the least transnationalized of all the leading producers In both cases however the relative importance of overseas operations has increased as Ford and GM have been forced to close large numbers of plants in the US Japanese producers Whereas both Ford and GM have had international operations for many decades the spectacular rise of the leading Japanese companies up the world league table Figure 115 was achieved almost entirely without any actual overseas produc tion apart from smallscale local assembly operations using imported kits Beyond such operations Toyota had no overseas production facilities for cars before the early 1980s while less than 3 per cent of Nissans total production was located outside Japan The biggest Japanese producer Toyota was in fact the slow est to transnationalize Toyota did not build its first European plant until 1992 six years after Nissan Paradoxically it was one of the smaller Japanese automobile manufacturers Honda which was the first to build production facilities outside Asia in Ohio in 1982 However the transnationality of the Japanese producers changed dramatically during the 1980s mainly as a result of a combination of political pressures in the US and Europe and the increased need to be inside major markets By 1989 28 per cent of Hondas output was produced outside Japan today the proportion is 68 per cent Toyota vastly increased its overseas production share from 8 to 45 per cent Nissan now produces 61 per cent of its cars outside Japan compared with 14 per cent in 1989 As Table 112 shows the three leading Japanese producers are now far more transnationalized than either Ford or GM Figure 119 shows the current geographical pattern of Toyotas Nissans and Hondas production The US is the most important single overseas focus for all three Japanese companies 11Dicken4084Ch11indd 351 19102010 35148 PM Part Three The Picture in Different Economic Sectors 352 European producers The major European automobile producers are strongly Eurocentric in their production geographies Figure 1110 Indeed while the Japanese were busy building large manufacturing plants in the US during the 1980s both VW and Renault pulled out of their earlier involvement there However of all the European producers VW has pursued by far the most extensive and systematic transnational strategy although twothirds of its car production is located in Europe initially in Germany and Spain but with an increasing emphasis on Eastern Europe 0 500 Automobile production thousands 1000 Germany Belgium US Spain Sweden Mexico Brazil China Canada Australia Argentina India Taiwan Thailand Malaysia Ford 0 500 Automobile production thousands 1000 US China South Korea Germany Brazil Spain Canada Poland Uzbekistan Russia Australia UK Argentina Mexico Sweden India Thailand Austria France General Motors Figure 118 The transnational production geography of US producers GM and Ford 2008 Source calculated from OICA statistics 11Dicken4084Ch11indd 352 19102010 35148 PM The Automobile Industry 353 0 500 Automobile production thousands 1000 Japan Mexico UK US China Thailand Indonesia Taiwan Spain Malaysia South Africa Philippines Nissan 0 500 Automobile production thousands 1000 Japan US China Canada UK Thailand Brazil India Mexico Turkey Indonesia Malaysia Taiwan Pakistan Philippines Vietnam Honda 0 500 Automobile production thousands 1000 4000 4500 Japan US China Canada Indonesia France UK Thailand Australia Turkey Czech Rep South Africa Brazil Taiwan Malaysia India Mexico Pakistan Vietnam Philippines Venezuela Argentina Toyota Figure 119 The transnational production geography of Japanese producers Toyota Honda and Nissan 2008 Source calculated from OICA statistics 11Dicken4084Ch11indd 353 19102010 35149 PM Part Three The Picture in Different Economic Sectors 354 0 500 France Spain Turkey South Korea Romania Slovenia Brazil Russia Argentina Iran Colombia Morocco India Mexico UK Renault 0 500 Automobile production thousands 1000 France Spain Iran China Czech Rep Slovakia Brazil Argentina Portugal Japan Turkey Nigeria PeugeotCitroën 0 500 Italy Brazil Poland Argentina Turkey Hungary France India Fiat 0 500 Automobile production thousands 1000 2000 1500 Germany China Brazil Spain Czech Rep Mexico Slovakia Portugal South Africa Belgium Poland Russia Argentina Hungary UK Italy France Volkswagen Figure 1110 The transnational production geography of European producers VW PeugeotCitroën Renault and Fiat 2008 Source calculated from OICA statistics especially the Czech Republic and Slovakia Outside Europe VW is a major producer in Brazil Mexico and especially China While VW was expanding its European production base to incorporate Spain in the 1980s the Italian automobile firm Fiat initially moved in the opposite 11Dicken4084Ch11indd 354 19102010 35150 PM The Automobile Industry 355 direction and reconcentrated production in its home market But that has changed radically in recent years Only around onethird of Fiats production is now in Italy although twothirds is in Europe Brazil is Fiats major focus outside Europe In 2008 Fiat made a failed attempt to buy GMs European operations which together with its acquisition of Chrysler would have made it a truly major global player The two French automobile companies Renault and PeugeotCitroën were both traditionally strongly home country oriented in their production Renault has been for more than 40 years the French governments national champion sup ported by massive state aid which served to constrain its activities State control has been reduced to 15 per cent and Renault has been involved in major restructuring including its major coup in acquiring a large equity stake in Nissan This has become the central pillar of Renaults international strategy For Renault itself Europe remains the dominant production location with 75 per cent of its total world production although it now has a presence in South Korea through its acquisition of Samsung PeugeotCitroën was formed by a stateinduced merger in 1975 It has recently become far more transnational in its operations Although 73 per cent of its production is in Europe it has a growing presence in China Korean Indian and Chinese producers The US Japanese and European automobile companies exert such market domi nance that there have been virtually no new entrants in the industry during the past 30 years The major exception is in South Korea and more recently India and China In the case of Korea automobiles were identified as one of the priority industries in the Heavy and Chemical Industry Plan of 1973 In 1974 an industryspecific plan for automobiles was published covering the next ten years The objectives were to achieve a 90 per cent domestic content for small passenger cars by the end of the 1970s and to turn the industry into a major exporter by the early 1980s35 Although the Korean government effectively made Hyundai the leading producer in the industry giving it an enormous relative advantage by 1997 there were still five Korean automobile producers Today there is just one Hyundai the others being victims directly or indirectly of the East Asian financial crisis of 1997 Hyundai depended for its early development on close technological and mar keting relationships with US and Japanese firms Its strategy was to compete with the Japanese in a very narrow product range and entirely on price Its initial export success was remarkable In 1986 300000 cars were exported to North America a level more or less maintained for the following two years On the strength of this success Hyundai built a second new plant in Korea More ambi tiously still it built a plant in Canada with the capacity to produce 120000 cars and to employ 1200 workers directly but this plant was closed in 1991 because of quality problems 11Dicken4084Ch11indd 355 19102010 35151 PM Part Three The Picture in Different Economic Sectors 356 As a result of the 1997 crisis Hyundai was forced to undertake major restructuring and refocusing of its operations First it acquired Kia one of the smaller Korean automobile firms Second in 2000 it separated from its parent company the Hyundai chaebol Third it began to move away from being merely a lowprice regional producer of cars primarily for the Asian market to one with much wider ambitions Hyundai sees itself as a major global producer of highquality vehicles operating a twobrand strategy with Kia providing the lowercost cars It is shed ding its cheapcar image and focusing like Toyota on superior quality control It has rapidly expanded geographically to operate plants in China India Turkey the US a new plant in Alabama opened in 2005 and the Czech Republic As a result over 40 per cent of its production is now located outside Korea It is a remarkable record of rapid growth to become the worlds eighth largest automobile producer see Table 111 The Indian company Tata is in a very different league But it has huge ambi tions to become a global automobile producer As a result of its acquisition of JaguarLand Rover in 2008 Tata now produces more cars outside India than domestically Its introduction of the Nano small car will undoubtedly help to expand its international operations So far Chinese firms have made little impact outside China But this will change The most likely candidate is the Shanghai Automotive Industrial Corporation SAIC which acquired the Ssangyong plants in South Korea the Nanjing Automobile Corporation which had itself acquired the British MG brand and the Beijing Automotive Industrial Corporation BAIC which has bought some of Saabs assets from GM Regionalizing production networks in the automobile industry Although in one sense the automobile industry is one of the most globalized of industries it is also an industry in which the regionalization of production and distribution is especially marked36 Geographically rather than attempting to organize and reorganize operations on a truly global scale the tendency of most of the leading automobile producers is towards the creation of distinctive pro duction and marketing networks within each of the three major world regions Figure 1111 shows that this is especially the case in both North America and Europe where more than threequarters of automobile trade is intraregional Europe Europe has the most complex automobile production networks in the world a reflection of the legacy of formerly nationally oriented automobile industries the 11Dicken4084Ch11indd 356 19102010 35151 PM The Automobile Industry 357 particular ways in which the political environment has evolved in the past four decades and the responses of automobile firms to these changes in the context of increasingly intensive global competition Two politicaleconomic transformations during the 1990s dramatically reshaped the regions automobile industry the completion of the Single Market in 1992 and the opening up and subsequent political integration of Eastern Europe see Chapter 6 The actual geographical configuration of automobile production within Europe bears the very strong imprint of each firms national origins and the his tory of their development within this evolving political framework Figure 1112 For example Ford and GM have been in Europe for almost 100 years building up multilocational initially nationally oriented production networks Both have rationalized their European operations in recent years a process accelerated by the 2008 crisis GM in particular aims to cut its European production capacity by onefifth which will involve the closure of its plant in Antwerp Belgium and a loss of more than 8000 jobs within Europe37 In contrast the position of the Japanese producers is very different With no history of European car production and no inherited structure the Japanese were able to treat Europe as a clean sheet Beginning in the early 1980s Japanese firms established production facilities in Europe All three leading Japanese firms Toyota Nissan Honda initially built their plants in the UK This led to political friction within the EU during the 1980s and 1990s Significantly Toyotas second European plant was built in northern France 2086 2086 539 539 3147 3147 484 484 031 031 137 137 365 365 815 815 885 885 938 938 203 203 718 718 Trade flows are in billions of dollars Intraregional exports North America North America Exports 220bn 776 internal Exports 220bn 776 internal Europe Europe Exports 6545bn 782 internal Exports 6545bn 782 internal Asia Asia Exports 2646bn 218 internal Exports 2646bn 218 internal Latin America Latin America Exports 212bn 643 internal Exports 212bn 643 internal Figure 1111 Global trade network in automobiles Source calculated from WTO 2009 Table A10 11Dicken4084Ch11indd 357 19102010 35151 PM Part Three The Picture in Different Economic Sectors 358 The geographical configuration of the indigenous European automobile producers is of course much more embedded in their national contexts Only VW has anything approaching a panEuropean production network focused around the three nodes of Germany Spain and its acquired Eastern European plants in the Czech Republic and in Slovakia Prior to the opening up of Eastern Europe VW had developed a clear strategy of geographical segmentation High value technologically advanced cars were produced in the former West Germany lowcost small cars were produced in Spain After 1990 VW moved very rapidly to establish production of small cars in Eastern Germany and to take a controlling stake in the Czech firm Skoda VW now has operations in the Czech Republic Hungary Poland and Slovakia Germany Germany GM GM Ford Ford others others VW VW BMW BMW Daimler Daimler GM GM BMW BMW Toyota Toyota Nissan Nissan others others Honda Honda United Kingdom United Kingdom Slovenia Slovenia Renault Renault Ford Ford GM GM Sweden Sweden Renault Renault Toyota Toyota others others PC PC France France Netherlands Netherlands Mitsubishi Mitsubishi others others Italy Italy Fiat Fiat others others Portugal Portugal VW VW PC PC Spain Spain Renault Renault Ford Ford others others GM GM PC PC VW VW others others Romania Romania Renault Renault Czech Rep Czech Rep others others VW VW PC PC Toyota Toyota Poland Poland Fiat Fiat GM GM VW VW others others Slovakia Slovakia Hyundai Hyundai PC PC VW VW Hungary Hungary Suzuki Suzuki VW VW Fiat Fiat Daimler Daimler GM GM Austria Austria Chrysler Chrysler BMW BMW others others Belgium Belgium Ford Ford Turkey Turkey others others Renault Renault Hyundai Hyundai Fiat Fiat Honda Honda Toyota Toyota 1 million cars 1 million cars Figure 1112 Automobile production in Europe Source calculated from OICA statistics 11Dicken4084Ch11indd 358 19102010 35152 PM The Automobile Industry 359 Indeed it is Eastern Europe that is now the primary focus of change in European automobile production networks38 In addition to joining with or taking over existing local automobile firms automobile producers are building new plants in Eastern Europe For example GM established operations in Poland and Russia Toyota has established a joint venture with PeugeotCitroën to develop and assemble small cars for the European market at Kolin in the Czech Republic PeugeotCitroën itself has established operations plants in Slovakia and the Czech Republic and closed its UK plant the Hyundai affiliate Kia has established an assembly plant in Slovakia while Hyundai itself has built a large assembly plant in the Czech Republic and Renault operates plants in Romania and Slovenia At the same time substantial components production is also shifting towards the East On the one hand there are the affiliates of foreign companies set up prima rily to follow the assemblers While some of these investments may be genuinely new in the sense that they did not formerly exist elsewhere or are acquisitions of local companies by foreign firms others are in effect locational transfers from elsewhere in Europe On the other hand there are the indigenous suppliers many of them the successors of formerly stateowned enterprises prior to the onset of privatization In many cases these have been restricted to the production of lowvalue components and are rather peripherally connected into transnational production networks However the specialization of many CEE countries is no longer limited to simple stan dard and labour intensive products and assembly of small vehicles A signifi cant value creation takes place due to manufacturing of more complex highvalueadded products and growing local sourcing39 Inevitably the question arises of the extent to which the shift in focus towards the East has adverse effects on automobile plants and jobs in the core European coun tries and the Iberian region There is little doubt that it has as the German case shows What has taken place is not a broad relocation from Germany to lowwage countries but a dramatic shift in the regions of origin for component imports to Germany The share of CEE in German automotive component imports rose from 9 per cent to 37 per cent between 1995 and 2005 Rather than displacing manufacturing in Germany component imports from CEE coun tries seem to have supplanted imports from Western Europe and the Iberian peninsula In the case of Spain and Portugal the share of German imports was not only halved their absolute value was reduced40 North America Although politicaleconomic integration in North America is much shallower than in the EU in the case of the automobile industry political agreements have had profound repercussions on its geographical structure By the early 1970s the USCanadian automobile industry was fully integrated as a result of the 1965 Automobile Pact The 1988 CanadaUS Free Trade Agreement CUSFTA 11Dicken4084Ch11indd 359 19102010 35152 PM Part Three The Picture in Different Economic Sectors 360 redefined the level of North American content necessary for a firm to be able to claim dutyfree movement within the North American market The 1994 North American Free Trade Agreement NAFTA had even more farreaching implica tions for the automobile industry because it incorporated the Mexican auto industry with its vastly lower production costs Figure 1113 shows the broad geographical structure of the North American production system Prior to the 1980s it was totally dominated by US producers attempts by Volkswagen and Renault to produce cars successfully in the US had failed But from the mid 1980s onwards the position changed dramatically Three major waves of foreign involvement have occurred Ford Ford GM GM Toyota Toyota Nissan Nissan BMW BMW Chrysler Chrysler Daimler Daimler Honda Honda United States United States Chrysler Chrysler GM GM Toyota Toyota Honda Honda Ford Ford Canada Canada Ford Ford GM GM Nissan Nissan others others VW VW Mexico Mexico 1 million cars 1 million cars Figure 1113 Automobile production in North America Source calculated from OICA statistics 11Dicken4084Ch11indd 360 19102010 35152 PM The Automobile Industry 361 First each of the major Japanese firms established largescale production facilities in the US and Canada during the 1980s The pioneer was Honda which estab lished a manufacturing plant at Marysville in Ohio in 1982 This was followed in 1983 by the Nissan plant at Smyrna Tennessee In contrastToyota entered North America very cautiously in 1984 through a joint venture NUMMI based at GMs Fremont California plant Since then each of the major Japanese firms has continued to increase its capacity and to make major investments in engine trans mission and components plants Today there are 16 Japanese automobile assembly plants employing around 60000 workers in the US and Canada41 As the Japanese plants progressively increased their North American content they were followed by a wave of Japanese component manufacturers In other words during a period of less than a decade an entirely new Japanesecontrolled automobile industry was created in North America in fierce direct competition with domestic manufactur ers This new automobile industry had a very different geography from that of the traditional one simply because the Japanese had no existing plants or alle giance to specific areas With few exceptions the oldestablished automobile industry centres were not favoured The second very much smaller wave of foreign investment in the North American automobile industry began in the mid 1990s in the form of German luxury car manufacturers DaimlerBenz and BMW DaimlerBenz built a new plant at Tuscaloosa Alabama in 1993 BMW built a plant at Spartanburg South Carolina in 1994 Subsequently of course DaimlerBenz created a major shakeup of the North American automobile industry when it acquired Chrysler in the late 1990s sold to Fiat in 2007 These incursions by the two upmarket German pro ducers were the first major European involvement in North America after the failed ventures of Volkswagen and Renault in the 1970s In 2005 the Korean firm Hyundai opened a major plant in Montgomery Alabama and its subsidiary Kia has built a new plant in Georgia The third development has been the largescale investment by foreign automo bile producers in Mexico42 Prior to the Mexican economic reforms of the 1980s and later the NAFTA in 1994 most of the automobile investment in Mexico was domestic market oriented Subsequently these investments were replaced by stra tegic assetseeking and costreducing FDI43 Most of these newer investments in vehicle assembly and major component plants have rather different locational characteristics from the earlier importsubstituting investments The latter being oriented to the Mexican domestic market tended to be concentrated in the cen tral region around Mexico City The newer investments oriented to the North American market as a whole are located nearer the border with the US The major exception is VWs large integrated facility in Puebla At the same time rationalization of some of the former coreregion plants has occurred By the early 2000s then a very different regional production network had evolved in North America compared with that existing before the 1980s which 11Dicken4084Ch11indd 361 19102010 35152 PM Part Three The Picture in Different Economic Sectors 362 had been dominated by the US manufacturers44 The arrival of Japanese firms in the 1980s created a new geography of production away from the oldestablished automobile concentration in the US Midwest The NAFTA together with earlier reforms within Mexico transformed that system by incorporating into the North American regional production network a production location with very low costs and a potentially fastgrowing domestic market The longterm decline of the US Big Three producers became almost a collapse with the 2008 crisis and this will have a massive effect on the geography of North American automobile production It is the traditional heartland of the US automobile industry Michigan which will be hardest hit but the effects will be widespread involving Canada in particular East Asia The development of distinctive regional automobile production networks in both Europe and North America reflects the combination of two forces the size and affluence of the market and the politicaleconomic integration of the market through the EU and the NAFTA respectively In these circumstances the develop ment of a high level of intraregional integration of supply production and distri bution becomes possible The situation in East Asia is very different the region remains primarily a series of individual national markets some of them very heav ily protected against automobile imports On the other hand the undoubted potential of the East Asian market set against the saturation of most Western mar kets makes it an absolutely necessary focus for the leading automobile manufac turers It is against this background that the current automobile production network in East Asia needs to be set As Figure 1114 shows automobile production in East Asia is dominated by Japan and to a lesser extent Korea and China Not surprisingly therefore the regions automobile production is dominated by Japanese firms45 Through a net work of assembly plants and joint ventures with domestic firms Japanese cars are assembled in Thailand Malaysia the Philippines Indonesia Taiwan and China In several of these countries Japanese manufacturers totally command the automo bile market Most of these are assembled locally in individual countries to serve the local market This is less out of choice on the part of the Japanese manufactur ers than out of the necessity created by high levels of import protection in virtu ally all the East Asian countries particularly those in South East Asia notably Malaysia Faced with increasingly difficult circumstances in the Japanese market itself Japanese firms have placed greater emphasis on raising their penetration of the Asian market by developing cars specifically tailored to that market and not just versions of existing models In comparison Korean firms have preferred to serve East Asian markets from their domestic bases although Hyundai has operations in Indonesia Western 11Dicken4084Ch11indd 362 19102010 35152 PM The Automobile Industry 363 automobile companies have only recently taken a really serious interest in East Asia Of course several US and European firms have had small complete knock down CKD plants in different parts of the region for many years while GM and Ford have had significant equity involvement in Japanese firms Today virtually all Nissan Nissan Toyota Toyota Honda Honda Proton Proton others others Malaysia Malaysia Nissan Nissan Toyota Toyota Honda Honda Suzuki Suzuki others others Indonesia Indonesia Hyundai Hyundai Kia Kia Renault Renault SAIC SAIC South Korea South Korea GM GM Nissan Nissan Toyota Toyota others others Mitsubishi Mitsubishi Taiwan Taiwan Honda Honda Ford Ford Nissan Nissan Toyota Toyota Mazda Mazda Mitsubishi Mitsubishi Japan Japan Honda Honda others others Suzuki Suzuki Thailand Thailand GM GM Nissan Nissan Mitsubishi Mitsubishi Honda Honda Toyota Toyota China China others others Nissan Nissan FAW FAW Chana Auto Chana Auto Brilliance Brilliance Dongfeng Dongfeng GM GM VW VW Toyota Toyota Chery Chery Beijing Auto Beijing Auto Hyundai Hyundai Honda Honda 1 million cars 1 million cars Figure 1114 Automobile production in Asia Source calculated from OICA statistics 11Dicken4084Ch11indd 363 19102010 35152 PM Part Three The Picture in Different Economic Sectors 364 the major Western automobile companies are in the process of establishing operations in the region particularly in Thailand and in China The continued restrictive nature of trade policy within ASEAN makes the development of a genuinely regionally integrated automobile industry difficult to achieve although significant regulatory changes have been introduced to facilitate crossborder flows of vehicles and components46 Within South East Asia Thailand has become the preferred production focus for many major automobile assemblers and component manufacturers a deliberate outcome of state policy Thailand has set out to be the car capital the Detroit of South East Asia and with some considerable success Virtually all the major foreign producers have a presence there Not only does it have a major concentration of Japanese automobile and components production but also it is the favoured point of entry of Western car manufacturers notably GM and Ford through Japanese partners BMW estab lished an assembly plant for its 3 Series model in Thailand However Thailand was hit hard by the 2008 crisis as exports and therefore production fell sharply More than half of Thai automobile production is exported so it is very vulnerable to the global slowdown Whereas Western automobile firms see Thailand as potentially a base for serving the whole of South East Asia their reasons for wishing to establish operations in China are rather different access to potentially the worlds biggest market Because all the major automobile manufacturers are extremely anxious to establish them selves in China the Chinese government has been able to retain the bargaining power to impose specific entry restrictions see Chapter 747 The Chinese automobile industry consists of a large number of state corpora tion groups together with a number of joint ventures between members of these groups and foreign firms48 VW was one of the earliest Western automobile firms to establish a joint venture in China first with the Shanghai Automotive Industry Corporation SAIC in 1985 and then with First Auto Works FAW For more than 10 years VW was virtually unchallenged in the Chinese market and it still has the biggest market share although its position has been heavily eroded by new entrants US firms have found entry to China rather more dif ficult GM also established a joint venture with SAIC in Shanghai Ford took considerably longer and only agreed a joint venture with the CAIC Group in 2001 Japanese firms continue to strengthen their presence in China Toyota has established a new joint venture with Guangzhou Automotive Hyundai is also expanding in China through its Kia affiliate which already had Chinese opera tions before it was acquired by Hyundai The prospect of gaining access to what is seen as the worlds largest and fastestgrowing consumer market has led to a scramble by automobile producers to enter China But the Chinese government has exerted virtually complete control over such entry and has adopted a policy of limited access for foreign firms including the form that their involvement can take Here therefore we have the obverse of the usual situation Whereas in many cases TNCs are able 11Dicken4084Ch11indd 364 19102010 35153 PM The Automobile Industry 365 to play off one country against another to achieve the best deal in the Chinese case it is the state whose unique bargaining position has enabled it to play off one TNC against another49 NOTES 1 Drucker 1946 149 2 The Economist 4 September 2004 3 ABNAMRO 2000 11 Freyssenet and Lung 2000 83 4 UNIDO 2003 22 5 Liu and Yeung 2008 6 Financial Times 6 December 2005 7 Financial Times 3 February 2009 8 Financial Times 3 February 2009 9 Veloso and Kumar 2002 3 10 Financial Times 15 April 2003 11 Veloso and Kumar 2002 6 12 Delphi Automotive Systems quoted in EIU 2000 1 13 Berger 2005 86 14 EIU 2000 7 15 Financial Times 16 June 2004 16 Financial Times 9 May 2008 17 Financial Times 9 May 2008 18 Financial Times 7 August 2008 19 Financial Times 11 November 2009 20 Humphrey and Oeter 2000 42 21 Financial Times 17 September 2009 22 Financial Times 18 January 2010 23 Financial Times 10 December 2009 24 The Economist 10 September 2005 73 25 Kang and Sakai 2000 45 See also Mockler 2000 Figure 15 26 Financial Times 6 May 2010 27 Frigant and Layan 2009 Frigant and Lung 2002 28 Financial Times 4 March 2003 29 Financial Times 25 February 2009 30 Financial Times 23 December 2009 31 Frigant and Layan 2009 13 32 Frigant and Layan 2009 13 33 Pires and Neto 2008 329 34 Frigant and Lung 2002 746 35 Wade 1990 310 36 See Dicken 2003a Freyssenet and Lung 2000 Rugman and Collinson 2004 Sturgeon et al 2008 UNIDO 2003 916 37 Financial Times 22 January 2010 11Dicken4084Ch11indd 365 19102010 35153 PM Part Three The Picture in Different Economic Sectors 366 38 See Domanski and Lung 2009 Frigant and Layan 2009 Jürgens and Krzywdzinski 2009 Pavlinek et al 2009 39 Domanski and Lung 2009 9 40 Jürgens and Krzywdzinski 2009 32 41 Sturgeon et al 2008 Table 2 42 Carillo 2004 Mortimore 1998 41117 UNCTAD 2000 1301 43 Mortimore 1998 417 44 Rutherford and Holmes 2008 Sturgeon and Florida 2004 Sturgeon et al 2008 45 Horaguchi and Shimokawa 2002 46 Guiher and Lecler 2000 47 Liu and Dicken 2006 48 Liu and Dicken 2006 Liu and Yeung 2008 49 Liu and Dicken 2006 11Dicken4084Ch11indd 366 19102010 35153 PM Twelve MAKING THE WORLD GO ROUND ADVANCED BUSINESS SERVICES ESPECIALLY FINANCE CHAPTER OUTLINE The centrality of advanced business services Money counts A global casino The structure of advanced business services Dynamics of the markets for advanced business services The increased diversity and volatility of the market for financial services Technological innovation and advanced business services Centrality of information and communication technology An epidemic of new financial products The role of the state regulation deregulation reregulation A tightly regulated financial system The crumbling of the walls Reintervention of the state The state as capitalist investor sovereign wealth funds Corporate strategies in advanced business services Concentration and consolidation Product diversification Transnationalization Financial services Legal services Executive recruitment Geographies of advanced business services Cities as the natural habitat for advanced business services The global network of financial centres Geographical decentralization and offshoring of business services Offshore financial centres 12Dicken4084Ch12indd 367 19102010 110902 AM Part Three The Picture in Different Economic Sectors 368 The centrality of advanced business services As we saw in Chapter 3 services especially advanced business services ABS banking accountancy insurance logistics law advertising business consultancy highlevel personnel recruitment are central to the operation of the economy Not only are they the lubricants to all production circuits but also they have become increasingly dominant For example financial services are both circulation services fundamental to the operation of every aspect of the economic system and also commodities or products in their own right produced and traded in the same way as more tangible manufactured goods are traded Money counts Every economic activity whether a material product or a service has to be financed at all stages of its production Without the parallel development of sys tems of money and creditbased exchange there could have been no develop ment of economies beyond the most primitive organizational forms and the most geographically restricted scales The geographical circuits of money and finance are the wiring of the socio economy along which the currents of wealth creation consumption and economic power are transmitted money allows for the deferment of pay ment over timespace that is the essence of credit Equally money allows propinquity without the need for proximity in conducting transactions over space These complex timespace webs of monetary flows and obligations underpin our daily social existence1 Finance is also one of the most controversial of economic activities because of its historical relationship with state sovereignty Ever since the earliest states emerged on the scene the creation and control of money have been regarded as central to their legitimacy and survival2 Today in the context of a globalizing world econ omy this tension has become especially acute The periodic financial crises that are endemic to the system intensify these tensions and also create legitimate fears over the accountability and responsibility of financial institutions A global casino In 1986 Susan Strange coined the graphic term casino capitalism to describe the international financial system every day games are played in this casino that involve sums of money so large that they cannot be imagined At night the games go on at the other side of the world the players are just like the gamblers in casinos watching the clicking spin of a silver ball on a roulette wheel and putting their chips on red or black odd numbers or even ones3 12Dicken4084Ch12indd 368 19102010 110902 AM Advanced Business Services 369 Twelve years later she used the term mad money to reflect the increased volatility of the financial system and the uncertainty it generates throughout the world economy These terms are even more appropriate in the light of the 2008 global financial crisis International financial flows and foreign currency transactions have reached unprecedented levels They totally dwarf the value of international trade in man ufactured goods and in other services and have done so at an increasing rate over the past three decades as Figure 121 shows In 1973 daily foreign exchange transactions were roughly twice that of world trade in 2007 they were 100 times greater Of course some of those financial transactions are directly related to international trade and production and are essential for that purpose But only a very small percentage of international financial transactions are of this kind The remainder take the form of what are essentially speculative dealings aimed at making short or longterm profits as ends in themselves through a bewildering variety of financial instruments Of course it is often difficult to draw a clear line between speculative and productively essential financial transactions4 The structure of advanced business services Advanced business services encompass a very broad range of activities Figure 122 identifies the major categories of ABS firm distinguishing between financial and 1973 1980 1992 1995 2007 Ratio of daily foreign exchange trading to world trade 21 101 501 701 1001 Figure 121 The growing disparity between foreign exchange trading and world trade 19732007 Source based on Dore 2008 3 Eatwell and Taylor 2000 34 12Dicken4084Ch12indd 369 19102010 110902 AM Part Three The Picture in Different Economic Sectors 370 professional business service firms They are all basically providers of highly specialized knowledge which facilitates the increasingly complex configuration and operation of global production networks All are in some sense intermediaries in the processes of production distribution and consumption In the case of banking the key function is the pooling of financial resources among those with surplus funds to be lent out to those who choose to be in deficit that is to borrow With financial intermediation investors in new productive activities do not themselves have to generate a surplus to finance their projects instead the projects can be financed by surpluses generated elsewhere within the economy5 The process of intermediation has constituted the basic function of banks from the very beginning Figure 123 shows the sequence of development of the banking system The first two stages of credit provision to borrowers depend greatly upon the nature of geographically specific knowledge to legitimize lend ing and borrowing The geographical scope of knowledge and trust grows through such developments as interbank lending that is lending outside the local area in stage 3 and eventually of a central bank that ultimately acts as the lender of last resort to the banking system as a whole stage 4 Subsequent developments especially in securitization create a totally different scale and complexity of financial activity Legal firm Business consultancy firm Advertising agency Executive recruitment headhunting firm Provides legal advice on regulatory requirements in specific territorial and international jurisdictions Provides advice in diverse aspects of business organization including strategic issues corporate reorganization etc Designs and implements commercial campaigns across the media to promote branded products andor corporate identity Searches for and recruits highlevel executive personnel Type Primary functions Commercial bank Investment bank securities house Credit card company Insurance company Accountancy firm Administers financial transactions for clients eg making payments clearing cheques Takes in deposits and makes commercial loans acting as intermediary between lender and borrower Buys and sells securities ie stocks bonds on behalf of corporate or individual investors Arranges flotation of new securities issues Operates international network of credit card facilities in conjunction with banks and other financial institutions Indemnifies a whole range of risks on payment of a premium in association with other insurersreinsurers Certifies the accuracy of financial accounts particularly via the corporate audit Type Primary functions Financial services Professional business services Figure 122 Major types of advanced business services 12Dicken4084Ch12indd 370 19102010 110902 AM Advanced Business Services 371 Such increased complexity of the financial system has resulted in the develop ment of a huge variety of different types of financial institution each of which has a specific set of core functions Figure 122 In fact the boundaries between these individual activities and institutions have become increasingly blurred The first three types of financial institution shown in Figure 122 are concerned with the creation and distribution of credit in various forms The two remaining categories are concerned with different forms of risk indemnification insurance companies and with certifying the accuracy of financial accounts accountancy firms Stage 7 Response to 2008 crisis Potential for redrawing of boundaries between different banking functions Possible reregulation at national andor international scales Possible refocus on lending to domestic borrowers Intermediation only Credit creation focused on local community because total credit constrained by redeposit ratio Redeposit constraint relaxed somewhat so can lend wider afield Banks freer to respond to credit demand as reserves constraint not binding and they can determine volume and distribution of credit within national economy Credit creation determined by struggle over market share and opportunities in speculative markets Total credit uncontrolled Shift to liquidity by emphasis being put on services rather than credit credit decisions concentrated in financial centres total credit determined by availability of capital ie by central capital markets Serving local communities Wealthbased providing foundation for future financial centres Market dependent on extent of confidence held in banker Banking system develops at national level Central bank oversees national system but limited power to constrain credit Banks compete at national level with nonbank financial institutions Deregulation opens up international competition eventually causing concentration in financial centres Stage 1 Pure financial intermediation Banks lend out savings Payment in commodity money No bank multiplier Saving precedes investment Stage 2 Bank deposits used as money Convenient to use paper money as means of payment Reduced drain on bank reserves Multiplier process possible Bank credit creation with fractional reserves Investment can now precede saving Stage 3 Interbank lending Credit creation still constrained by reserves Risk of reserves loss offset by development of interbank lending Multiplier process works more quickly Multiplier larger because banks can hold lower reserves Stage 4 Lenderoflastresort facility Central bank perceives need to promote confidence in banking system Lenderoflastresort facility provided if interbank lending inadequate Reserves now respond to demand Credit creation freed from reserves constraint Stage 5 Liability management Competition from nonbank financial intermediaries drives struggle for market share Banks actively supply credit and seek deposits Credit expansion diverges from real economic activity Stage 6 Securitization Capital adequacy ratios introduced to curtail credit Banks have an increasing proportion of bad loans because of overlending in Stage 5 Securitization of bank assets Increase in offbalance sheet activity Drive to liquidity Credit and space Banks and space The stages of banking development Figure 123 The sequence of development of the banking system Source based in part on Dow 1999 Tables 1 and 2 12Dicken4084Ch12indd 371 19102010 110903 AM Part Three The Picture in Different Economic Sectors 374 We dont have warehouses full of cash We have information about cash that is our product8 Indeed money itself is primarily an item of information governed by rules Money is therefore shaped by the development and adoption of information and communication technologies how the information is managed and to a degree the very nature of the information and regulation how information is ruled9 Not surprisingly therefore all the major financial services firms invest phenomenal sums in information technologies It is of course the speed with which financial services firms can perform transactions and the global extent over which they can be made that are especially important Travelling at the speed of light as nothing but assemblages of zeros and ones global money dances through the worlds fiberoptic networks in aston ishing volumes National boundaries mean little in this context it is much easier to move 41 billion from London to New York than a truckload of grapes from California to Nevada10 From a technological viewpoint global 24hoursaday trading or following the sun whether this be in securities foreign exchange financial and commodities futures or any other financial service is perfectly feasible11 As Figure 124 shows the trading hours of the worlds major financial centres overlap In fact genuine 24hour trading is currently limited to certain kinds of transaction partly because although the technology is available either the organizational structure or the national regulatory environment creates an obstacle see next section San Francisco Hong Kong Singapore New York London Bahrain Tokyo 0 Hours difference from Greenwich Mean Time 3 3 6 6 9 9 12 12 Figure 124 The potential for 24hour financial trading Source based on Warf 1989 Figure 5 12Dicken4084Ch12indd 374 19102010 110904 AM Part Three The Picture in Different Economic Sectors 376 delocalized and outsourced13 It was the packaging repackaging and selling on and on and on of mortgagebased securities MBS based on loans in the US sub prime mortgage market loans to individuals without the means to repay them that triggered the crisis when borrowers began to default Nobody not even the financial institutions themselves quite knew where the risks lay When it is real ized that the notional value of the derivatives market was almost eleven times the value of the worlds financial assets14 then the riskiness of such risktaking becomes apparent No wonder the US investor Warren Buffett called derivatives time bombs or financial weapons of mass destruction or that Gillian Tett talked about destructive creation a neat reversal of Schumpeters notion of creative destruction see Chapter 4 In effect The modern financial services industry is a casino attached to a utility The utility is the payments system which enables individuals and companies to manage their daily affairs It allows them to borrow and lend in line with the fundamental value of business activities In the casino traders make profits from arbitrage differences in the prices of related assets and from short term price movements The users of the utility look to fundamental values The players in the casino are preoccupied with the mind of the market15 Without question therefore developments in information and communication technology as well as in product innovations have transformed the financial ser vices industries The global integration of financial markets has become possible collapsing space and time and creating the potential for virtually instantaneous financial transactions in loans securities and a whole variety of financial instru ments However completely borderless financial trading does not actually exist for the simple reason that most financial services remain very heavily supervised and regulated by individual national governments Let us now see how the regulatory system works or doesnt and how it has changed Type of financial instrument Assetbacked Securities ABS eg Mortgagebacked Securities MBS Credit Default Swaps CDS Collateralized Debt Obligations CDOs Constant Proportion Debt Obligations CPDOs Basic characteristics Debt parcelled up and sold as securities backed by the repayment from those loans Securities based on the sellingon of mortgages in packages Insurance against corporate default Structured financial products that pool different kinds of loans and bonds funding themselves by issuing new bonds whose price depends upon the risk level Leveraged bets on a group of highquality US and European companies These vehicles issued securities to generate to pay out by selling protection on credit default swaps Figure 125 Examples of recent product innovations in financial markets Source based on the Financial Times 13 October 2009 33 12Dicken4084Ch12indd 376 19102010 110904 AM Part Three The Picture in Different Economic Sectors 378 slow at first but accelerated rapidly after the late 1980s Deregulatory pressures came from several sources most notably the increasing abilities of transnational firms to take advantage of gaps in the regulatory system and to operate outside national regulatory boundaries Money has a habit of seeking out geographical discontinuities and gaps in these regulatory spaces escaping to places where the movement of financial assets is less constrained where official scrutiny into financial dealing and affairs is minimal where taxes are lower and potential profits higher16 The starting point was the emergence of the Eurodollar that is offshore markets in the 1960s Initially Eurodollars were simply dollars held outside the US banking system largely by countries anxious to prevent their dollar holdings being subject to US political control The rapid growth of this new currency market outside national regulatory control was reinforced by pressure from banks and other finan cial services firms to operate in a less constrained and segmented manner both domes tically and internationally The internationalization of financial services and the deregulation of national financial services markets therefore are virtually two sides of the same coin Forces of internationalization were one of the pressures stimulating deregulation deregulation is a necessary process to facilitate further internationalization Major deregulation occurred in all the major developed economies In the US a series of changes since the 1970s both eased the entry of foreign banks into the domestic market and facilitated the expansion of US banks overseas as well as allowing banks to become involved in a whole variety of financial services and to operate nationwide branching networks In 1999 the GlassSteagall Act which prohibited the joint ownership of commercial and investment banking was abol ished In the UK the socalled Big Bang of October 1986 removed the existing barriers between banks and securities houses and allowed the entry of foreign firms into the Stock Exchange In France the Little Bang of 1987 gradually opened up the French Stock Exchange to outsiders and to foreign and domestic banks In Germany foreignowned banks were allowed to leadmanage foreign issues subject to reciprocity agreements Financial deregulation also occurred in East Asia In Japan the restrictions on the entry of foreign securities houses were relaxed though not removed and Japanese banks could open international banking facilities But the Japanese finan cial system remained more tightly regulated than elsewhere In 1996 the Japanese government announced its intention to undertake a wideranging deregulation of the countrys financial system a process made more difficult by Japans attempt to recover from its deep financial crisis of the 1990s Even the Singaporean govern ment has progressively loosened the restrictions on the financial sector in order to maintain the countrys position as a major Asian financial centre Most recently China has allowed foreign participation in big stateowned banks and has listed them on overseas stock exchanges 12Dicken4084Ch12indd 378 19102010 110904 AM Advanced Business Services 379 Increasing deregulation of financial services has been an important component of the major regional economic blocs A financial services agreement was part of the CanadaUS Free Trade Agreement whilst under the NAFTA Mexico had to open up its financial sector to North American firms by 2007 EU reforms aim at removing the individual national financial regulatory structures inhibiting the creation of an EUwide financial system so that financial services flow freely throughout the EU and financial services firms could establish a presence any where within the Single Market The creation of a single European currency transformed wholesale financial markets in the EU but retail financial markets remained fragmented on national lines Reintervention of the state The unexpected financial crisis of 2008 stopped this apparently inexorable trend towards the deregulation of financial services in its tracks The collapse of major banks and investment firms initially in the US and the UK was a shock of unprecedented magnitude at least since the Wall Street Crash of 1929 As a result of the virtual collapse of the financial system in 2008 the IMF estimated that financial institutions faced losses of 41 trillion17 Governments have ploughed billions of dollars pounds euros yen and other currencies into propping up their collapsing banking systems Some institutions like Lehman Brothers in the US have been allowed to fail But for the most part governments have stepped in with massive financial support In effect a number of leading US and British banks have been nationalized Rescuing their banks became the preoccu pation of national governments simply because credit is essential for an economy to operate The banks were regarded as being too big to fail But the cost to the taxpayer has been immense and poses major problems for future public expenditure and for peoples economic wellbeing In the short run the need is to stabilize the financial system but in the longer run the need clearly is for a new financial architecture for the global economy This is an issue we will explore in Chapter 17 Suffice it at this stage to note that the accepted wisdom of the past 20 years of the efficiency of free unregulated financial markets and the benefits of derivatives and other exotic financial products has been destroyed The state as capitalist investor sovereign wealth funds A rather different state financial phenomenon has emerged in recent years the state as a large and active investor in international financial markets The mecha nism is the governmentowned sovereign wealth fund SWF Figure 126 shows the geographical origins and magnitude of the major SWFs in 2007 Their combined 12Dicken4084Ch12indd 379 19102010 110904 AM Part Three The Picture in Different Economic Sectors 380 value was 29 trillion equal to around 2 per cent of the worlds total financial assets bank deposits bonds shares The leading SWFs are virtually all from emerging economies notably those that are oilrich In effect SWFs are a way to help recycle emergingmarket surpluses And yet suspicion about their motives could make their money much less welcome rather than accepting investment from sovereignwealth funds countries could turn to financial protectionism For some the rub is that governments are less interested in money than in power Others are worried for precisely the opposite reason that the funds are interested chiefly in making money This would not matter much but for the sheer size that some funds have now attained They are big enough to shift markets18 The virtual collapse of Dubai World a stateowned holding company in late 2009 raised some critical questions about such funds Corporate strategies in advanced business services Concentration and consolidation The history of most advanced business services is a more or less continuous trend towards greater concentration into a smaller number of companies 875 100 300 30 Sovereign wealth funds billions Norway Norway Abu Dhabi Abu Dhabi Singapore Singapore Singapore Singapore Saudi Arabia Saudi Arabia Brunei Brunei China China Qatar Qatar Kuwait Kuwait Libya Libya Algeria Algeria United States United States Figure 126 The geography of sovereign wealth funds Source press reports 12Dicken4084Ch12indd 380 19102010 110904 AM Advanced Business Services 381 Much of this consolidation has occurred through the conventional route of organic growth and of merger and acquisition However in some ABS like accounting law and executive recruitment for example the development of alliances and networks has become especially apparent As a result virtually all ABS sectors are dominated by a small number of very large firms or networks of firms Figure 127 The changes in banking have been especially marked In 1989 no fewer than seven of the top 10 banks were Japanese a reflection of Japans spectacular eco nomic growth during the 1980s However Japanese banks suffered very badly in the collapse of the Japanese bubble economy in the early 1990s In 2009 only one of the top 10 banks was Japanese Western banks especially US and UK banks still dominate although it is highly significant that one of the top 10 banks in 2009 was Chinese Mergers have been endemic in the banking sector for the past 20 years at least For example the Mitsubishi UFJ Financial Group has evolved from a whole series of mergers First the Bank of Tokyo Mitsubishi Bank and Mitsubishi Trust merged to form MTFG Then Sanwa Bank and Tokai Bank merged in 2002 to form the UFJ Bank Finally MTFG merged with UFJ in 2005 In the US Chase Manhattan Bank merged with JP Morgan to form JP Morgan Chase Citigroup grew aggressively through acquiring a whole series of banks and financial services firms including Travelers Group In the UK the major banks have all grown through merger and acquisition for example Bank of Scotland and Halifax combined to form HBOS 402 375 362 336 268 147 135 79 76 75 US US US Switzerland US US Belgium France UK Canada KornFerry Heidrick Struggles Spencer Stuart Egon Zehnder Russell Reynolds Ray Berndtson Amrop Hever TransSearch Globe IIC Partners 1 2 3 4 5 6 7 8 9 10 Revenue m Top 10 global headhunting firms 83600 39474 37241 28857 26985 26900 26500 25000 24219 19975 PricewaterhouseCoopers Deloitte Ernst Young KPMG BDO Grant Thornton Geneva Group RSM Praxity Crowe Horwath 1 2 3 4 5 6 7 8 9 10 Fee income m Top 10 accountancy networks 1030 935 885 882 776 743 736 706 618 575 UK UK US UK US US UK US US US Clifford Chance Linklaters Skadden ARPS Freshfields Bruckhaus Deringer Latham Watkins Baker Mckenzie Allen Overy Jones Day Sidley Austin White Case 1 2 3 4 5 6 7 8 9 10 Turnover m Top 10 law companies 136104 120814 118758 101818 95336 86397 77218 74701 71681 65267 US US US UK UK US Japan China France Spain JPMorgan Chase Bank of America Citigroup Royal Bank of Scotland HSBC Wells Fargo Mitsubishi UFJ ICBC Crédit Agricole Santander 1 2 3 4 5 6 7 8 9 10 Tier 1 capital m Top 10 banks Figure 127 Dominant firms in advanced business services Source based on data in The Banker July 2009 The Lawyer October 2009 Accountancy Magazine June 2009 Faulconbridge et al 2008 Table 3 12Dicken4084Ch12indd 381 19102010 110905 AM Part Three The Picture in Different Economic Sectors 382 In the aftermath of the 2008 financial crisis however many of these deals involving commercial and investment banks unravelled For example Bank of America acquired Merrill Lynch in the UK HBOS was acquired by Lloyds which in turn had to be rescued by the British government as did the largest bank of all RBS Both are currently largely owned by the UK government Not part of their corporate plan In the investment banking sector JP Morgan Chase acquired Bear Stearns and the Japanese firm Nomura acquired the Asian and European operations of Lehman Brothers which had been allowed to collapse in September 2008 by the US government The collapse of Lehman was without doubt one of the biggest shocks of all The UK company Barclays acquired some of Lehmans core US assets A great deal of financial blood was spilled Product diversification It is a short and supposedly logical step from this kind of growth orientation to the notion that ABS firms should not only operate in their own core area of expertise but also supply a complete package of related services The services conglomerate or the services supermarket arrived greatly stimulated in the case of financial services by increasing deregulation As we saw earlier it became increasingly possible for banks to act as securities houses for securities houses to act as banks and for both to offer a bewildering array of financial services way beyond their original operations A typical leading banks portfolio of offerings came to include clearing banking cor porate finance insurance broking commercial lending life assurance mortgages unit trusts travellers cheques treasury services credit cards stockbroking fund man agement development capital personal pensions and merchant banking At the same time entirely new nonbank financial services companies emerged In nonfinancial ABS sectors a similar trend developed For example companies offering accoun tancy consulting and other services under a single umbrella became common The rationale for product diversification was the familiar one of economies of scale and scope The argument for a strategy of diversified service operations was that it offered a complete package of services a onestop shop to customers Their supply by a large globally recognized brandname firm was supposed to give reassurance to potential customers that they would receive the highest quality service However there is little evidence that such diversifying mergers lead to significant improvements in efficiency One potential problem is the nature of financial services products themselves Mergers between car manufacturers or consumer goods companies allow production to be centralized because the products are essentially the same The same is not true for many financial services A bottle of beer is a real thing but financial products are intangible constructs of regulation culture and behaviour A current account is a different product in every country while life insurance policies are taxdriven products and tax systems are not harmonised Where will the synergies come from19 12Dicken4084Ch12indd 382 19102010 110905 AM Advanced Business Services 383 Nevertheless the merger waves in the financial sector showed no sign of disappearing until the 2008 crisis intervened and threw such ideas into question Transnationalization The provision of advanced business services to customers depends more than in any other sector on geographical proximity Although it is certainly true that some services can be supplied at a distance including of course many financial services the need for facetoface contact is hugely important As their major customers have expanded their overseas operations the pressure on ABS firms to follow has intensified Not surprisingly then all the leading ABS firms have become increasingly transnational in their operations20 In this section we look at three examples banking legal services and executive recruitment headhunting Financial services Although banks have long engaged in international business for example through foreign exchange dealing or providing credit for trade historically this kind of business was carried out from their domestic locations Any business that could not be carried out by mail or using telecommunications was handled by local correspondent banks there was no need for a direct physical presence abroad A small number of banks certainly set up a few overseas operations towards the end of the nineteenth century But even in the early part of the twentieth century the international banking network was very limited indeed Almost all interna tional banking operations were colonial part of the imperial spread of British Dutch French and German business activities In 1913 the four major US banks had only six overseas branches between them By 1920 the number of branches had grown to roughly 100 but there was little further change until the 1960s As with TNCs in manufacturing industries the most spectacular expansion of transnational banking occurred in the 1960s and 1970s In both cases US firms led the initial surge a reflection of both the focal role of the US in the postwar international financial and trading system and also the rapid proliferation of US manufacturing TNCs The number of foreign affiliates of banks increased from 202 in 1960 to 1928 in 1985 At the same time the geographical composition of the international banking network changed US banks became less dominant whilst European and Japanese banks increased the size of their international branch network Today the extent of transnationalization among financial services firms is considerable but also variable as Table 121 shows Although size and transna tionality are related it is not necessarily the biggest firms that are the most transnationalized It is notable that only two US firms are among the most trans national financial services firms Citigroup and AIG However JP Morgan Chase plans to launch a global business aimed at selling loans and commercial banking services to multinational corporations pitting the US bank against Citigroup and HSBC21 12Dicken4084Ch12indd 383 19102010 110905 AM Advanced Business Services 387 legal speciality sit the aim of firms is to make practice groups cohesive and based on a common set of values27 However perhaps more than many other kinds of TNC legal firms face an especially strong tension between creating a global way of working and local integration28 Table 122 lists the leading legal services firms all of which are from either the US or the UK These leading firms tend to use their own direct operations rather than work within a network29 The nature of transnationalization in the sector has marked regional patterns UK and European firms have extended their operations primarily into Asian markets not North America and conversely North American firms have shown little interest in expanding into Europe In that sense the pattern of sector transnationalization in legal services is a more complex and fragmented one than in the investment banking sector30 Table 122 The transnational scope of leading legal services firms 2006 Company Headquarters No of lawyers No of offices Clifford Chance UK 2432 28 Linklaters UK 2072 30 Skadden Arps Slate Meagher Flom US 1699 22 Freshfields Bruckhaus Deringer UK 2013 28 DLA Piper Rudnick Grey Cary UK 2900 59 Latham Watkins US 1669 22 Baker Mckenzie US 2975 70 Allen Overy UK 1760 25 Jones Day US 2178 29 Sidley Austin Brown Wood US 1495 16 White Case US 1783 38 Weil Gotshal Manges US 1129 20 Mayer Brown Rowe Maw US 1331 14 Kirkland Ellis US 1056 8 Sullivan Cromwell US 589 44 Shearman Sterling US 910 19 Wilmer Cutler Pickering Hale Dorr US 976 15 McDermott Will Emery US 1018 14 Lovells UK 1353 26 Dechert US 831 18 Source based on Faulconbridge 2008 Table 2 12Dicken4084Ch12indd 387 19102010 110905 AM Part Three The Picture in Different Economic Sectors 388 Executive recruitment The global executive search headhunting industry has a rather brief history originating in the US in the 1950s but growing very rapidly from the 1970s It developed primarily out of the management consultancy sector31 Headhunting exemplifies one of the key attributes of contemporary global business the per ceived importance of business leaders with transnational experience Headhunters are firms which search out suitable senior managerial or board executives on behalf of corporate clients It is an elite labour market function As a rule the target individuals are already employed in another firm so the term headhunting is rather appropriate Table 123 The transnational scope of leading headhunting firms 2008 No of Organizational No of worldwide Company Headquarters form consutants offices MRI Worldwide na Network 4500 65 KornFerry International US Owned 426 73 Heidrick Struggles International US Owned 297 58 Spencer Stuart US Owned 292 49 Egon Zehnder International Switzerland Owned 290 59 Russell Reynolds Associates US Owned 133 33 Ray Berndtson US Hybrid 300 48 AmropHever Belgium Hybrid 264 78 Globe UK Network na 15 EMA Partners na Hybrid 130 42 Source based on Faulconbridge et al 2009 Table 1 It is estimated that the top 10 firms listed in Table 123 account for around onethird of the global executive search market These firms are hired by clients for a fee based upon a candidates salary to fill a vacant senior position either actual or potential Whilst they are fundamentally offering the same service different firms have their own unique executive search cultures and styles Distinctions can be made between specialist boutiques that concentrate on headhunting in a limited number of sectors and integrated complete service corpora tions that offer executive search in any major industry As with other pro ducer services a long tail exists with firms that have some form of international operation circa 5000 firms32 It is the very largest headhunting firms that have expanded the most rapidly and aggressively 12Dicken4084Ch12indd 388 19102010 110905 AM Part Three The Picture in Different Economic Sectors 390 Geographies of advanced business services Cities as the natural habitat for advanced business services At first sight ICT developments would appear to release business services especially financial services from geographical constraints Such firms might seem to be especially footloose they are not tied to specific raw material loca tions whilst at least some of their transactions can be carried out over vast geographical distances using telecommunications facilities Their business as we have seen is information Such considerations have led many to write geog raphy and distance out of the script as far as financial services in particular are concerned35 There is no doubt that the revolutionary developments in ICT permit informa tion including financial transactions to whizz around the world electronically and that deregulation has reduced the resistance of national boundaries to finan cial flows But far from heralding the end of geography this has in fact made geography more not less important Indeed we find that at global national and local scales advanced business services continue to be extremely strongly concen trated geographically They are in fact more highly concentrated than virtually any other kind of economic activity except those based on highly localized raw mate rials However there are some subtle variations according to the particular func tion involved there is a division of labour within ABS firms parts of which may show a greater degree of geographical decentralization The geographies of ABS are enmeshed and embedded in cities cities of all kinds but especially the biggest cities whose top tier consists of the socalled global or world cities36 The reason is the primary importance of facetoface contact for all ABS That has been the recurring theme throughout this chapter Such services need geographical proximity to their clients They also create and benefit from the kinds of traded and untraded interdependencies discussed in Chapters 3 and 4 the buzz that comes from localized clustering The geogra phies of ABS then are synonymous with the geographies of big cities These cities are their natural habitat In this section we will focus on global financial centres but we should bear in mind that such centres are also the primary loca tions of the leading legal accounting consultancy headhunting advertising and other ABS Indeed they tend to form an ecology of ABS in which each feeds upon the others The global network of financial centres The network of global financial centres shown in Figure 129 has three major levels with London and New York forming the top level The widespread deregulation of 12Dicken4084Ch12indd 390 19102010 110905 AM Part Three The Picture in Different Economic Sectors 394 It takes a long time for real change to become apparent which is why it is impossible to predict with any certainty the effect of the 2008 crisis on Londons or New Yorks standing On the one hand there are anecdotal stories of financial firms planning to move out of London because of the fear of increased regulation or higher taxation On the other hand a 2009 Global Financial Centres Index report45 showed London improving its standing among the worlds leading financial centres as did New York But especially interesting was the increasing status of East Asian financial centres particularly Singapore Hong Kong and Shanghai The two latter cities are locked in competition as the leading financial centres of China46 Geographical decentralization and offshoring of business services All of the discussion of global financial centres suggests that the potential for other cities outside the favoured few shown in Figure 129 to develop as significant centres of finance and related activities is very limited In the UK for example the sheer overwhelming dominance of London makes it extremely difficult for pro vincial cities to develop more than a very restricted financial and ABS function It is of course the higherorder financial and ABS functions which are espe cially heavily concentrated in the major global financial centres However as we have seen the essence of ABS activities is the transformation of massive volumes of information Much of that activity is routine data processing performed by clerical workers Such backoffice activity can be separated from the frontoffice functions and performed in different locations The early adoption of largescale computing by banks insurance companies and the like from the late 1950s ini tially led many of them to set up huge centralized data processing units To escape the high costs of both land and labour in the major financial centres such units were often relocated to less expensive centres or in the suburbs Access to large pools of appropriate often female labour was a key requirement The introduction of dispersed computer networks made such centralized pro cessing units unnecessary and the trend changed to decentralize backoffice func tions more widely At the same time the distinction between backoffice and frontoffice functions became less clear In fact it is not only routine backoffice activities that have been decentralized It has become increasingly common for some of the higherskilled functions to be relocated away from head office into dispersed locations both nationally and in some case transnationally However centralization of backoffice functions is by no means obsolete For example Citicorp gathered all its back offices from around the world and recentralized them in large and more efficient centres to achieve economies of scale Even in the case of back offices therefore geographical centralization is far from dead Beyond the continued tendency to retain their major presence in key centres the major ABS firms have become increasingly involved in offshoring some of their 12Dicken4084Ch12indd 394 19102010 110906 AM Advanced Business Services 395 functions Note that the term offshoring in this context does not have the same meaning as the offshore financial centres discussed in the next section In 2006 over 75 per cent of major financial institutions had offshore activities compared with less than 10 per cent in 2001 The main activities offshored are those involving the use of IT lower valueadded activities such as payroll and lower valueadded contact with customers such as scripted outbound sales calls But offshoring has spread across nearly all business functions with sig nificant growth in transaction processing finance and various aspects of human resources activity Even activities requiring specific skills such as financial research and modelling have the potential to be ultimately offshored as well47 As the extent of offshoring has increased its particular organizational form has become more varied as Figure 1210 shows Initially most offshoring by financial services firms was vendor direct outsourcing to a foreign firm located overseas As major financial services firms became increasingly involved in offshoring they began to establish systems of captive direct offshoring setting up their own subsidiary operations in other countries The third and most recent arrangement vendor indi rect offshoring reflects the tendency for specialist outsourcing companies to establish their own transnational networks to serve more diverse customers So for example one of the leading Indian IT outsourcing companies Tata Consultancy Services TCS has recently established its own operations in Hungary as part of its increasingly global network TCS first opened a software centre in Hungary in 2001 it is now building a global delivery network so that projects can be completed closer to the cus tomer where necessary TCS chose Hungary because as well as English many Hungarians can speak other European languages including German French and Italian We want to provide a European front and point of con tact for our European customers TCS preferred eastern Europe over western Europe because it was much cheaper Eastern Europe is where India was a decade ago48 However India itself remains by far the most popular offshoring location Vendor direct Captive direct Vendor indirect Place contract with specialist firm in specific country Cost reduction Use of specialist expertise Speed Potential benefits Loss of control Security risks Potential costs Set up own directly owned operations overseas Increased control Reduced risk Greater security High cost of establishment and control Place contract with specialist firm with operations in several countries Lower costs Use of specialist expertise Vendor reputation Control issues Security risks Figure 1210 Alternative modes of offshoring Source based in part on material in the Financial Times 18 February 2004 12Dicken4084Ch12indd 395 19102010 110906 AM Part Three The Picture in Different Economic Sectors 396 with around twothirds of global offshored staff employed in the subcontinent A number of other countries have also attracted offshoring activity These include South Africa Malaysia and the Philippines where financial institutions can find the necessary skill and work quality These countries have large pools of young educated technologically competent and Englishspeaking workers There are a large number of graduates with finance accounting or management and information technology backgrounds who are ideally suited to offshore work in the financial sector49 Offshore financial centres Scattered across the globe a series of little places islands and microstates have been transformed by exploiting niches in the circuits of fictitious capital These places have set themselves up as offshore financial centres as places where the circuits of fictitious capital meet the circuits of furtive money in a murky concoction of risk and opportunity Furtive money is hot money that seeks to avoid regulatory attention and taxes50 The speculative nature of financial transactions and the desire to evade regulatory systems have led to the development of a number of offshore financial centres OFCs51 With few exceptions the sole rationale for such centres is to operate outside the regulatory reach of national jurisdictions They attract investors through their low tax levels and light regulatory regimes52 For example although more than 500 banks are located in the Cayman Islands with more than 500 billion in their accounts only around 70 of these actually have a physical pres ence there The vast majority are no more than a brass or plastic name plate in the lobby of another bank as a folder in a filing cabinet or an entry in a computer system53 Similarly there are roughly 300000 companies registered in the Virgin Islands although only 9000 of them show any signs of activity locally54 Figure 1211 shows the geographical distribution of offshore financial centres Each tends to fill a specific niche which it exploits in competition with other centres in the same geographical cluster and with similar niche centres elsewhere in the world Much of their growth occurred in the 1970s in places that were already operating as tax havens to act as banks booking centres for their Eurocurrency transactions By operating offshore booking centres international banks could act free of reserve requirements and other regulations Offshore branches could also be used as profit centres from which profits may be repatriated at the most suit able moment for tax minimization and as bases from which to serve the needs of multinational corporate clients55 The location of these offshore centres and especially their geographical clustering is partly determined by time zones and the need for 24hour financial trading There is now a concerted international drive to crack down on these offshore tax havens Such action was initiated by the OECD but has been followed by 12Dicken4084Ch12indd 396 19102010 110906 AM Advanced Business Services 397 0 Hours difference from Greenwich Mean Time 3 3 6 6 9 9 12 Nauru Nauru Manila Manila Taipei Taipei UAE UAE Kuwait Kuwait Lebanon Lebanon Cyprus Cyprus San Marino San Marino Campione Campione Andorra Andorra Costa Rica Costa Rica Aruba Aruba Turks Caicos Is Turks Caicos Is British Virgin Is British Virgin Is Anguilla Anguilla Antigua Antigua Nevis Nevis Montserrat Montserrat St Vincent St Vincent Barbados Barbados Netherlands Antilles Netherlands Antilles Malta Malta Monaco Monaco Liberia Liberia Mauritius Mauritius Tonga Tonga Vanuatu Vanuatu Cook Is Cook Is Western Samoa Western Samoa Singapore Singapore Bahrain Bahrain Luxembourg Luxembourg Gibraltar Gibraltar Bermuda Bermuda Bahamas Bahamas Cayman Is Cayman Is Panama Panama Isle of Man Isle of Man Jersey Jersey Guernsey Guernsey Liechtenstein Liechtenstein Switzerland Switzerland Hong Kong Hong Kong Figure 1211 Offshore financial centres Source based on Roberts 1994 Figure 51 specific actions by the US UK and other European governments These initiatives reflect the fact that huge tax losses are being incurred as firms and individuals hide their profits offshore A notable breakthrough was the raid on German accounts held in Liechtenstein It is not only developed countries that are affected by off shore tax havens Oxfam estimated that developing countries are losing out on annual income of up to 124 billion because more than 6 trillion of developing country wealth is held in offshore accounts56 NOTES 1 Martin 1999 6 11 2 See Braithwaite and Drahos 2000 for a discussion of the history of money and its regulation 3 Strange 1986 1 4 Pauly 2000 120 5 Dow 1999 33 6 French and Leyshon 2004 7 Financial Times 18 March 2008 8 Financial Times 16 March 1994 9 OBrien and Keith 2009 2456 10 Warf and Purcell 2001 227 11 See Langdale 2000 12 Kelly 1995 229 See also Crotty 2009 Dore 2008 Mügge 2009 Tett 2009 13 OBrien and Keith 2009 249 14 OBrien and Keith 2009 249 15 Kay 2009 57 12Dicken4084Ch12indd 397 19102010 110906 AM Part Three The Picture in Different Economic Sectors 398 16 Martin 1999 8 9 17 Financial Times 22 April 2009 18 The Economist 19 January 2008 70 71 19 Financial Times 26 May 2000 20 Jones 2005 21 Financial Times 29 January 2010 22 Financial Times 9 September 2009 23 ScottQuinn 1990 281 24 This section is based primarily on Faulconbridge 2008 and Jones 2007 See also Beaverstock 2004 25 Jones 2007 234 original emphasis 26 Faulconbridge 2008 502 27 Faulconbridge 2008 504 28 Faulconbridge 2008 504 29 Faulconbridge 2008 502 30 Jones 2007 233 31 This section is based upon Faulconbridge et al 2008 2009 32 Faulconbridge et al 2008 214 33 Faulconbridge et al 2008 222 34 Faulconbridge et al 2008 2267 230 Numbers in parentheses refer to pages in this work 35 OBrien 1992 See also OBrien and Keith 2009 36 There is a large literature on world cities notably Sassen 2001 Taylor 2004 See also the Globalization and World Cities Research Network GaWC based at Loughborough University UK wwwlboroacukgawc 37 Martin 1999 1920 38 Thrift 1994 Quotations are from that work 39 Thrift 1994 333 40 Thrift 1994 334 41 Cassis 2006 42 Lewis and Davis 1987 43 Clark 2002 448 44 Financial Times 8 February 2002 45 Financial Times 22 September 2009 46 Karreman and van der Knaap 2009 47 WTO 2008 114 48 Financial Times 3 August 2005 emphasis added 49 WTO 2008 114 50 Roberts 1994 92 51 See Hudson 2000 Palan 2003 Roberts 1994 52 Eatwell and Taylor 2000 189 53 Roberts 1994 92 54 Financial Times 7 December 2001 55 Roberts 1994 99 56 The Guardian 14 March 2009 12Dicken4084Ch12indd 398 19102010 110906 AM Thirteen MAKING THE CONNECTIONS MOVING THE GOODS LOGISTICS AND DISTRIBUTION SERVICES CHAPTER OUTLINE Taking distribution for granted The structure of logistics and distribution services The dynamics of the market for logistics services Technological innovation and logistics and distribution services Ecommerce a logistics revolution The role of the state regulation and deregulation of logistics and distribution services Regulation and deregulation of transportation and communications systems Regulation of transnational retailing Corporate strategies in logistics and distribution services Global logistics from transportation companies to integrated logistics service providers Global trading companies Globalizing retailers Logistics places key geographical nodes on the global logistics map Taking distribution for granted Whereas there is a huge literature and a continuous often frenzied debate on the role of financial services in the processes of globalization distribution rarely makes an appearance on the stage1 It remains hidden mainly confined to the specialist 13Dicken4084Ch13indd 399 19102010 110944 AM Logistics and Distribution Services 403 deal directly with the manufacturer or as other forms of logistics and distribu tion services have developed In a similar way the development of ecommerce makes it possible to bypass the traditional retailer as the key intermediary between producer and final consumer and to create a new type of retailer the etailer Figure 133 shows just one possible way in which the productionsupply circuit may be organized internationally although great diversity remains The dynamics of the market for logistics services In aggregate terms the growth of the market for logistics and distribution services is closely related to growth in the economy as a whole Hence the 2008 economic recession had a huge impact reducing demand for transportation and logistics services and putting on hold some major infrastructural projects in ports and other transportation and communications hubs and routes But beyond this cyclical variation in demand the market for logistics and distribution services is highly heterogeneous and we would not expect all parts to grow at similar rates Demand for certain kinds of distribution services has been growing more rapidly than others driven by the different characteristics of individual services Figure 133 A potential way of organizing logistics services Source adapted from Schary and SkjøttLarsen 2001 Figure 74 Supplier Customer Lead logistics provider Assetbased provider Information services Carrier DC services Local transport Parcel service Tier 1 Tier 2 Tier 3 13Dicken4084Ch13indd 403 19102010 110945 AM Part Three The Picture in Different Economic Sectors 408 home and to the seller direct access to a massive potential market without the need for physical space in the form of retail outlets and the associated inventory and staffing costs As a result online shopping has grown extremely rapidly Ecommerce both B2B and B2C has enormous potential implications for the traditional intermediaries of business and retail transactions for example wholesalers shippers travel agents and the like The early predictions were that many would disappear as their functions were displaced by direct online transac tions In fact this has not happened to the extent predicted On the contrary ecommerce has actually enhanced opportunities for such roles and created entirely new Internetbased service companies Some traditional intermediaries have adapted and found new ways of adding value as providers of logistics information and financial services new intermediaries have emerged14 Some of these are what are sometimes termed infomediaries notably the Internet service and content providers shown in Figure 134 To some extent these new infome diaries are increasing their relative bargaining power visàvis producers and buy ers More generally Figure 135 shows that in the case of both physical goods and electronic goods and services either old intermediaries transform themselves or new ones appear Related to the perception that ecommerce spells the end for the traditional intermediary organization is the idea that the traditional physical infrastructures will also be displaced by the new technological forms Again this is an illusion As Figure 136 shows there are several ways of fulfilling ecommerce orders15 Inherent in each of these is the question of physical space which paradoxically Conventional system Ecommerce in physical goods Ecommerce in electronic goods and services Supplier Intermediary Producer provider Intermediary Customer Old intermediary New or old intermediary Physical goods Electronic goods services Physicalized information Electronic information Figure 135 The continuing role of intermediaries in an ecommerce world Source based on Kenney and Curry 2001 Figure 32 13Dicken4084Ch13indd 408 19102010 110945 AM Part Three The Picture in Different Economic Sectors 410 Thus a whole variety of technological developments has helped to transform the nature and operations of the logistics and distribution industries Initially in the early twentieth century they were the technologies that enabled mass distribution systems to facilitate the output of the mass production systems of the day By the last two decades of the twentieth century the technologies had become predom inantly electronic Such technologies facilitate the operations of more flexible production systems through their ability to transmit and process vast quantities of information on all aspects of the supply circuit The role of the state regulation and deregulation of logistics and distribution services There is a significant obstacle to the smooth seamless operation of the kinds of logistics and distribution systems made possible by these technological innova tions state regulatory regimes By definition transnational production and distribu tion involve crossing political boundaries All national governments regulate in various ways the crossborder movement of goods and services We have discussed one aspect of this in Chapter 6 and in the other case study chapters the variety of trade measures both tariff and nontariff barriers that states use The existence of such regulations for example customs requirements and procedures creates a major discontinuity in the geographical surface over which distribution services operate see Figure 132 In this section we are concerned with the regulatory structures affecting the basic functions of the logistics and distribution services themselves especially transportation and communication systems Such regulations are devised and implemented at various politicalgeographical scales international regional and national They are also in a continuous state of flux In the past three decades in particular there have been major waves of deregulation Regulation and deregulation of transportation and communications systems Regulation of transportation and of communications has a very long history17 It has involved a varying mix of national and international level systems in the pub lic sphere as well as private organizations in the form of the operators themselves Much of the regulatory system in air and sea transportation relates to issues of safety and security whilst in communications a key issue is harmonization of standards to enable communications originating in one place to be received and understood in other places Such international bodies as the IMO International 13Dicken4084Ch13indd 410 19102010 110945 AM Part Three The Picture in Different Economic Sectors 412 of the airline industry within IATA In 1978 the US domestic airline industry was deregulated Subsequently both the US and the UK then set about reshaping their bilateral agreements towards more liberal policies For example France has been the most vigor ous opponent of liberalization so the US worked at isolating France by nego tiating openskies agreements with Belgium and other countries around France In short the process in the 1990s is USled liberalization that is seeing the world become gradually and chaotically more competitive The process is chaotic because even the most liberal states such as the US and UK are liberal mercantilists Another chaotic element is that many European African and South American states support liberalization within their continents but want protection from competition outside the continent especially from the US20 The continuing tensions between states in terms of their own air spaces and often their national airlines have important implications for logistics and distribution services Two examples illustrate this First the continuing disagreement between the US and the UK over mutual access over the North Atlantic route means that on the one hand US airlines have restricted access to London Heathrow whilst on the other British airlines are not allowed to fly routes onwards within the US beyond their initial point of entry This also means that the US company FedEx cannot operate a fully fledged operation from its UK base at Stansted it is allowed to fly from the US to Stansted but only to a small number of destinations from there Instead it has to charter planes to fly from Britain to Paris to connect with its European hub21 A second example is the recently resolved dispute between the US and Hong Kong which was especially important for the large express couriers FedEx DHL and UPS FedEx was allowed only five flights a week from Hong Kong to desti nations outside the US This was because Hong Kong wanted its airline Cathay Pacific to be able to fly within as well as to the US which the US refused to allow The agreement signed in 2002 increased the daily flights for allcargo car riers from eight to 64 phased in over three years although Cathay Pacific insisted that the agreement overbenefited US carriers22 Some of the biggest changes in the regulatory environment have resulted from the emergence of regional economic blocs such as the EU and the NAFTA The completion of the Single European Market in 1992 removed virtually all obstacles to internal movement of goods and services within the EU Liberalization of truck ing within and between the US Canada and Mexico was also a part of the NAFTA Under this agreement the US and Mexican border states were to be opened to international trucking by the end of 1995 By January 1997 Mexican trucking companies would be allowed to operate as domestic carriers in the border states and for international cargo in the rest of the US and by January 2000 they would be able to file to operate in the entire US In fact this did not happen Not until 2004 did the US Supreme Court overthrow the opposition of the House of 13Dicken4084Ch13indd 412 19102010 110945 AM Logistics and Distribution Services 413 Representatives to Mexican and US truckers operating in each others domestic markets In fact it still hasnt happened In 2009 Mexico retaliated with tariffs against US products because of the continued failure to implement the NAFTA agreement The Obama administration promised to work out a new agreement Regulating transportation and communication systems is not easy given the number of conflicting interests involved But it is far easier than regulating the Internet As a medium that knows no boundaries and that is allegedly although as we have seen not actually placeless it involves some intractable issues as to who regulates it The answer is far from clear not least because of the very newness of the Internet and ecommerce and their phenomenally rapid growth The key issue is whose laws apply when ecommerce transactions transcend different national jurisdictions Regulation of transnational retailing Retail markets tend to be a sensitive national and local issue Many countries have protected their domestic retail sector either by keeping out or by constraining the entry and operations of foreign retailers Restrictions on ownership for example by insisting on local partners or minority foreign ownership have been very common and continue to exist especially in emerging economies where there is a great fear of the domestic retailing sector primarily a smallfirm sector being swamped by foreign incursion Despite the considerable relaxation of such restrictions on foreign retailers the sector remains one in which regulatory considerations are important The rules of operation in national retail markets continue to be very diverse This is the case even within the EU where despite the Single Market consider able differences still exist in the regulatory structures of individual member states Each country continues to make and enforce its own rules about hours of oper ation the building of largescale retail stores the doing of parttime and overtime work and Sunday trading practices23 In the case of store opening hours for example the UK is the most liberalized EU state whereas in Germany Austria and most parts of Italy most stores are closed on Sundays This is changing espe cially in the big cities but not rapidly The US has probably the most lenient regulatory system towards retailing whereas Japan has been very restrictive although it has begun to liberalize Corporate strategies in logistics and distribution services Logistics and distribution services cover an immensely wide range of activities and consist of a mix of traditional shipping and carriage of goods through to the 13Dicken4084Ch13indd 413 19102010 110945 AM Part Three The Picture in Different Economic Sectors 414 highly complex and sophisticated logistics service providers LSPs from trading companies to large transnational retail chains In this section we outline the major trends in corporate strategies as firms respond to market technological and regu latory forces Although there are many niche areas within the distribution sector there is a broad tendency in most activities for the size of firms to be increasing and for higher degrees of concentration in a smaller number of large firms Growth through merger and acquisition and through network alliances has been especially prominent in this sector as firms strive to provide global logistics services This has meant that the names and identities of many firms are continuously changing Table 131 lists the worlds 10 largest logistics firms Table 131 Leading global logistics firms ranked by revenue Revenue Number Number of Company Country 2007 m Employment of offices countries DHL International Germany 30015 300000 18000 220 Kuehne Nagel Switzerland 14919 55000 100 SchenkerBAX Germany 14000 59000 1500 UPS Supply Chain Solutions US 7706 175 Panalpina Switzerland 7200 15000 90 C H Robinson Worldwide US 6556 7500 230 Geodis France 5016 26465 120 Agility US 4900 37000 120 Expeditors International US 4626 258 CEVA Logistics US 4600 54000 150 Source based on company and press reports Global logistics from transportation companies to integrated logistics service providers As customer demands have become more complex and more global the provid ers of logistics and distribution services have responded in a number of ways24 Some have diversified into complete onestop shops others have remained more narrowly focused on providing a limited range of functions In both cases the trend has been towards greater consolidation and concentration through acquisi tion and merger Some examples illustrate the trend In the shipping sector Maersk acquired Nedlloyd in 2005 to become the largest container operator in the world In the logistics field acquisitions and mergers have accelerated since 2000 when Exel was formed from a merger of a shipping company Ocean and a contract logistics supplier NFC In 2004 13Dicken4084Ch13indd 414 19102010 110945 AM Logistics and Distribution Services 415 Exel purchased the second largest UK logistics company Tibbett and Britton to become the sector leader with 111000 employees in more than 135 coun tries In turn in 2005 Deutsche Post World Net owner of DHL which it had acquired in 2003 acquired Exel This created by far the worlds largest logistics service company providing air freight ocean freight and contract logistics ser vices The new group DHL International employs around 300000 people worldwide As a result of such developments together with the movement of other service companies into logistics provision we can identify four major types of logistics service firm classified according to the kinds of physical and management services provided Figure 137 The simplest functions are provided by the traditional trans portation and forwarding companies The assetbased logistics providers first emerged dur ing the 1980s developing primarily from the diversification of some traditional transportation companies into more complex logistics service providers Several of the worlds leading container shipping companies such as MaerskSealand and NedlloydPO moved in this direction For example in 1992 Nedlloyd took on responsibility for all of IBMs distribution activities as part of its strategy to become a worldwide logistics provider During the early 1990s a number of networkbased logistics providers appeared on the international scene notably DHL FedEx UPS and TNT These thirdparty logistics providers started as couriers and express parcel companies and built up global transportation and communication networks to be able to expedite express shipments fast and reliably Supplemental informa tion services typically include electronic proofofdelivery and trackandtrace Assetbased logistics providers Traditional transportation and forwarding companies Major functions Major functions Warehousing Transportation Transportation Warehousing Inventory management Export documentation Postponed manufacturing Customs clearance Skillbased logistics providers Networkbased logistics providers Major functions Major functions Management consultancy Express shipments Information services Track and trace Financial services Electronic proofofdelivery Supply chain management JIT deliveries Solutions Physical services Management services Figure 137 Types of logistics service providers Source based in part on Schary and SkjottLarsen 2001 Figure 73 13Dicken4084Ch13indd 415 19102010 110945 AM Part Three The Picture in Different Economic Sectors 416 options from sender to receiver Recently these players have moved into the timesensitive and highvaluedensity thirdparty logistics market such as electronics spare parts fashion goods and pharmaceuticals and are com peting with the traditional assetbased logistics providers in these high margin markets25 The nature of these services necessitates creating geographically extensive and tightly integrated networks of operations All the leading firms therefore have a global presence Figure 138 shows just one such network DHL Each of these companies operates on the basis of global hubandspoke transportation networks owned either by themselves or with partners The fourth type of logistics service firm shown in Figure 137 the skillbased logistics providers became increasingly significant in the later 1990s These are firms that do not own any major physical logistics assets but provide a range of primarily informationbased logistics services These encompass consultancy ser vices including supply chain configuration financial services information tech nology services and a range of management expertise Examples of such skillbased logistics service providers include GeoLogistics a firm created in 1996 through the merger of three existing logistics companies Bekins LEP Matrix and recently rebranded as Agility now the eighth largest logistics company in the world Table 131 Figure 138 DHLs global network Source DHL 13Dicken4084Ch13indd 416 19102010 110945 AM Logistics and Distribution Services 417 Global trading companies Trading companies have a history going back many hundreds of years From the earliest days of longdistance trade they played an especially important role in facilitating trade in materials and products Here we look at two important contemporary examples both taken from East Asia The first example is the Japanese sogo shosha The common translation of the term sogo shosha is general trading company but they are very much more than this having been central to the development of the Japanese economy since the late nineteenth century26 The six leading sogo shosha Mitsubishi Mitsui Itochu Marubeni Sumitomo and NisshoIwai are gargantuan commercial financial and industrial conglomerates They operate a massive network of subsidiaries and thou sands of related companies across the globe Figure 139 and handle tens of thou sands of different products In the early 1990s they were responsible for roughly 70 per cent of total Japanese imports and for 40 per cent of Japanese exports This is the true Japanese general trading oligopoly each member of which has a major coordinating role within one of the Japanese keiretsu see Figure 57 Historically the sogo shosha developed to organize exchange and distribution within the Japanese domestic market Subsequently they became the first Japanese companies to invest on a large scale outside Japan These foreign investments were primarily designed to organize the flow of imports of muchneeded primary materials for the resourcepoor Japanese economy and to channel Japanese Figure 139 The global distribution of Japanese sogo shosha offices Source company reports 1 10 100 500 2000 Number of employees 13Dicken4084Ch13indd 417 19102010 110946 AM Logistics and Distribution Services 419 The second example of a trading company also taken from East Asia is the Hong Kongbased firm Li Fung27 This firm is not only the biggest export trading company in Hong Kong but also and more importantly a highly innovative logistics company with offices spread across 40 countries see Figure 1311 employing more than 14000 Established in Canton in 1906 Li Fung was originally a simple commodity broker connecting together buyers and sellers for a fee Today although still a Chinese family firm it has been transformed from the simple brokerage to an immensely sophisticated organizer of geographically dispersed manufacturing and distribution opera tions in a whole variety of consumer goods but with a strong specialization in garments see Chapter 10 Li Fung controls and coordinates the entire process In the companys own words We act as extension of your own business to manage all aspects of your global supply chain Dedicated teams of product specialists focus on each customer segment to professionally manage the entire supply chain from product design and development through raw material and factory sourcing production planning and management quality assurance and export docu mentation to shipping control28 These two examples show that traditional trading companies have carved out new roles for themselves both responding to and creating new demands for distribution and logistics services Figure 1311 The global spread of the offices of Li Fung Source Li Fung 13Dicken4084Ch13indd 419 19102010 110946 AM Part Three The Picture in Different Economic Sectors 420 Globalizing retailers Retailing is the final link in the production circuit As such it is extremely sensi tive to the specific characteristics of the consumer markets it serves Such markets continue to have a high degree of individuality despite the apparent universalization of some types of consumer preference Consequently retailing has always had and continues to have a strong domestic orientation although retailers invariably source their products from a much broader spectrum of geographical locations A few retailers moved into foreign markets at a relatively early stage in their develop ment One of the best examples was the US company F W Woolworth which opened stores in Canada in 1897 in the UK in 1909 and in Germany in 1926 Indeed so familiar did Woolworths become in most big cities in the UK that few of its customers realized it was a foreign firm But this was an exceptional case For the most part retailers were very reluctant entrants into foreign markets Where they did so it was usually into geographically andor culturally proximate locations But there has been a marked acceleration in the transnational activities of major retailers in recent years29 Table 132 lists the worlds leading transnational retailers ranked by their international sales volume The list includes the big food retailers Table 132 The worlds leading transnational retailers 2008 ranked by international sales volume International No of Company Headquarters sales USm of total sales countries WalMart US 113020 26 16 Carrefour France 91763 57 33 Metro Germany 70724 61 32 Ahold Netherlands 49440 76 9 Lidl Schwartz Germany 43931 51 24 Auchan France 38924 53 11 Aldi Germany 35269 48 15 Tesco UK 32717 30 13 IKEA Sweden 29763 94 37 Rewe Germany 25955 33 14 Seven I Japan 25490 30 4 Delhaize Belgium 21545 77 6 Costco US 18900 24 8 PPR France 17365 61 48 Tengelmann Germany 13036 47 15 Casino France 9287 23 11 Amazon US 9777 51 7 Kingfisher UK 9055 55 9 Best Buy US 8103 18 4 Home Depot US 7843 11 7 Source data supplied by Neil Coe 13Dicken4084Ch13indd 420 19102010 110946 AM Part Three The Picture in Different Economic Sectors 424 UPS in their links with China Leipzig in Germany is likely to join this group in the future DHL opened its principal European hub there in 2008 replacing its former hub in Brussels Figure 1313 The leading world container hubs 2009 Source based on Baird Maritime data Hong Kong Hong Kong Singapore Singapore Shanghai Shanghai Shenzhen Shenzhen Busan Busan Kaohsiung Kaohsiung Los Angeles Long Beach Los Angeles Long Beach Rotterdam Rotterdam Hamburg Hamburg Antwerp Antwerp Dubai Dubai Port Kalang Port Kalang Guangzhou Guangzhou Quingdao Quingdao Ningbo Ningbo Tanjung Pelepas Tanjung Pelepas Tianjin Tianjin Bremerhaven Bremerhaven Laem Chabang Laem Chabang Xiamen Xiamen Rank 1 TEU 1 20foot container 122 5 2 Top 20 container ports 2009 million TEUs 6 11 7 19 14 4 12 2 10 13 3 1 17 16 18 9 15 5 8 20 1 Memphis Memphis Hong Kong Hong Kong Anchorage Anchorage Tokyo Tokyo Seoul Seoul Frankfurt Frankfurt Los Angeles Los Angeles Shanghai Shanghai Singapore Singapore Louisville Louisville Paris Paris Miami Miami Taipei Taipei New York New York Chicago Chicago Amsterdam Amsterdam London London Dubai Dubai Bangkok Bangkok Beijing Beijing 3700 2000 1000 Top 20 cargo airports 2008 thousand tonnes 5 19 13 1 12 9 17 16 7 14 6 11 18 20 10 2 15 3 8 4 Rank 1 Figure 1314 The leading world cargo airports 2008 Source based on Airports Council International data 13Dicken4084Ch13indd 424 19102010 110946 AM Logistics and Distribution Services 425 NOTES 1 See Wrigley 2000 292 2 Schoenberger 2000 3 Min and Keebler 2001 265 4 OECD 2004 178 5 Financial Times 25 August 2005 6 Schary and SkjøttLarsen 2001 129 7 Abernathy et al 1999 Chapter 4 8 Financial Times 22 August 2008 9 Abernathy et al 1999 61 10 Quoted in the Financial Times 20 April 2005 11 Abernathy et al 1999 66 12 Stalk et al 1998 58 13 Leinbach 2001 15 14 US Department of Commerce 2000 18 15 Schary and SkjøttLarsen 2001 1326 16 Schary and SkjøttLarsen 2001 132 See also Fields 2004 17 See Braithwaite and Drahos 2000 18 Braithwaite and Drahos 2000 322 19 Braithwaite and Drahos 2000 454 20 Braithwaite and Drahos 2000 4567 21 The Sunday Times 23 January 2005 22 Commercial Aviation Today 21 October 2002 23 Sternquist 1998 151 24 This section is based primarily on Schary and SkjøttLarsen 2001 23041 25 Schary and SkjøttLarsen 2001 231 26 See Dicken and Miyamachi 1998 27 See The Economist 2 June 2001 Schary and SkjøttLarsen 2001 3835 28 wwwlifungcomengbusinessservicechainphp 29 Coe and Wrigley 2009 Dawson 2007 30 UNCTAD 2009 Annex Table AI9 31 Dawson 2007 38892 Numbers in parentheses refer to pages in this work 32 Coe and Wrigley 2009 33 Singapore Economic Development Board June 2004 34 Wang and Cheng 2010 provide a detailed analysis of the transition of the port of Hong Kong from a hub port city to a global supply chain management centre 13Dicken4084Ch13indd 425 19102010 110947 AM 13Dicken4084Ch13indd 426 19102010 110947 AM PART FOUR WINNING AND LOSING IN THE GLOBAL ECONOMY 14Dicken4084Ch14 Part 4indd 427 19102010 110956 AM 14Dicken4084Ch14 Part 4indd 428 19102010 110957 AM Fourteen CAPTURING VALUE WITHIN GLOBAL PRODUCTION NETWORKS CHAPTER OUTLINE Placing places in GPNs Creating enhancing and capturing value in GPNs Upgrading or downgrading of local economies within GPNs Injecting capital Stimulating local fi rms Diffusing knowledge Creating good jobs Number of jobs Quality of jobs Wages and salaries Labour relations The other side of the coin exporting jobs from headquarters countries The importance of being there But just being there is not enough The dangers of external dominance Placing places in GPNs Our focus so far has been on the patterns and processes of global shift on the forms being produced by the globalizing of economic activities and on the forces producing those forms These transformations of the geoeconomy are the outcome of extraordinarily complex processes involving major changes in the nature of pro duction distribution and consumption My central argument in this book is that the reshaping of the global economic map has been driven increasingly by the emergence of extremely complex organizational and geographical networks of 14Dicken4084Ch14 Part 4indd 429 19102010 110957 AM Part Four Winning and Losing in the Global Economy 430 production distribution and consumption what we have called global production networks GPNs The precise form of such networks how they are controlled and coordinated as well as the shape and extent of their specific geographies varies enormously as the case studies of Part Three revealed As we have seen TNCs operate through a complex mix of intraorganizational and interorganizational networks the internalized networks of TNCs themselves varying from centrally controlled hierarchies to flatter heterarchies and the externalized captive rela tional and modular networks created through strategic alliances and various kinds of subcontracting and supplier relationships within GPNs These complex production networks are grounded in specific places organizational networks connect into geographical networks GPNs therefore not only integrate firms and parts of firms into structures which blur traditional organizational boundaries for example through the development of diverse forms of equity and nonequity relationships but also integrate places national and local economies in ways that have enormous implications for their economic development It is this place dimension that provides the focus of this chapter The questions posed are those relating to the ways in which a places insertion or noninsertion into GPNs affects its developmental prospects We can think of places at whatever geographical scale as having an organizational ecology Figure 141 a mix of firms and parts of firms large and small old and new foreign and domestically owned connected together through geographically extensive production circuits and networks The branches and affiliates of TNCs are obviously part of a specific corporate structure and are constrained in their autonomy by parent company policy The extent to which they are functionally connected into the local economy is enormously variable But even the independent firms in a local economy may in fact be rather less independent than they appear at first sight Many are integrated into the supply networks of larger firms whose decisionmaking functions are very distant Other local firms may be linked together through strategic alliances or they may be a part of the flexible business networks coordinated by key broker firms TNC parent TNC affiliate Locallyheadquartered large firm Small local firm Figure 141 A places organizational ecology 14Dicken4084Ch14 Part 4indd 430 19102010 110957 AM Part Four Winning and Losing in the Global Economy 432 Creating enhancing and capturing value in GPNs Each stage in a production circuit Figure 33 each node in a global production network creates value through the combined application of labour skills process and product technologies and the organizational expertise involved in coordinat ing complex production and logistical processes and in marketing and distribu tion In this sense value is a surplus over and above the costs involved in performing the transformations and transactions at that particular stage or node In the economists terminology it would be called economic rent2 By definition the process is dynamic the aim is continuously to enhance value to increase profits andor to reduce competition through a whole variety of means product and process innovation improved labour productivity more efficient logistical systems and so on When we turn to value capture the situation is far more complicated A detailed analysis of the value chain for the production of the Apple iPod shows just how complicated the capture of value can be and also the extent to which the highest value capture tends to be at the high end of the value chain design brand ownership and control whilst assembly is far less significant in the total value added3 Geographically in the case of the iPod this means that the US captures most of the value even though all iPods are actually manufactured in China in Taiwanesecontrolled factories and the hard disk drive the most expensive component is manufactured by the Japanese firm Toshiba but mostly in factories located in China and the Philippines So the key questions addressed in this chapter are Who captures the value created within production networks Who benefits from value creation and enhancement This raises issues way beyond the narrow confines of firm com petitiveness and profitability to encompass all the different stakeholders involved in global production networks in different geographical locations The key issue is the configuration of power within GPNs which as we have seen already tends to be highly asymmetrical and subject to complex bargaining processes One dimension of this is the relationship between capital and labour In general over the past few decades there has been a pronounced shift in which capital has gained massively at the expense of labour not least because of the increased financialization of all parts of the economy see Chapter 3 This is shown for example in the increased unevenness in the distribution of incomes in many developed economies Chapter 16 Another dimension is the relationship between lead firms and their multilayered tiers of suppliers the extent to which lead firms are able to squeeze their firsttier suppliers who in turn try to squeeze their suppliers and so on through the entire production network This is apparent in several of the cases discussed in Part Three In this chapter however we are concerned with how value within GPNs is created enhanced and captured in the places the national and local economies in 14Dicken4084Ch14 Part 4indd 432 19102010 110957 AM Global Production Networks 433 which the component parts are located In other words the focus is developmental at the community level To what extent is the value created within GPNs captured for the benefit of the places in which the activities occur To what extent does participation in global production networks offer the potential to upgrade a places economic wellbeing Upgrading or downgrading of local economies within GPNs The potential effects of GPNs on local economies involve a whole range of com plex direct and indirect interactions as Figures 142 and 143 show They are contingent upon the relationships between the nature of the GPN operations themselves and the nature and characteristics of the local economy In the follow ing sections we focus on four especially important dimensions of a places involve ment in a GPN capital injection local firm stimulus knowledge diffusion and local employment creation Injecting capital The inflow of capital is the most obvious impact of foreign investment especially for those countries suffering from capital shortage TNCs have certainly been responsible for injecting capital into host economies both developed and develop ing But not all new overseas ventures undertaken by TNCs involve the actual transfer of capital into the host economy One estimate for the 1990s was that around 50 per cent of US foreign direct investment was actually raised on host country capital markets and not imported4 Thus local firms may be bought with local money Local firms may even be squeezed out of local capital markets by the perceived greater attractiveness of TNCs as an outlet for local savings Even where capital inflow does occur there will eventually be a reverse flow as the local operation remits earnings and profits back to its parent company This outflow may in time exceed the inflow A recent analysis of the impact of FDI on the Mexican economy concluded that when profit remittances are deducted from gross FDI flows the economic impact of the resulting net FDI capital per worker variable is reduced in magnitude and statistical significance5 Any net financial gain to the host country also depends on the trading practices of the TNC A host economys balance of payments will be improved to the extent that the local plant exports its output and reduced by its propensity to import A vital issue therefore is the extent to which financial leakage occurs from host 14Dicken4084Ch14 Part 4indd 433 19102010 110957 AM Unequal distribution of gains No necessary increase in wages Displacement of workers Repressive labour regulation Differential effects of upgrading Entry barriers Transactional dependencies Distance from lead firms Obstacles to upgrading Process upgrading Product upgrading Functional upgrading Types of upgrading interrelationships Volume of employment Type of employment skills gender Wage levels and recruitment Labour relations Stability Employment creation Integration of local firms into supply network Enhanced roles Spinoff effects Local firm stimulation Extent of knowledge transfer Appropriateness of technology Cost to local economy Knowledge diffusion Initial inflow of capital Capital raised locally Cost to local economy of obtaining investment Profits retained locally Profits remitted to parent company Transfer pricing Exportimport balance Capital injection Level of economic development Size of the economy Resource endowment Knowledge and skill base Composition of local labour supply Social political cultural characteristics etc Industry type Technology Scale of operations Extent of integration within the GPN Attributes To utilize local resources including knowledge and skills To serve host country market import substitution To serve export markets export platform Function Establishment of new unit Acquisition of existing firm Joint venture with local firm Use of local firm as supplier Mode of entry Potential for upgrading within GPNs Major areas of potential GPN impact Nature of the local economy Nature of the GPN operation Figure 142 Major dimensions of potential GPN impact on local economies 14Dicken4084Ch14 Part 4indd 434 19102010 110957 AM Local labour market effects Indirect employment Transfer pricing Purchase of local siterelated services Payment of local taxes rates etc Multiplier effects on local economy Transfer pricing Indirect employment survival of existing firms formation of new firms Competitive effects on local firms Learning effects on local firms production technology organizational practices labour organization Nonlocal Local Home Imports Overseas GEOGRAPHICAL Independent company Parent company ORGANIZATIONAL Sources of inputs Nonlocal Local Home Exports Overseas GEOGRAPHICAL Independent company Parent company ORGANIZATIONAL Destinations of outputs External to area Local borrowing Capital subsidy tax concessions from host government Sources of capital Reinvested locally Remitted to parent Profits created BACKWARD LINKAGES FORWARD LINKAGES Size of labour force Types of labour employed skills gender Wage levels Working conditions Training Labour relations Recruitment policies Direct employment Extent of integration within GPN and degree of local autonomy Function of plant Technology Scale of operations Industry type Mode of entry Nature of local operation Figure 143 Tracing the direct and indirect connections of a GPN in a local economy 14Dicken4084Ch14 Part 4indd 435 19102010 110957 AM Part Four Winning and Losing in the Global Economy 438 poorly developed supply linkages between local firms and foreigncontrolled plants A common observation is that foreign plants located in export processing zones EPZs are particularly unlikely to develop supplier linkages with the wider economy In the case of the Mexican maquiladora plants for example less than 5 per cent of the inputs used are sourced from within Mexico Additionally most of those inputs are lowvalue and lowtechnology products whose production does little to upgrade the local technological and skill base In some cases there may be a considerable amount of local sourcing but with relatively little involvement of genuinely local firms For example although the new foreign manufacturing plants established in the Johor region of southern Malaysia are sourcing a large part of their inputs in Johor the regional effect is confined to foreign mainly Japanese and Singaporean suppliers As a result the linkages of the new manufacturing plants are only in part beneficial to the local economy7 Overall Japanese firms in the Malaysian electronics industry tend to rely more heavily on relocated suppliers from their home country supporting the general belief about the effect of Japanese business ties8 In the electronics industry sourcing patterns appear to differ significantly by host country For example in 2001 foreign affiliates in the colour TV industry in Tijuana Mexico sourced about 28 per cent of their inputs locally of which only a very small proportion 3 per cent was supplied by Mexicanowned firms in Malaysia locallyprocured components by foreign affiliates in the electronics and electrical industries comprised 62 per cent of exports in 1994 the corresponding figure for Thailand was 40 per cent However in both coun tries the most strategic parts and components were supplied mainly by foreign owned companies rather than domestic ones9 Deeply embedded High level of investment in decentralized multifunctional operations Markets for local firms to develop and produce their own products Transfer of technology and expertise from inward investor strengthens local firms Selfsustaining growth through cumulative expansion of linked firms Diverse including highskilled highincome employment Weakly embedded Branch plants restricted to final assembly operations Markets for local firms to make standard lowtechnology components Subcontracting restricts independent growth Vulnerable to external forces and distant corporate decisionmaking Predominantly lowskilled lowpaid May be high level of temporary and casual employment Longterm partnerships Shortterm contracts Collaborative mutual learning Basis in technology and trust Emphasis on added value Unequal trading relationships Conventional subcontracting Emphasis on costsaving Degree of local embeddedness of inward investors Benefits to local firms Prospects for the local economy Quality of jobs created Duration and nature of local linkages Form of local linkages Attribute Developmental structure Dependent structure Figure 144 Dependent and developmental linkage structures Source based on Turok 1993 Table 1 14Dicken4084Ch14 Part 4indd 438 19102010 110958 AM Global Production Networks 439 This latter point is confirmed by a study of 227 Japanese electronics companies operating in 24 countries10 which found that although local procurement was widespread such increase in local content did not necessarily involve local suppliers Nevertheless involvement in a GPN may well create opportunities for the enhancement of local businesses Existing firms may receive a boost to their fortunes or new firms may be created in response to the stimulus of demand for materials or components The formation of new enterprises may be stimulated through the spinoff of managerial staff setting up their own businesses on the basis of experience and skills gained in participation in a GPN Diffusing knowledge GPNs in their operations disseminate important knowledge to local suppliers in lowcost locations which could catalyze local capability formation11 Simply by locating some of its operations outside its home country a TNC engages in the geographical transfer of knowledge In so far as a foreign affiliate employs local labour there will be a degree of knowledge transfer to elements of the local population through training in specific skills and techniques But the mere existence of a particular technology within a foreigncontrolled operation does not guarantee that its benefits will be widely diffused through a host economy The critical factor here is the extent to which the technology is made available to potential users outside the firm either directly through linkages with indigenous firms or indirectly via demonstration effects In fact the very nature of the TNC inhibits the spread of its proprietary technologies beyond its own organizational boundaries Such technologies are not lightly handed over to other firms Control over their use is jealously guarded the terms under which technologies are transferred are dictated primarily by the TNC itself in the light of its own overall interests They tend to transfer the results of innovation but not the innovative capabilities the knowhow rather than the knowwhy A major tendency as we saw in Chapter 5 is for TNCs to locate most of their technologycreating activities either in their home country or in the more advanced industrialized and some of the more advanced newly industrializing countries So far relatively little RD other than lowerlevel support laboratories has been relocated to developing countries In some cases this is a direct result of host government pressure on TNCs to establish RD facilities in return for entry Such leverage is greatest where the TNC wishes to establish a branch plant to serve the hostcountry market itself The evidence for TNCs transferring technologies beyond a fairly basic level to developing countries is very mixed A study of the electronics industry in Malaysia the Philippines and Thailand was fairly positive 14Dicken4084Ch14 Part 4indd 439 19102010 110959 AM Global Production Networks 443 unions in Western countries The general response of TNCs to such allegations is that they do not have complete control over what goes on in independent facto ries although in the face of these criticisms many TNCs are now implementing codes of practice to which their suppliers must conform see Chapter 17 However as far as their directly owned affiliates are concerned the general consensus seems to be that TNCs generally pay either at or above the going rate in the host economy Figure 145 shows two aspects of the wage comparison First the relative height of the columns shows that TNCs pay very much more to workers in highincome countries than to those in middle and lowincome countries This differential reflects a number of factors including the composition of economic activity educational and skill levels cost of living and so on Second although TNCs certainly pay higher wages overall than domestic firms in the same country group a ratio of 15 the pattern varies between country groups 14 in highincome countries 18 in middleincome countries and 20 in lowincome countries TNCs that do pay above the local rate may well cream off workers from local firms and possibly threaten their survival This point relates to the kinds of recruitment policies used by TNCs which may well mean that employees for a newly established local plant are drawn from existing firms rather than from the ranks of the unemployed Another aspect of recruitment at least in some industries is the extent to which TNCs recruit particular types of workers to keep labour costs 0 10 20 30 All countries High income Middle income Low income Annual wage thousands 15 14 18 20 Ratio Average wage paid by foreign affiliates Average domestic manufacturing wage Figure 145 Differences in average wages paid by foreign affiliates of TNCs and domestic firms Source based on Crook 2001 15 14Dicken4084Ch14 Part 4indd 443 19102010 110959 AM Part Four Winning and Losing in the Global Economy 444 low In the textiles garments and electronics industries for example there is a very strong tendency to prefer females to males in assembly processes and in some cases to employ members of minority groups as a means of holding down wage costs and for ease of dismissal But such practices appear to be specific to particular industries and should not necessarily be regarded as universally applicable to all TNCs in all industries Labour relations In many developing countries either labour is weakly organized or labour unions are strictly controlled or even banned by the state Even in developed economies some major TNCs simply do not recognize labour unions in their operations while deregulation of labour markets has become widespread But most TNCs however reluctantly do accept labour unions where national or local circum stances make this difficult to avoid Whether labour unions are involved or not the question of the nature of labour relations within TNCs focuses on whether they are good or bad that is harmonious or discordant Some studies suggest that TNCs tend to have better labour relations in their plants than domestic firms others point to a higher incidence of strikes and internal disputes in TNCs But it is often difficult to separate out the transnational element In the case of strikes for example it may be plant or firm size that is the most important influence rather than nationality of ownership One of the most acute concerns of organized labour is that decisionmaking within TNCs is too remote that decisions affecting work practices and work conditions pay and other labour issues are made in some fardistant corporate headquarters which has little understanding or even awareness of local circumstances Some labour relations decisions are far more centralized than others either being made at corporate headquarters or requiring its approval These areas tend to relate to the parent companys concern to control financial and labour costs However there is considerable variation between TNCs in their degree of headquarters involvement in labour relations The dispersed nature of TNC operations and the tendency towards remoteness in decisionmaking have made it very difficult for labour unions to organize effectively to counter such issues as plant closure or retrenchment Two developments although relatively limited so far are significant19 One is the initiation by global union federations such the International Confederation of Free Trade Unions ICFTU of networks of workers within specific TNCs in an attempt to move industrial relations issues to the global level The second development has occurred within the European Union As part of the social protocol of the 1993 Maastricht Treaty at least 15 million employees in some 1500 TNCs operating in Europe now have rights to infor mation and consultation on all matters that affect more than one member state Each company that employs more than 1000 people of whom at least 14Dicken4084Ch14 Part 4indd 444 19102010 110959 AM Part Four Winning and Losing in the Global Economy 448 are highly contingent on the specific circumstances involved But even though we cannot put precise numbers on jobs gained or lost through FDI one thing is clear the winners and the losers are rarely the same At one time it could be said with some accuracy that the dominant losers were production workers while the major gainers were whitecollar managerial workers But such a simple distinction no longer holds as the recent rapid increase in the outsourcingoffshoring of white collar jobs has shown Also given the complex geography of TNC networks Chapter 5 it is almost inevitable that jobs created in the home country through outward investment effects XE HE SE in the above formula will be in different places from those where jobs are lost The importance of being there One main challenge is to use globalization as a lever for local development by helping local firms and workers take advantage of the opportunities opened up by the global economy This derives from an awareness that the development of transnational networks of economic activities generates unprecedented possibilities for accessing new markets and resources acquiring new skills and capabilities and developing international competitive advantage24 Indeed the fact that GPNs have become the predominant mode within which production is organized means that it is very difficult indeed for local firms economies to prosper outside them Being there as an insider is virtually a prerequisite for development Whether or not a local firm is able to gain entry into a particular GPN depends on the extent to which a GPN is actually accessible The openness of a production network can be defined as the ease of entry for both new firms and new locations The degree of network openness varies according to industryspecific characteristics and the features of the business systems within which network firms are embedded Buyerdriven networks in garments and footwear tend to be more open than producer driven networks in say automobiles mainly as a result of lower entry barriers in the lowskilled labourintensive production activities In addition lead firms in the same industry might exhibit different networking behaviours depending on the idiosyncrasies of their national environments For example Japanese electronics companies have been slower than their American coun terparts to diversify their supply base and extend the geographical scope of their production networks in East Asia Japanese networks also tend to be more socially embedded and less marketoriented than American networks The most successful production networks however are neither closed nor open but permeable They are characterized by an evolving tiered structure in which a firsttier of selected stable partners is surrounded by a more mobile row of secondtier suppliers25 14Dicken4084Ch14 Part 4indd 448 19102010 110959 AM Global Production Networks 451 matters enormously Figure 147 summarizes the kinds of relationships involved in what has been called a strategic coupling process33 In effect this means that to participate in a GPN successfully a local economy needs to develop institutions and practices including training and education support for local entrepreneurial activities development of highquality physical infrastructure etc which meet the needs of GPNs Of course this will not guarantee success in capturing GPN value As we have seen TNCs have enormous potential flexibility in deciding where to locate their operations or source their inputs The relative bargaining power of firms versus local economies is critical see Chapter 7 This poses a huge dilemma for local economic development in a GPNdominated world Not to try to create the right conditions to attract GPN activities will undoubtedly close off a major avenue for economic development On the other hand to try to couple local assets too closely to specific GPNs also has its dangers not least that of being left stranded if the local operation is relocated elsewhere or of becoming too tightly locked in The dangers of external dominance Whereas the involvement of some foreign activities in a localnational economy will generally have beneficial effects not only in creating employment but also in introducing new technologies and business practices overall dominance by foreign firms is almost certainly undesirable There are real dangers in acquiring the status of a branch plant economy or of being totally at the mercy of shifting Technology Organization Territory Value creation Value enhancement Value capture Lead firms Subsidiaries and suppliers Customers Government agencies Labour organizations Business associations Local assets Local development Global production networks Local institutions Dependency and transformations Strategic coupling process Figure 147 Relationships between local economic development and global production networks Source based on Coe et al 2004 Figure 1 14Dicken4084Ch14 Part 4indd 451 19102010 111000 AM Part Four Winning and Losing in the Global Economy 452 configurations within GPNs But precisely what constitutes an undesirable level of foreign penetration is open to debate A high level of dependence on foreign enterprises potentially reduces the host economys sovereignty and autonomy its ability to make its own decisions and to implement them At the heart of this issue are the different often conflictual goals pursued by nationstates on the one hand and TNCs on the other see Chapter 7 Each is concerned to maximize its own welfare in the broadest sense Where much of a host countrys economic activity is effectively controlled by foreign firms nondomestic goals may well become dominant It may be extremely difficult for the host government to pursue a particular economic policy if it has insufficient leverage over the dominant firms The tighter the degree of control exercised by TNCs within their own production networks and the lower the degree of autonomy of individual plants the greater this loss of hostcountry sovereignty is likely to be In the individual case this may not matter greatly but where such firms collectively dominate a host economy or a key economic sector it most certainly does matter The most significant aspect of dependence upon a high level of foreign direct investment is technological the inability to generate the knowledge inventions and innovations necessary to generate selfsustaining growth As we have seen TNCs have a strong propensity to keep their higherlevel RD design and decisionmaking functions close to home When a domestic firm is taken over by a foreign firm there is almost inevitably a loss or downgrading of such functions in the acquired firm However this is not to argue that foreign investment should be avoided completely On the contrary What should be avoided by host economies is an excessive degree of foreign domination In other words ownership still matters This is an especially vital message for those economies like the UK which take a totally laidback view of the indiscriminate acquisition of domestic firms by foreign firms Seller beware NOTES 1 Bair 2009 29 30 2 Kaplinsky 2004 discusses economic rent in the context of global value chains See also Henderson et al 2002 Coe et al 2004 Palpacuer 2008 3 Dedrick et al 2009 4 UNCTAD 1995 1423 5 Ramirez 2006 812 6 Girourd and Mirza 2006 Tavares and Young 2006 UNCTAD 2000 2001 7 Van Grunsven et al 1995 3 8 Linden 2000 210 9 UNCTAD 2001 135 emphasis added 10 Belderbos and Capannelli 2001 11 Ernst and Kim 2002 2 12 Rasiah 2004 619 14Dicken4084Ch14 Part 4indd 452 19102010 111000 AM Global Production Networks 453 13 Mytelka and Barclay 2004 553 14 Ernst and Kim 2002 2 6 15 Ernst and Kim 2002 8 16 See Palpacuer and Parisotto 2003 10911 Jürgens and Krzywdzinski 2009 29 17 The Economist 17 December 2005 18 UNCTAD 2001 19 Wills 1998 20 Wills 1998 122 21 See for example Coe et al 2008b 22 Financial Times 17 February 2009 23 Hawkins 1972 24 Palpacuer and Parisotto 2003 97 25 Palpacuer and Parisotto 2003 1056 26 Humphrey and Schmitz 2002 27 Neilson and Pritchard 2009 Chapter 8 28 Barrientos and Gereffi 2009 29 Gereffi 1999 38 30 Palpacuer and Parisotto 2003 1078 31 Palpacuer and Parisotto 2003 11011 32 Bair 2009 30 33 Coe et al 2004 14Dicken4084Ch14 Part 4indd 453 19102010 111000 AM Fifteen DESTROYING VALUE ENVIRONMENTAL IMPACTS OF GLOBAL PRODUCTION NETWORKS CHAPTER OUTLINE Productiondistributionconsumption as a system of materials fl ows and balances Negative spillovers unintentional effects of production Disturbing the delicate balance of life on earth damaging the earths atmosphere CO2 emissions and climate change Atmospheric pollution The double exposure problem Fouling the nest creating and disposing of waste Distinguishing between valueless waste and valuable materials An inexorable avalanche of waste Recreating value from waste A global shift in waste We should think about production not as value creation but as a process of materials transformation in which environmental change and the organization disorganization of matter and energy are integral rather than incidental to economic activity1 Productiondistributionconsumption as a system of materials flows and balances Throughout all of our discussion of global production networks we have focused on the creation of value at various points in a network Such value as we saw in 15Dicken4084Ch15indd 454 19102010 111008 AM Environmental Impacts 455 Chapter 14 takes on different forms for different actors within a network Firms make profits shareholders receive dividends workers are paid wages or salaries In a developmental context what matters is how much and what kinds of value are captured for the benefit of the local community However there is another darker side to the picture We can see this more clearly using Figures 151 and 152 In Figure 151 the basic production circuit shown originally in Chapter 3 as Figure 33 has been set within a much broader framework which presents the productiondistributionconsumption circuit as a system of materials flows and balances Figure 152 provides a more detailed picture of the ways in which materials flows involved in the processing residual recycling and residual discharging are configured within a production system Negative spillovers unintentional effects of production What Figures 151 and 152 demonstrate is that there are unintentional external effects negative externalities or spillovers involved in all economic activities In other words just as production creates value it also has the capacity albeit Flows of information including customer orders Flows of materials and products Secondary recycled inputs Primary inputs for recycling andor modification processes Residuals requiring disposal Residuals generated during treatment andor recycling processes Nonproduct outputs Modification activity Recycling Environment as waste receptor Environmental damage externalities Inputs Transformation Distribution Consumption of materials and nonmaterials of inputs into semi finished or finished goods or services of the goods or services of the goods or services Energy inputs Financial inputs investment capital credit banking Technology inputs research design quality control product and process technologies Logistics inputs movement of materials products people and information electricity oil coal gas nuclear energy and renewables Services inputs procurement accountancy insurance marketing sales legal human resources advertising maintenance R E G U L A T I O N C O O R D I N A T I O N C O N T R O L Figure 151 Production circuits and the environment Source based in part on Turner et al 1994 Box 12 15Dicken4084Ch15indd 455 19102010 111009 AM Environmental Impacts 457 dispersed and chemically transformed In particular they enter in a state of low entropy as useful materials and leave in a state of high entropy as useless materials such as low temperature heat emissions mixed municipal wastes etc No material recycling processes can therefore ever be 100 per cent efficient3 Thus even after all efforts are made to recycle the unused energy and materials involved in production there will still be things left over in the form of residual waste and environmental damage This is simply because the fundamental laws of thermodynamics cannot be overruled the total mass of inputs to a transformation process is equal to the total mass of outputs If inputs do not emerge as desired products they must therefore appear as unwanted byproducts or wastes4 Such negative externalities are of various kinds and of varying geographical extent For example the negative externalities from a factory or from an airport are at one level geographically localized The impact is greatest at the location of the facility itself and its immediate neighbourhood but then declines with increas ing distance away from that location On the other hand the smoke pollution from the factory or the effect of aircraft fuel combustion may have much more extensive geographical effects particularly on the atmosphere The problem is that many adverse environmental effects cannot be contained within geographical boundaries Some are indeed global The environmental problems that are inherent in all aspects of production distri bution and consumption raise serious questions about the future sustainability of economy and society as we know them They raise big issues relating to the future of the worlds economic and trading system and indeed to most aspects of contemporary economic life In this chapter we will focus on two aspects of negative environmental impacts of production atmospheric damage including climate change atmospheric pollution and waste The question of environmental regulation will be addressed in Chapter 17 Disturbing the delicate balance of life on earth damaging the earths atmosphere Human life is only made possible by a complex and extremely delicate balance of processes atmospheric hydrological and biological As the history of the earth clearly shows such a critical balance may be disturbed by natural forces Periods of widespread freezing and glaciation drought and high temperatures rises and falls in sea level are all evident in the earths geological record Until relatively recently it was generally assumed that human activity would have little effect on natural processes it was simply too small in relative terms to influence such enormous 15Dicken4084Ch15indd 457 19102010 111010 AM Part Four Winning and Losing in the Global Economy 458 natural forces It is now widely accepted that this is not the case Indeed the evi dence of not only largescale but potentially irreversible damage to the natural environment by human activity is accumulating day by day By far the most contentious aspect of negative environmental externalities relates to potential atmospheric damage that is damage to the gaseous membrane that sustains all life on earth The processes of material transformation involve the use of massive quantities of energy especially of fossil fuels whose combustion products are the major source of damage to the earths atmosphere The problems arise because some of the key gas eous components of the earths atmosphere notably carbon dioxide methane and ozone are becoming excessively concentrated in the atmosphere The issue is one of balance Without these and other gases the earth would have a surface tempera ture like that of the planet Mars it would be uninhabitable The earths surface remains habitable precisely because of the presence of such gases in the atmosphere In combination they act like a greenhouse preventing both excessive solar heating and excessive cooling But it is a very delicate balance CO2 emissions and climate change It is now abundantly clear that this balance is dangerously disturbed by human action The causes of contemporary and future changes in climate their rate and their potential significance for the human species are all notably different from anything that has occurred previously in history or prehistory The causes are now dominated by human perturbation of the atmosphere the rate of warming already exceeds anything experienced in the last 10 000 years and is set to be more rapid probably than anything experienced in human history and the significance for humanity is qualitatively different from the previously given ecological imprint made by our current and growing population of 6 billion and more5 The overwhelming scientific consensus is that humaninduced climate change has become dominant In the view of the Intergovernmental Panel on Climate Change IPCC Warming of the climate system is unequivocal as is now evident from obser vations of increases in global average air and ocean temperatures wide spread melting of snow and ice and rising global mean sea level The updated 100year linear trend 19062005 of 074 056 to 092 C is larger than the corresponding trend for 19012000 of 06 04 to 08 C The linear warming trend over the last 50 years is nearly twice that for the last 100 years The total temperature increase from 18501899 to 20012005 is 076 057 to 095 C6 15Dicken4084Ch15indd 458 19102010 111010 AM Part Four Winning and Losing in the Global Economy 460 and oil for industrial production transportation and domestic use which accounts for almost twothirds of total CO2 emissions Within that figure emis sions from power plants account for 27 per cent industry for 14 per cent road transport for 12 per cent refineries for 6 per cent and international transport for 2 per cent9 A further onethird is created by emissions from global biomass mainly forest fires In absolute terms the worlds biggest emitters of CO2 were CO emissions 2 per capita tonnes 0110 1130 3160 61120 120 b b CO emissions 2 million tonnes 2500 1000 250 10 6018 a a Figure 154 The geography of CO2 emissions 2008 Source based on data in wwweladoegovenvironment 15Dicken4084Ch15indd 460 19102010 111010 AM Environmental Impacts 461 China and the US Together these two countries produced no less than 42 per cent of the worlds total emissions Europe contributed around 15 per cent But the picture is rather different when we look at the volume of emissions per head of population From such a per capita perspective China contributes less than 79 other countries But there is a further complication in interpreting the geography and there fore the politics of CO2 emissions The emissions data shown in Figure 154 are production data What happens if we take a different perspective that of consumption The CO2 emission figures especially for countries like China India and other developing countries particularly in East Asia are greatly influenced by the fact that much of those countries industrial production is for export to the developed markets of the US and Europe For example Chinese CO2 emissions grew by 45 per cent between 2002 and 2005 One estimate is that half of that increase was associated with production for export and 60 per cent of that export production was for Western economies10 In effect Quite a lot of carbon production was simply outsourced abroad We then imported the carbon intensive goods back to Britain and then consumed that carbon It is not the Chinese who are consuming the outputs from its coastal economic boom The extra two large coal stations per week in China are being built for export manufacturers And since it is likely that the efficiency of coalfired generation is lower in China than in developed coun tries outsourcing carbon intensive industries may be more polluting before adding in the pollution from shipping and other transport back to developed countries11 Predicting the precise effects of global warming is like all predictions of the outcome of highly complex processes far from easy However it is abun dantly clear that the current upward trend in temperatures is potentially catastrophic for many parts of the world as the IPCC reports show But the effects will be far from geographically evenly spread Shifting climatic zones will create intensified drought in some areas but higher rainfall and increased frequency of flooding in others The geography of food production will be very different from that of today Rising sea levels produced by the melting of polar ice will drastically change the shape of coastlines with especially serious effects on those cities located on lowlying land The global economic map will be drastically reshaped Atmospheric pollution Industrial processes including transportation create other forms of atmospheric damage in addition to the effect of CO2 emissions on climate change Some of these types of atmospheric pollution are invisible to the naked eye others are very 15Dicken4084Ch15indd 461 19102010 111011 AM Part Four Winning and Losing in the Global Economy 462 visible indeed most notably the dense clouds of yellow polluted air found in major cities and industrial clusters One of the most important types of atmospheric dam age occurs in the earths ozone layer Ozone is formed in the stratosphere through the chemical reaction of oxygen and sunlight At this level ozone is vital to the sustainability of human life on earth because it absorbs almost all the ultraviolet radiation from the sun which would otherwise make human life impossible Equally an excess of ozone in the atmosphere is inimical to temperature change and to human health Any damage to this vital protective shield poses a serious problem Just such thinning of or even holes in the ozone layer beyond natural occur rences began to be identified in certain parts of the world in the early 1970s One of the major effects of ozone depletion is an increase in the incidence of skin cancer A primary cause was believed to be the chlorofluorocarbons CFCs which had become extensively used in refrigeration and aerosols Although CFCs are now heavily restricted the fact that these chemicals are immensely stable means that the amount already in the stratosphere will still be affecting the ozone layer until about 208712 In fact there is no guarantee that holes in the ozone layer will not continue to appear and even to grow The most significant types of atmospheric pollution induced by the processes of production distribution and consumption result from the emission of a whole range of tiny particles of sulphur dioxide nitrogen oxides lead copper zinc and other products of combustion Such particles may remain in the atmosphere as solid par ticulate matter SPM or in a dissolved state in rainfall or in rivers and lakes In each case the result is a serious environmental and health problem Although such pollu tion may have localized sources it frequently spreads very widely depending on the nature of the pollutant and the prevailing atmospheric conditions notably air mass and wind directions and intensities What is usually called acid rain for example is generated at specific locations coalfired power stations metallic ore smelters but can travel across considerable distances to affect places far from the point of genera tion It causes acidification of rivers and lakes damages vegetation degrades soils and corrodes buildings Such acidic pollutants are classic cases of global or at least transboundary environmental damage Figures 155 and 156 provide two examples of pollution through the concentra tion of particulate matter that are closely linked to the operation of global produc tion networks Figure 155 maps the particulate matter emitted by oceangoing ships a key element in the movement of materials commodities products and wastes within GPNs This is a much bigger source of environmental pollution than air transport It is estimated that merchant shipping emits 12 billion tonnes of CO2 per year For example When the worlds largest merchant ship ferries its monthly cargo of 13000 containers between China and Europe it burns nearly 350 tonnes of fuel a day its giant diesel engine can emit more than 300000 tonnes of CO2 a year equivalent to a mediumsized coal power station13 15Dicken4084Ch15indd 462 19102010 111011 AM 0005 00501 0102 0205 05101 10120 Particulate matter concentration 3 microgramsm Figure 155 Pollution from maritime transport Source based on Corbett et al 2007 Figure 1 The Guardian 13 February 2008 15Dicken4084Ch15indd 463 19102010 111011 AM Part Four Winning and Losing in the Global Economy 464 Most significant is the fact that ships use the most polluting type of oil what is known as bunker fuel which is the residue from crude oil refining after all the cleaner elements have been removed It is an extremely potent source of pollutioninduced health problems Our results indicate that shippingrelated emissions from maritime shipping contribute approximately 60000 deaths annually at a global scale with impacts concentrated in coastal regions on major trade routes Most mortality effects are seen in Asia and Europe where high populations and high shippingrelated PM concentrations coincide14 Apart from such concentrated sources of atmospheric pollution as power stations metal smelters and oceanic shipping routes among the most significant locations of healththreatening pollution are the worlds major cities Figure 156 shows the variation in concentrations of particulate matter across major world cities Virtually all cities have levels of concentration above the World Health Organization guide lines of 20 micrograms per cubic metre However the biggest problems are clearly in big cities in developing countries where there has been rapid industrialization inefficient power generation and an accelerated increase in car ownership often of old polluting vehicles One extremely serious byproduct of such high levels of atmospheric pollution is the high number of premature deaths Figure 157 The double exposure problem Climate change is an emerging threat to global public health It is also highly inequitable as the greatest risks are to the poorest populations who have contributed least to greenhouse gas GHG emissions The rapid economic development and the concurrent urbanization of poorer countries mean that developingcountry cities will be both vulnerable to health haz ards from climate change and simultaneously an increasing contributor to the problem15 Climate change is claiming 300000 lives a year and costing the global economy 125bn annually with the damage set to escalate rapidly A further 300m people around the world are seriously affected by climate change through for instance malnutrition or disease and by being displaced from their homes16 The highly uneven incidence and impact of climate change and atmospheric pol lution in conjunction with the immense variations in global economic wellbeing discussed in Chapter 16 create what has been called a double exposure problem Both climate change and economic globalization are ongoing processes with uneven impacts and both include implicit winners and losers Double expo sure refers to cases where a particular region sector ecosystem or social group is confronted by the impacts of both climate change and economic 15Dicken4084Ch15indd 464 19102010 111011 AM 1 10 35 City population millions Particulate matter concentration 3 microgramsm 1029 3049 5099 100 Figure 156 Air pollution in world cities Source based on data from World Bank 2008a Table 314 15Dicken4084Ch15indd 465 19102010 111011 AM Part Four Winning and Losing in the Global Economy 466 globalization It recognises that climate impacts are influenced not only by current socioeconomic trends but also by structural economic changes that are reorganizing economic activities at the global scale different outcomes emerge when the two processes are considered together17 It is the worlds poorest countries that are most seriously threatened Although Africa is a double loser overall the situation is more varied than this generaliza tion suggests There are sectoral effects as in the case of Mexican agriculture farmers who are trying to compete in international markets as well as agri cultural wage labourers in Mexico are likely to be double losers in terms of climate change and globalization18 Among the most vulnerable social groups affected by double exposure are the poor residents of cities in both the developed and developing worlds At the same time that globalization is contributing to the economic vulnerabil ity of disadvantaged residents of US cities climate change may increase the physical vulnerability of these groups to weatherrelated events Climate change may increase mean summer temperatures in Northern cities and may also increase the frequency and magnitude of summer heat waves con sequently increasing heatrelated illnesses and deaths Residents of poor innercity communities are among the most vulnerable to heat waves due to lack of resources to pay for air conditioning or to leave stifling central 0 100 200 300 Annual average deaths thousands 400 500 600 China India Former socialist economies East Asia and the Pacific Latin America and the Caribbean South Asia Middle East SubSaharan Africa Established market economies Figure 157 Premature deaths due to urban air pollution Source data from World Bank WorldWatch Institute cited in the Financial Times 27 January 2006 15Dicken4084Ch15indd 466 19102010 111012 AM Environmental Impacts 467 city areas Globalization and climate change thus represent a dual threat to these groups For poor residents of cities in the developing world the double impacts of globalization and climate change may be even more severe In conjunction with increased financial vulnerability as the result of globalization poor resi dents of developing world cities are also among the groups that are most vulnerable to climatic change Many of the urban poor live in shantytowns and squatter settlements located in precarious areas such as on hillsides Such areas are especially vulnerable to mudslides or flooding as the result of severe storms events that may increase in both frequency and magnitude as the result of climate change In addition to direct physical hazards the urban poor are also vulnerable to climate change related healthhazards particularly outbreaks of diseases such as cholera and malaria both of which increase with warm spells and heavy rains19 The argument therefore is that different sets of winners and losers from globalization may emerge when the effects of the two sets of global processes economic glo balization and environmental change are superimposed both on those who are vulnerable and on those who may benefit Fouling the nest creating and disposing of waste Distinguishing between valueless waste and valuable materials Wastes are materials that are not prime products that is products produced for the market for which the generator has no further use in terms of hisher own purposes of production transformation or consumption and which he she wants to dispose20 However distinguishing between waste valueless or useless materials and valuableuseful materials is far from straightforward A glance back to Figures 151 and 152 show why this is so Conventionally waste is seen as the endofpipeendofprocess unwanted and valueless product of a linear process In contrast given a conceptualiza tion of the economy as complex marked by recursive flows and feedback loops waste is more appropriately seen as an unintended consequence of every stage in the economy every material transformation Equally however such waste has the potential once again to become a valued and valuable material Whether a material is seen as valueless waste or valuable resource is therefore a contingent and context dependent matter depending on specific combinations of material technological economic and regulatory influences in timespace21 15Dicken4084Ch15indd 467 19102010 111012 AM Environmental Impacts 469 different problems What has come to be called ewaste is now the biggest and fastestgrowing source Such waste is highly problematic On average a computer is 23 plastic 32 ferrous metals 18 nonferrous metals lead cadmium antimony beryllium chromium and mercury 12 electronic boards gold palladium silver and platinum and 15 glass Only about 50 of the computer is recycled the rest is dumped The toxicity of the waste is mostly due to the lead mercury and cadmium nonrecyclable components of a single computer may contain almost 2 kilograms of lead Much of the plastic used contains flame retardants which make it difficult to recycle25 The above examples of waste are producer generated But as consumers we also generate huge volumes of what is usually classified as municipal solid waste MSW Our trash or municipal solid waste MSW is made up of the things we com monly use and then throw away These materials range from packaging food scraps and grass clippings to old sofas computers tires and refrigerators26 As the figures above show the volume of MSW is astronomical and poses huge disposal problems Figure 159 shows the broad breakdown of MSW for the US Although the largest share of the total materials is organic in nature paper Food and beverages Animal waste Cleaning wastes Refrigerants Metals Paint wastes containing heavy metals Strong acids and bases Cyanide wastes Sludges containing heavy metals Construction Ignitable wastes Paint wastes Spent solvents Strong acids and bases Vehicle maintenance shops Paint wastes Ignitable wastes Spent solvents Acids and bases Chemicals Strong acids and bases Reactive wastes Ignitable wastes Discarded commercial chemical products Paper and printing Ink wastes including solvents and metals Photography waste with heavy metals Ignitable and corrosive wastes Heavy metal solutions Furniture and wood Ignitable wastes Spent solvents Paint wastes Cleaning and cosmetics Heavy metal dust and sludges Ignitable wastes Solvents Strong acids and bases Figure 158 Typical hazardous wastes generated by selected manufacturing industries Source based on UNEP 2004 20 15Dicken4084Ch15indd 469 19102010 111012 AM Part Four Winning and Losing in the Global Economy 470 paperboard yard garden trimmings and food scraps the biggest single category is containers and packaging followed by nondurable goods The throwaway con sumer society is the major source of MSW at least in developed countries Indeed the trend is clear as countries get richer the organic share decreases whereas the paper and plastic ones increase27 Recreating value from waste As we saw earlier waste almost always has the potential once again to become a valued and valuable material Each stage in the materials flow and transformation cycle presents opportunities to recycle at least some of the waste created see Figure 152 The problems inherent in dumping waste in landfill sites or the burning of waste in incinerators other than to generate energy are so great that the recovery and recycling of waste at all stages of the productiondistribution consumption circuit has become a major priority All countries now operate some kind of waste recycling strategy although its scale and effectiveness vary widely Indeed such activity is now on such a large scale that it forms the basis of entirely new businesses and industries In that respect it could be said that value is being recreated However the economics of recycling are quite volatile At times of very high commodity prices in say steel or paper the market for scrap steel or recycled paper will be very buoyant When such commodity prices weaken the obverse applies Recycling may be seen as too expensive although national regulations will invariably insist that it is carried out On the other hand there is little doubt that recycling has significant environmental benefits Paper 327 Plastics 121 Rubber leather and textiles 76 Metals 82 Wood 56 Glass 53 Yard trimmings 128 Food scraps 125 Other wastes 32 MSW generation by material 2007 254 million tons before recycling b Containers and packaging 309 Nondurable goods 245 Durable goods 179 Yard trimmings 128 Food scraps 125 Other wastes 14 MSW generation by category 2007 254 million tons before recycling a Figure 159 The composition of municipal solid waste in the United States Source based on USEPA 2008 Figures 5 6 15Dicken4084Ch15indd 470 19102010 111012 AM Environmental Impacts 471 The most valuable benefit of recycling is the saving in energy and the reduction in greenhouse gases and pollution that result when scrap materials are sub stituted for virgin feedstock Recycling aluminium for example can reduce energy consumption by as much as 95 Savings for other materials are lower but still substantial about 70 for plastics 60 for steel 40 for paper and 30 for glass Recycling also reduces emissions of pollutants that can cause smog acid rain and the contamination of waterways28 A global shift in waste In many cases wastes are dealt with locally at or close to the point of generation However one of the most significant developments of recent years is the reloca tion of waste on an international or global scale In other words there is a global shift in waste In large part this arises from the existence of wide geographical dif ferentials in the nature and stringency of environmental regulations Just as firms may seek out tax havens or unionfree labour havens so too some may seek out pollution havens The notorious environmental problems within the USMexico border zone are often cited as evidence as are examples of serious environmental damage in the newly industrialized economies of East and South Asia29 This differential capacity to pollute and produce dangerously in part reflects the increasing involvement of national states with environmental regulation which creates opportunities and constraints for companies in their locational strategies As a result of this and changes in production and transportation technologies dirty industries and the production of pollutants can to a degree be shifted to spaces where their localized impacts are more tolerated With the tightening of environmental regulation companies began to relocate dirty hazardous and polluting production activities initially to peripheral regions within their home national territories but increasingly to parts of the global periphery Companies were often encouraged to do this by financial inducements and low or no levels of environmental regulation as national governments eagerly encouraged the perceived benefits of modernization via industrial growth regardless of environmental or social cost30 A specific aspect of this issue concerns safety and environmental management Industrial disasters such as the oftquoted one at the Union Carbide plant at Bhopal India in 1984 have focused attention on the safety practices of TNCs A frequent claim was that TNCs tend to adopt less stringent safety practices in their developing country plants than in their home plants The more recent conflict in Nigeria involving Shells environmental practices in Ogoniland raised both envi ronmental and political issues The now collapsed and infamous US company Enron clearly rode roughshod over environmental regulations in many parts of the world with some devastating effects These cases and others are serious in the extreme But it is dangerous to generalize from them to produce universal statements The significance of lower environmental 15Dicken4084Ch15indd 471 19102010 111012 AM Part Four Winning and Losing in the Global Economy 472 standards in relocation should not be overestimated31 A study of US companies in the late 1980s at a time when environmental regulatory differentials were steeper than today did not show such firms engaging in industrial flight to pollution havens on a large scale The period following the introduction of stringent environmental regulations in the US was not characterized by the widespread relocation of pollutionintensive industries to countries with lower regulatory standards32 The tendency for TNCs to relocate their environmentally noxious production has almost certainly been exaggerated especially as regulatory pressures have inten sified However there is another dimension to the global shift in waste that is most certainly on the increase international trade33 According to UNEP Between 1993 and 2001 the amount of waste crisscrossing the globe increased from 2 million tonnes to more than 85 million tonnes Unfortunately data on waste movements are incomplete not all countries report waste movements to the Basel Convention However we do know that the movement of waste is big business34 It is also highly contentious business not least because of the argument that devel oped countries are in effect dumping their waste especially their hazardous waste on to poor countries Although there is certainly some truth in this it is not the whole story35 Only 2 per cent of the waste generated worldwide in 2000 was actually traded However the vast majority of the waste that was traded around 90 per cent was hazardous waste consisting of radioactive materials toxic heavy metals and printed circuit boards The biggest single waste component by volume was lead and lead compounds The most contentious material however is that of radioactive waste Over 50 countries currently have spent fuel stored in temporary locations awaiting reprocessing or disposal Major commercial reprocessing plants operate in France the UK and the Russian Federation with a capacity of some 5000 tonnes per year Countries like Japan have sent 140 shipments of spent fuel for reprocessing to Europe since 197936 The idea of container ships moving such hazardous materials round the world is not a very comforting one But it is going on all the time and is likely to increase Where does this traded waste end up Although most of the publicity focuses on China in fact the majority of the worlds waste around 75 per cent in 2000 is actually traded between developed countries During the late 1990s Germany was the biggest exporter and France the biggest importer of waste Nevertheless there is no doubt that China plays a huge role in international trade in waste In large part this is because of Chinas recent insatiable appetite for industrial materials see Chapter 8 For example in 2004 the US exported 31 billion in scrap to China making scrap the USs biggest dollar value export to China outstripping airplane parts and electronics37 Some 70 per cent of the UKs exports of plastic waste go to 15Dicken4084Ch15indd 472 19102010 111012 AM Environmental Impacts 473 Hong Kong and thence to the mainland 50 per cent of the UKs exports of paper waste go to China38 A similar situation applies to most other developed countries China is the magnet for waste One repercussion is that it has become more difficult for domestic recycling firms to compete with Chinese recyclers who may offer prices for plastic waste some twoandahalf times higher than UK companies The result is that China drives the waste trade But the trade is being driven equally by tough EU legislation forcing local authorities and businesses to recycle more Landfill charges are rising steeply making it relatively cheaper to send the waste abroad Meanwhile major companies have moved in offering to collect and dispose of large quantities The trade is made pos sible by the vast numbers of shipping containers arriving in Britain with Chinese exports the return waste trade to China is accelerating rapidly39 This in effect takes us back full circle Not only are waste materials reused in further manufacturing processes but also the huge imbalance in trade between China and the West creates yet another form of reverse trade Not least some of the packaging materials used in the consumer goods exported from China go back to their origin Global production networks are indeed powerful shapers of our world both positively and negatively Environmental degradation is therefore a major social problem throughout the world It is especially problematic in many of the newly industrialized and emerging market economies where the singleminded pursuit of rapid economic growth has caused particularly severe environmental degradation Rising environmental costs in both urban and rural areas are materializing in poor health physical damage loss of amenities and other problems that demand extensive remedial spending In order to stimulate rapid growth the NIEs have used up significant environ mental capital that can only be restored if at all at considerable cost to future generations40 The thorny question of what can or should be done to ameliorate such nega tive effects of production distribution and consumption will be addressed in Chapter 17 NOTES 1 Bridge 2008a 77 emphasis added Hudson 2009 discusses the neglect of materiality in the social sciences 2 Simonis and Brühl 2002 98 3 Turner et al 1994 17 15Dicken4084Ch15indd 473 19102010 111012 AM Part Four Winning and Losing in the Global Economy 474 4 Hudson 2001 288 5 Hulme 200448 6 IPCC 2007 4 7 IPCC 2007 2 8 McNeill 2000 109 9 Financial Times 9 July 2008 10 Guan et al 2009 11 Helm 2009 78 12 McNeill 2000 114 13 The Guardian 13 February 2008 14 Corbett et al 2007 8517 15 CampbellLendrum and Corvalán 2007 109 16 Global Humanitarian Forum cited in The Guardian 30 May 2009 17 OBrien and Leichenko 2000 227 18 OBrien and Leichenko 2000 229 19 OBrien and Leichenko 2000 229 20 UNEP 2004 1 See also Taylor and Morrissey 2004 USEPA 2008 21 Hudson 2009 emphasis added 22 The following section draws extensively on UNEP 2004 23 UNEP 2004 34 24 UNEP 2004 16 25 UNEP 2004 36 26 USEPA 2008 2 27 UNEP 2004 22 28 The Economist Technology Quarterly 9 June 2007 22 29 Bello and Rosenfeld 1990 30 Hudson 2005 194 31 Hudson 2005 195 See also Smarzynska and Wei 2001 32 Leonard 1988 33 See for example Beukering 2001 Beukering and Bouman 2001 UNEP 2004 34 UNEP 2004 30 35 UNEP 2004 30 36 UNEP 2004 31 37 Goldstein 2007 38 UK Department for Environment Food and Rural Affairs Defra figures 39 The Guardian 20 September 2004 40 Brohman 1996 126 127 15Dicken4084Ch15indd 474 19102010 111013 AM Sixteen WINNING AND LOSING WHERE YOU LIVE REALLY MATTERS CHAPTER OUTLINE Location matters Incomes and poverty The contours of world poverty Inequalities within countries Income inequalities within developed countries Income inequalities within developing countries Winners and losers Where will the jobs come from Employment and unemployment in developed countries Changing employment structures Resurging unemployment Why is it happening Technological change Globalization of production Trade competition from developing countries Searching for explanatory needles in messy haystacks Employment and unemployment in developing countries Changing employment structures Formal and informal labour markets Positive and negative effects of globalizing processes on developing country employment Overdependence on a narrow economic base Populations on the move The contours of world population Population growth 16Dicken4084Ch16indd 475 19102010 111028 AM Part Four Winning and Losing in the Global Economy 476 Old and young populations An urban explosion People on the move migration Global migration trends Homecountry implications of outmigration Hostcountry implications of inmigration Location matters There is no such thing as being born equal It depends upon whether the address is good or bad1 The real effects of globalizing processes are felt not at the global or the national level but at the local scale the communities within which people struggle to meet the needs of their daily lives It is at this scale that physical investments in economic activities are actually put in place restructured or closed down It is at this scale that most people make their living and create their own family household and social communities Despite the undoubtedly large volumes of migration that have occurred throughout human history most people live out their lives within the country often even the locality of their birth A persons place of birth or resi dence therefore is a key determinant of the range of life chances that are available These are highly unevenly distributed across the earths surface at all geographical scales between countries within countries even within individual cities The contours of the wellbeing map show a landscape of staggeringly high peaks of affluence and deep troughs of deprivation interspersed with plains of greater or lesser degrees of prosperity Writing before the onset of the 2008 global economic crisis the UN Human Development Report observed The era of globalization has been marked by dramatic increases in technol ogy trade and investment and an impressive increase in prosperity Gains in human development have been less impressive Large parts of the devel oping world are being left behind Human development gaps between rich and poor countries already large are widening The scale of the human development gains registered over the past decade should not be underesti mated nor should it be exaggerated Part of the problem of global snapshots is that they obscure large variations across and within regions Progress towards human development has been uneven across and within regions and across different dimensions2 Today this statement is even more valid Looking at the world through the lens of global production networks leads us to think of the map of economic activities as a set of variably interconnected 16Dicken4084Ch16indd 476 19102010 111028 AM Where You Live Really Matters 477 islands rather than as a continuous surface Figure 161 is one such representation by Allen Scott in which the developed areas of the world are represented as a system of polarized regional economies each consisting of a central metropolitan area and a sur rounding hinterland of indefinite extent occupied by ancillary communities prosperous agricultural zones smaller tributary centers and the like Each metropolitan nucleus is the site of intricate networks of specialized but com plementary forms of economic activity together with large multifaceted labour markets and each is a locus of powerful agglomeration economies and increasing returns effects These entities can be thought of as the regional motors of the new global economy Equally there are large expanses of the modern world that lie at the extensive economic margins of capitalism Even so underdeveloped areas are occasionally punctuated by islands of relative prosperity3 This notion of islands of relative prosperity resonates with the more general metaphor of the global economy as an archipelago literally a sea studded with many islands4 The processes of winning and losing in the global economy are highly inter connected Development and underdevelopment are in a very real sense two Regional motor Prosperous hinterland area Island of relative prosperity and economic opportunity Extensive economic frontiers of global capitalism Figure 161 The global economy as interconnected islands Source based on Scott 1998 Figure 42 16Dicken4084Ch16indd 477 19102010 111028 AM Part Four Winning and Losing in the Global Economy 478 sides of the same coin although the relationships are more complex than is often suggested In particular establishing a link between globalization and inequality is fraught with diffi culty not only because of how globalization is defined and how inequality is measured but also because the entanglements between globalization forces and domestic trends are not that easy to separate out However there is sufficient evidence to conclude that contemporary processes of globalization have been accompanied by a rise in global inequality and vulnerability5 At the global scale the development gap is stunningly wide The developed coun tries are clearly winners They continue to contain a disproportionate share of the worlds wealth trade investment and access to modern technologies especially information technologies The 20 per cent of the worlds population living in the highestincome countries have well over 80 per cent of world income trade investment and communications technology The 20 per cent of the worlds population living in the poorest countries have around 1 per cent In the developed countries of the world the trajectory has been of generally increasing affluence although not everybody has been a winner The picture in the developing countries of the world is very different Although there are some undoubted winners there are also many losers In large part though by no means entirely the economic progress and material wellbeing of developing countries are linked to what happens in the developed economies A continuation of buoy ant economic conditions in those economies stimulating a general expansion of demand for both primary and manufactured products would undoubtedly help developing countries But the notion that a rising tide will lift all boats while containing a kernel of truth ignores the enormous variations that exist between countries The shape of the economic coastline is highly irregular some econo mies are beached and stranded way above the present water level Indeed the global financial and economic crisis that erupted in 2008 may well have redrawn the economic coastline in rather dramatic ways just as the effects of climate change threaten to redraw the physical coastline In both cases we cannot yet see precisely what new forms will emerge For the poorest countries however there is no automatic guarantee that a rising tide of economic activity would on its own do very much to refloat them The internal conditions of individual countries their histories cultures political insti tutions forms of civil society resource base both natural and human obviously influence their developmental prospects However despite the claims of the neo environmental determinists low levels of development cannot be explained simplis tically in terms of the natural environment for example climatic conditions6 As always it is a specific combination of external and internal conditions which determines the developmental trajectory of individual countries For the develop ing world as a whole the basic problems are those of extreme poverty continuing rapid population growth and a lack of adequate employment opportunities 16Dicken4084Ch16indd 478 19102010 111028 AM Where You Live Really Matters 479 Apart from the yawning gap between developed and developing countries as a whole however there are enormous disparities within the developing world itself In this chapter we focus on two tightly interconnected dimensions of the prob lems posed by globalizing processes for both developed and developing countries incomes and jobs There is a very good reason for adopting such a perspective Income is the key to an individuals or a familys material wellbeing However income or the lack of it in the form of poverty is not an end in its own right but rather a means towards what Amartya Sen calls development as freedom In that sense poverty is an unfreedom a deprivation of basic capabilities rather than merely a low income7 The major source of income for all but the exceptionally wealthy is employ ment or selfemployment Hence the question Where will the jobs come from is a crucial one throughout the world The major employment changes that have been occurring in both developed and developing countries are the result of an intri cate interaction of processes Job losses in the developed market economies for example cannot be attributed simply to the relocation of production to lowcost developing countries There is far more to it than this What is clear however is that the industrialized economies face major problems of adjusting to the decline in manufacturing jobs in particular but also increasingly in some service jobs especially in the current global crisis However the problems facing developing countries are infinitely more acute despite the spectacular success of a small number of newly industrialized economies Incomes and poverty The contours of world poverty Before the beginning of the nineteenth century the differences in levels of income between different parts of the world were relatively small At the dawn of the first industrial revolution the gap in per capita income between Western Europe and India Africa or China was probably no more than 30 per cent All this changed abruptly with the industrial revolution8 Figure 162 shows the huge unevenness in the map of incomes Although it is conventional to draw a distinction between developed and developing countries the latter category is highly problematic It implies a degree of homogeneity which simply does not exist within this group of countries In this respect the World Bank makes a useful distinction between three groups of developing countries based on per capita income level uppermiddleincome lowermiddleincome and lowincome countries 16Dicken4084Ch16indd 479 19102010 111028 AM Part Four Winning and Losing in the Global Economy 480 There is a striking geography to these categories The whole of the Indian subcontinent falls into the lowermiddle or lowincome categories In contrast most East Asian countries are in the middleincome categories Despite its recent spectacular economic growth China is still in the lowermiddleincome category although Malaysia is in the uppermiddleincome group while Singapore Taiwan and Korea now have sufficiently high per capita incomes to fall into the high income category along with the worlds developed countries Singapore in particular now has a per capita income level higher than several European countries All coun tries in Latin America and the Caribbean are in the middleincome group apart from lowincome Haiti No fewer than 33 of the worlds poorest countries two thirds of the total are in Africa Their average per capita income is 578 compared with the average for the highincome countries of 37566 a ratio of 165 But within the lowincome group 26 of the 33 countries have a per capita income less than the groups average Indeed the very poorest have per capita incomes of less than 200 These are the worlds most deeply impoverished countries many of which face mass starvation and again the vast majority are located in Africa Figure 163 provides an especially graphic perspective on gross national income GNI distribution The height of the bars is the level of GNI per head by decile of the population in the 140 countries Each country has a number of bars equivalent to its population The graph therefore gives a general simultaneous impression of two distributions between countries the longer axis ascending from left to right and between income groups the shorter axis from left to right9 0500 5011250 12513000 30017500 750130000 30000 GNI per capita 2007 US Figure 162 The huge global unevenness in per capita income Source based on World Bank 2009b Table 1 16Dicken4084Ch16indd 480 19102010 111028 AM Part Four Winning and Losing in the Global Economy 482 proceeded In 1820 the ratio between the richest and the poorest countries was 3 to 1 by 2007 it had grown to a staggering 92 to 1 A rather different way of measuring global poverty is to calculate the number of people living on less than 1 per day Despite very considerable advances in some parts of the world one in five people around 11 billion live on less than this minuscule sum Nearly 70 per cent of these utterly impoverished people live in South Asia and subSaharan Africa Figure 165 There have been changes but such improvement has been extremely uneven as Figure 165 shows The biggest improvement was in East Asia and the Pacific But this is almost entirely accounted 0 5 10 15 20 25 30 35 40 GDP per capita thousands of 1990 US 1820 1870 1900 1913 1950 1973 1992 2007 Income range of the richest 5 countries Income range of the poorest countries 1820 1913 1950 1973 1992 2007 3 to 1 11 to 1 35 to 1 44 to 1 72 to 1 92 to 1 Income gap between richest and poorest countries Figure 164 The widening income gap between countries Source based on UNDP Human Development Report 1999 Figure 16 World Bank 2009b Table 1 16Dicken4084Ch16indd 482 19102010 111029 AM Where You Live Really Matters 483 for by China Take out China where there has been very substantial progress in reducing poverty and the position looks very different In a number of African countries for example well over half the population has to survive on less than 1 a day and more than fourfifths on less than 211 As we have seen in earlier chapters the spectacular economic growth of a rela tively small number of developing countries especially in East Asia has been one of the most significant developments in the global economy in the past 50 years In particular the four East Asian tigers Korea Singapore Taiwan and Hong Kong although now incorporated into China have industrialized at a rate unmatched in the nineteenth and twentieth centuries by Western countries and for that matter by Latin American economies12 The spread of the growth processes to encompass some other East Asian countries during the 1980s and 1990s Malaysia Thailand the Philippines Indonesia and most of all China means that in little more than a generation hundreds of millions of people have been lifted out of abject poverty and many of these are now well on their way to enjoying the sort of prosperity that has been known in North America and Western Europe for some time13 In general however the winners and the losers have been the usual suspects The already affluent developed countries have sustained even increased their South Asia South Asia SubSaharan Africa SubSaharan Africa East Asia and Pacific East Asia and Pacific Latin America and Caribbean Latin America and Caribbean Europe and Central Asia Europe and Central Asia Middle East and North Africa Middle East and North Africa 0 0 100 40 200 60 300 20 400 500 20 40 60 Population millions a b Geographical distribution of population living on less than 1 per day 2007 Change in the number of people living on less than 1 per day 19982007 Total 11 billion people Figure 165 Distribution of the worlds poorest population Source based on data in World Bank World Development Report 2001 2009 16Dicken4084Ch16indd 483 19102010 111029 AM Part Four Winning and Losing in the Global Economy 484 affluence and some developing countries have made very significant progress but there is a hard core of exceptionally poor countries that remains stranded Despite the generally rising tide associated with overall world economic growth it has not lifted all boats These data are somewhat historic especially in the light of the 2008 crisis But there is little doubt that poor countries will be hit especially hard The World Bank estimates that lower growth in poor countries will trap an additional 53m people on less than 2 a day this year 2009 a rise in abso lute poverty that is additional to the 130m155m increase in 2008 caused by soaring food and fuel prices14 The Asian Development Bank has warned that the global economic malaise is creating a social crisis in Asia with slower growth leaving millions more people than expected mired in poverty and malnutrition15 Inequalities within countries Focusing the analytical lens at the country level provides a useful first cut at map ping the contours of poverty and income But of course such a focus obscures the detail of the economic landscape both at smaller geographical scales and in terms of nongeographical criteria gender social class and so on For example even though most people in developed countries are significantly better off than in the past it is remarkable that the extent of deprivation for particular groups in very rich countries can be comparable to that in the socalled third world For example in the US African Americans as a group have no higher indeed have a lower chance of reaching advanced ages than do people born in the immensely poorer economies of China or the Indian state of Kerala or in Sri Lanka Jamaica or Costa Rica16 In other words the distribution of income within an individual countrys population can be extremely variable Income inequalities within developed countries One measure of such variation is the Gini coefficient a summary statistic whose value ranges theoretically from zero complete income equality to one complete income inequality Although neither of these extremes is likely in reality the extent to which individual countries tend towards one or the other extreme is a useful if crude indicator A striking feature of Figure 166 is the relative income equality within the Nordic countries as well as in Japan and Germany and in contrast the fact that the US has a much poorer income distribution than any other leading developed economy and this has worsened since the 1960s In 1967 the Gini coefficient for the US was 039 by 2007 it was 04617 16Dicken4084Ch16indd 484 19102010 111030 AM Where You Live Really Matters 485 The Gini coefficient is a highly aggregative measure of income distribution Another approach is to examine the share that each quintile fifth of the popu lation has of national income and how that changes over time Figure 167 shows this for the US and the UK between 1977 and 2007 In both cases the only group that increased its share of total household income was the highestincome group Figure 168 shows the trends in the ratio of the 10 per cent highest paid to the 10 per cent lowest paid workers in leading industrialized countries between the mid 1980s and mid 1990s the latest years for which comparable data are available Most striking is the extent to which the US and the UK stand out from the rest In those two countries the gap between the highest and lowest paid increased by more than onethird The pattern is more varied across the other industrialized countries shown in Figure 168 For example the same degree of increasing income dispersion within the labour force did not occur in many of the continental European countries In the case of Germany the gap actually narrowed slightly These differences of detail between individual countries reflect specific social policies most notably the contrast between the neoliberal market capitalist sys tems of the US and the UK and the social market systems of continental Europe But it is generally the case as with employment that it is the less skilled workers who have been most adversely affected As compensation has fallen for the unskilled worker it has increased might ily for highly educated workers in 1979 male workers with a college degree earned on average about 50 per cent more than unskilled workers by 1993 020 025 030 035 040 045 Gini coefficient Denmark Japan Sweden Norway Finland Germany Austria Netherlands Canada France Switzerland Ireland Spain Australia United Kingdom Italy United States Inequality Decreasing Increasing Figure 166 Variations in income inequality within developed countries Source calculated from data in UNDP 2008 16Dicken4084Ch16indd 485 19102010 111030 AM Part Four Winning and Losing in the Global Economy 486 0 10 20 30 40 50 1977 1987 19978 20067 1982 1992 20023 0 10 20 30 40 50 1977 Percentage share of total household income by quintile group 1987 1997 2007 1982 1992 2002 Top fifth Top fifth 4th 4th 3rd 3rd 2nd 2nd Bottom fifth Bottom fifth United States United Kingdom Figure 167 The top end wins changing income distribution within the US and the UK Source calculated from US Census Bureau Historical Income Inequality Tables 2008 Table A3 Jones et al 2008 Figure 3 Finland United States Ireland United Kingdom Australia Canada Germany Italy Sweden 0 1 2 3 4 5 Change in ratio 368 351 153 115 90 73 43 37 58 Mid 1980s Mid 1990s Figure 168 The widening gap between the highestpaid and lowest paid workers in developed economies Source based on ILO 2004b Figure 16 16Dicken4084Ch16indd 486 19102010 111030 AM Where You Live Really Matters 487 1960 1997 Economic Health Index 150 Figure 169 Counties within the US with high levels of economic distress Source based on Glasmeier 2002 Figure 1 16Dicken4084Ch16indd 487 19102010 111030 AM Part Four Winning and Losing in the Global Economy 488 that difference was nearly 90 per cent To put the inequality problem in its starkest terms between 1979 and 1994 the upper 5 per cent of American families captured 99 per cent of the nations per capita gains in gross domes tic product That is with a mean family gain over this period of 4419 4365 went to the upper 5 per cent18 Such uneven income distributions also have a distinctive geographical manifestation As this chapters title suggests where you live really matters Figures 169 and 1610 illustrate the enormous geographical unevenness in wellbeing within the US and Western Europe And even within the socalled global cities like New York and London where wealth tends to be highly concentrated there is huge income inequality Because of their particular functions in the global economy as the con trol points of global financial markets and of transnational corporate activity cities like New York and London contain both highly sophisticated economic activities with their highly paid cosmopolitan workforces and also large supporting work forces in low and mediumlevel services The result is a high degree of social and spatial polarization within these cities19 During the 1990s for example income inequality in New York City grew much more sharply than in the US as a whole New York has the worst income inequality in the US20 Similarly earnings dif ferentials within London have increased substantially since the mid 1980s Income inequalities within developing countries A widely voiced criticism of industrialization in developing countries is that its material benefits have not been widely diffused to the majority of the population Luxembourg Belgium Denmark Austria Germany Netherlands France Italy Sweden Finland United Kingdom Ireland Spain Portugal Greece 0 EU average 100 200 GDP per capita relative to EU average in 1995 PPS 300 400 Figure 1610 Regional income inequalities in Europe Source based on Dunford and Smith 2000 Figure 2 16Dicken4084Ch16indd 488 19102010 111030 AM Where You Live Really Matters 489 There is indeed evidence of highly uneven income distribution within many devel oping countries as Figure 1611 shows Although some developing countries actually have a more equal income distribution than the US see Figure 166 the situation is significantly worse in others notably in Latin America Table 161 shows this in a different way In countries such as Brazil Chile and Mexico for example the share of total household income received by the top 20 per cent of households is very much higher than in the industrial market economies However this pattern does not apply in all cases For example Korea has a household income distribution very similar to that of the industrial market economies Of course the question of income distribution is very much more complex than these simple figures suggest and is the subject of much disagreement among analysts The fact remains however that in general the East Asian countries have a more equitable income distribution than the Latin American countries where there is a hugely unequal distribution of income and wealth A disproportionately large number of Latin Americans are poor some 222m or 43 of the total population21 Such differences reflect specific historical experiences and social policies in particular the different patterns of land ownership and reform In Korea and in Taiwan for example postwar reform of land ownership had a massive effect increasing individual incomes through greater agricultural productivity expanding domestic demand and contributing to political stability22 This has not happened in most Latin American countries 03 04 05 06 07 Gini coefficient Pakistan Korea Bangladesh Indonesia Vietnam India Malawi Thailand Singapore Kenya Turkey Nigeria Mexico China Venezuela Malaysia Argentina Chile Brazil Colombia Bolivia Sierra Leone Namibia Inequality Decreasing Increasing Figure 1611 Variations in income inequality within developing countries Source calculated from data in UNDP 2008 16Dicken4084Ch16indd 489 19102010 111030 AM Part Four Winning and Losing in the Global Economy 490 In 1953 while Taiwan was still recovering from World War II the island had a level of income inequality that was about the level found in presentday Latin America Ten years later it had dropped to the level now found in France At the same time growth rates in this period were of the order of 9 per cent per annum this outcome was due primarily to improved income distribution in Taiwans agriculture sector This improvement in turn rested on a specific set of governmental policies that focused in the first instance on agricultural reforms especially land reform infrastructure investment and price reform coupled with a rapid proliferation of educational opportunities for Taiwanese students at all levels In terms of distributive measures land reform was of greatest significance23 However especially in geographically extensive countries like Brazil China or India such aggregative income distribution data are misleading As always there are vast differences in income levels and in other measures of wellbeing between different parts of the same country China for example faces massive internal problems Its spectacular economic growth since its opening up in the early 1980s has created vast inequalities between different parts of the country Figure 1612 especially between inland and rural areas on the one hand and coastal and urban areas on the other Currently rural incomes are less equally distributed than urban incomes However urban inequality is increasing faster than rural inequality At its cur rent rate urban inequality will eventually overtake rural inequality Moreover this trend would further accelerate the increase in inequality as people move to urban areas On the other hand the Chinese government restricts free migration from rural to urban areas Even if such migration were permitted it probably is not possible for the urban economy to accommodate the majority of the gigantic rural population Thus gaps between rural and urban incomes may persist and cause overall inequality to rise for an extended period24 Winners and losers How we identify the winners and losers in terms of incomes depends very much on the scale of analysis we adopt As we have seen there are huge income differentials Table 161 Distribution of income within selected developing countries Country year Lowest 10 Lowest 20 Highest 20 Highest 10 Brazil 2001 07 24 632 469 Chile 2000 12 33 622 470 Mexico 2000 10 31 591 431 Malaysia 1997 17 44 543 384 Philippines 2000 22 54 523 363 Korea 1998 29 79 375 225 Singapore 1998 19 50 490 328 China 2001 18 47 500 331 India 19992000 39 89 433 285 Source based on World Bank World Development Indicators 2005 Table 27 16Dicken4084Ch16indd 490 19102010 111030 AM Where You Live Really Matters 491 both between and within countries However there are two broad groups of win ners and losers that merit our brief attention at this stage These two groups cut right across the broad development divide The clear winners are the elite transnational capitalist class TCC25 whose members are predominantly although no longer exclusively drawn from devel oped countries Indeed the emergence of a substantial class of extremely wealthy and influential individuals within most developing countries who see themselves as global players has become a major feature of the global economy The dominant group within the TCC consists of the owners and controllers of the major corporations and leading financiers the globetrotting jetsetting TNC executives To these we can add globalizing bureaucrats and politicians globalizing professionals with particular technical expertise even including some academics merchants and media people Without question these are winners in the global economy and are highly influential in global policy discourses26 Xinjiang Xinjiang Gansu Gansu Qinghai Qinghai Tibet Tibet Yunnan Yunnan Sichuan Sichuan Shaanxi Shaanxi Guizhou Guizhou Hainan Hainan Guangdong Guangdong Hunan Hunan Hubei Hubei Jiangxi Jiangxi Fujian Fujian Zhejiang Zhejiang Shanghai Shanghai Anhui Anhui Henan Henan Jiangsu Jiangsu Shandong Shandong Shanxi Shanxi Hebei Hebei Ningxia Ningxia Chongqing Chongqing Tianjin Tianjin Beijing Beijing Liaoning Liaoning Inner Mongolia Inner Mongolia Jilin Jilin Guangxi Guangxi Heilongjiang Heilongjiang 600012999 1300019999 2000039999 4000069999 GDP per capita RMB current price Figure 1612 Income inequalities within China Source based on data in Statistical Yearbook of China 2009 16Dicken4084Ch16indd 491 19102010 111030 AM Where You Live Really Matters 493 market economy In 2005 approximately 192 million people were unemployed in the world economy an increase of 22 million since 2004 and 344 million since 1995 and this figure refers only to open unemployment it does not include the millions of people suffering from hidden unemployment who are not measured in the official figures30And as always the pattern of unemployment is extremely uneven between different parts of the world between different parts of the same country and between different population groups Serious as the unemployment position is in the industrialized nations it pales into insignificance compared with the problems of most developing countries particularly the least industrialized countries At least in older industrialized coun tries the growth of the labour force is now easing Only 1 per cent of the pro jected growth of the global labour force between 1995 and 2025 will be in the highincome countries while more than twothirds of the projected growth will occur in developing countries As Figure 1613 shows the low and middle income countries already account for 85 per cent of the global labour force In many of these countries extremely high rates of population growth mean that the number of young people seeking jobs will continue to accelerate for the foresee able future Some 46 million new workers will be joining the worlds labour force every year in the future the bulk of them in developing countries While the worlds labour force is concentrated in developing countries its capital and skills are concentrated in advanced industrial countries The global employment situa tion reflects this huge asymmetry in the distribution of the worlds productive resources31 0 1000 1965 1995 2003 2025 2000 Millions of workers 3000 4000 East Asia and the Pacific South Asia High income Low and middle income Europe and Central Asia SubSaharan Africa Latin America and the Caribbean Middle East and North Africa Figure 1613 Distribution of the global labour force Source calculated from World Bank World Development Report 1995 Table 1 2005 Table 2 16Dicken4084Ch16indd 493 19102010 111031 AM Where You Live Really Matters 497 countries Between the mid 1980s and mid 1990s total employment in the US grew almost four times faster than in the European Union and 50 per cent faster than in Japan But this differential is now far less pronounced Rates of employ ment growth overall have been modest and variable for all the developed economies Between 1996 and 2005 US employment grew by 15 per cent EU employment grew by 13 per cent Within the EU the UK has had significantly higher employment growth rates in recent years Resurging unemployment The obverse of employment growth is of course unemployment Figure 1616 demonstrates just how volatile unemployment rates have become since the so called golden age of growth of the 1960s and early 1970s Since then unemploy ment rates in the industrialized countries have increased dramatically though very unevenly The overall pattern of change in unemployment rates is clearly related to the rollercoaster of production and trade shown in Figure 23 Over the entire period the trend has been one of significantly higher levels of unemployment in the major European economies excluding the UK compared with both the US and especially Japan However the unemployment situation in Japan has under gone a particularly significant change Historically unemployment rates in Japan were extremely low well below 2 per cent throughout the 1960s and most of the 1970s A combination of a rapidly growing economy and a very strong orienta tion towards job security in the largecompany sector of the economy sustained lower rates of unemployment than in any other industrialized country for almost 30 years But the burst of the bubble economy at the end of the 1980s and persistent Norway Sweden Netherlands Denmark United States United Kingdom Japan Germany France Spain Belgium Italy 0 20 Percentage of females in the labour force 40 60 Figure 1615 Variations in female participation in the labour markets of developed countries Source based on ILO 2001 Table 2 16Dicken4084Ch16indd 497 19102010 111031 AM Part Four Winning and Losing in the Global Economy 498 1970 1980 1990 2000 1975 1985 1995 2005 0 2 4 6 8 10 12 14 France Germany Italy 0 2 4 6 8 10 12 14 Unemployment rate per cent UK Netherlands Sweden 0 2 4 6 8 10 12 14 Japan US Canada Figure 1616 Unemployment rates 19692009 Source ILO data 16Dicken4084Ch16indd 498 19102010 111031 AM Where You Live Really Matters 499 domestic recession throughout the 1990s changed all that The lifetime job system has crumbled the days of the salaryman are numbered The current financially induced economic crisis has drastically altered the situ ation once again although it is too soon to tell how long its employment effects will last how deep they will be and which countries will be worst affected Estimates for 2009 show that unemployment rates rose sharply again in several countries Reports from virtually all the developed economies suggest huge job losses either actual or in the pipeline For example the OECD predicted that one in ten workers in advanced economies would be unemployed by 201042 Increases in unemployment rates were highest in Spain and Ireland followed by the US but significantly lower in the UK and France while Germanys unemployment rate improved slightly43 Whatever its precise level at any point in time unemployment is always a selec tive process The drastic collapse of financial services employment in 2008 clearly affected particular groups of workers and particular places where such activities are concentrated Some manufacturing industries automobiles being a prime example have also been very hard hit More generally however males aged between 25 and 54 years with a good education and training are far less likely to be unemployed on average than women younger people older workers and minorities Most of these latter categories tend to be unskilled or semiskilled workers The vulnerability of women and young people to unemployment reflects two major features of the labour markets of the older industrialized countries First as we have seen the increased participation of women in the labour force particularly married women has increased dramatically A large proportion of these are employed as parttime workers in both manufacturing and services especially the latter Second youth unemployment during the 1980s partly arose from the entry on to the labour market of vast numbers of 1960s baby boom teenagers In most industrialized countries therefore unemployment rates among the young under 25 years have been roughly twice as high as that for the over25s In some cases youth unemployment is three times higher than adult unemploy ment Unemployment tends to be especially high among minority groups within a population In the US for example unemployment among black youths can be 150 per cent higher than among white youths Similarly unemployment rates among Hispanic youths are at least 50 per cent higher than among white youths In Europe the problem of minority group unemployment reflects the largescale immigration of labour in the boom years of the 1960s Why is it happening Put this question to most politicians journalists quite a lot of academics and many ordinary people and you are likely to get a simple answer Its globalization 16Dicken4084Ch16indd 499 19102010 111032 AM Part Four Winning and Losing in the Global Economy 500 stupid In fact it isnt as simple as that These highly uneven trends in employment unemployment and incomes in the industrialized economies cannot be explained simplistically in terms of a single set of causes In so far as globalization contributes to these trends it does so precisely because globalizing processes are themselves highly complex and intrinsically uneven Its a matter of searching for explanatory needles in very messy haystacks For example the most general explanation of an overall high level of unem ployment in the older industrialized countries between the early 1970s and mid 1980s in the 1990s and again in the 2010s is the effect of world recession Recession whatever its causes drastically reduces levels of demand for goods and services By this explanation the bulk of unemployment in the older indus trialized countries as a whole is cyclical it is demanddeficient unemployment But the general force of recession does not explain the geographical variation in unemployment between and within countries In fact a whole set of inter connected processes operates simultaneously to produce the changing map of employment its reverse image unemployment and the increasingly uneven map of income Technological change Technological developments in products and processes are widely regarded as being a major factor in changing both the number and the type of jobs available In general product innovations tend to increase employment opportunities overall as they create new demands On the other hand process innovations are generally introduced to reduce production costs and increase productive efficiency They tend to be labour saving rather than job creating Such process innovations are characteristic of the mature phase of product cycles see Figure 411 and became a dominant phenomenon from the late 1960s onwards The general effect of process innovations therefore is to increase labour pro ductivity an increased volume of output from the same or even a smaller number of workers But again the impact of such technological change on jobs tends to be uneven In most cases it has been the semiskilled and unskilled workers who have been displaced in the largest numbers Initially it was manual workers rather than professional technical and supervisory workers whose numbers were reduced most of all although this is no longer the case There is no doubt that changes in process technology have adversely affected the employment opportunities of less skilled members of the population However there is much disagreement about the overall contribution of technological change to unemployment Some argue that the end of work is nigh and that much of this is due to the jobdisplacing effects of technological change The explosive spread of new information and communications technologies ICT would seem to confirm such apocalyptic views But do they Not in the opinion of the ILO which argues that44 16Dicken4084Ch16indd 500 19102010 111032 AM Part Four Winning and Losing in the Global Economy 502 are minuscule compared with the number of job changes that occur within individual countries all the time For example an average of 46m Americans started work with a new employer every month in the year to March 200546 However as always the effects are experienced differentially by different groups of people in different places It is not so much the aggregate numbers affected by the reconfiguration of global production networks that counts but rather their distribution Trade competition from developing countries One of the most widely accepted explanations for the employment and income problems facing workers in the older industrialized countries is the competi tion from imports of cheaper manufactured goods from developing countries The rapid development of manufacturing production in a small number of NIEs and their accelerating involvement in world trade has been a major theme of this book It is one of the most striking manifestations of global shifts in the world economy The basic question is how far has the industrialization of these fastgrowing economies as expressed through trade contributed towards the deindustrializa tion of the older industrialized countries to the increased levels of unemployment and to the pauperization of workers at the bottom end of the labour market This has become an even more contentious issue with the recent emergence of China and to a lesser extent India as a major global economic force China is no longer a marginal supplier Chinas low production costs arise from and are coupled with growing industrial competence developments in these labour forces when these economies are integrated into the global labour force have the capacity to significantly affect global wage levels It is not just the wages of unskilled labour in the global economy which are being and will increasingly be undermined by the size of the labour reservoir in China and India One of the most striking features of the Chinese labour market is its growing level of education and skilling47 There is a wide range of views on the relationship between developing country trade and employment and income changes in industrialized countries48 Wood for example argues that trade with developing countries has had a considerable impact especially in widening the gap between skilled and unskilled workers Countries in the South have increased their production of labourintensive goods both for export and domestic use and their imports of skillintensive goods raising the demand for unskilled but literate labour relative to more skilled workers In the North the skill composition of labour demand has been twisted the other way Production of skillintensive goods for export has increased while production of labourintensive goods has been replaced by imports reducing the demand for unskilled relative to skilled workers up to 1990 the changes in trade with the South had reduced the demand for 16Dicken4084Ch16indd 502 19102010 111032 AM Where You Live Really Matters 503 unskilled relative to skilled labour in the North as a whole by something like 20 per cent Thus expansion of trade with the South was an important cause of the deindustrialization of employment in the North over the past few decades However it does not appear to have been the sole cause49 The general conclusion of the ILO is that the results of the many economic studies of the relationship between trade and wage and income inequality in the older industrialized countries are inconclusive Although international trade has contributed to income inequality trends to some extent it has not played a major role in pushing down the relative wage of lessskilled workers in the case of the US employment patterns in industries least affected by trade moved in the same direction as those in tradeaffected manufacturing industry increasing the share of highwage employment This pattern of change in the employment structure is not well explained by the argument relying on the trade effect50 Again however the focus tends to be on the aggregate geographical picture Given the particular ways in which the internal geographies of national economies have evolved there will inevitably be a correspondingly uneven impact of trade on different parts of the same country But such effects are very complex as a study of US regions shows51 Many regions benefited from cheaper imports The Southeast and South Central regions however both of which are dominated by lowwage import sensitive manufacturing industries were made worse off by both cheaper imports and by greater orientation toward the production of importcompeting goods By contrast the Great Lakes a region with industries that are highly reliant on imported intermediate inputs was helped by cheaper imports and a greater orientation toward the production of goods in importcompeting sec tors On the export side cheaper exports hurt most regions but helped states on the West Coast a highly exportoriented region52 Recent detailed empirical research into the Los Angeles labour market suggests that An increase in foreign competition significantly reduces the wages of less skilled workers in the Los Angeles CMSA The wages of more highly educated workers are unaffected by imports and appear to rise with exports Between 1990 and 2000 the negative impact of import competition moves up the skills ladder suggesting that higher education may not insulate all workers from the pressures of the global economy over the longrun the impact of trade on wage inequality eclipses the influence of technological change through the 1990s at least in our study region53 Searching for explanatory needles in messy haystacks Which of these forces are responsible for changing employment and income levels and distribution in developed economies Is one more important than the 16Dicken4084Ch16indd 503 19102010 111032 AM Part Four Winning and Losing in the Global Economy 504 others In fact efforts to separate out individual influences and to calculate their precise effects have not been very successful The basic problem in all of the indi vidual factor explanations is that each of the factors is treated independently of the others It is as though changes in one of the variables are unrelated to the others But this is clearly not the case For example although the direct effects of trade may be relatively small the indirect effects may be larger because of the ways in which firms respond to the threat of increased global competition They may for instance invest in labour saving technologies to raise labour productivity and to reduce costs This would appear as a technology effect whereas the underlying reason for such techno logical change may be quite different a response to lowcost external competi tion How do we separate out trade effects from TNC effects when so much of global trade either is intrafirm trade or is controlled and coordinated by TNCs In some cases a major driving force in import penetration has actually been the direct or indirect involvement of domestically owned TNCs Is this a trade effect or a TNC effect In fact the decline in overall manufacturing and increasingly some service employment in the older industrialized countries is primarily the result of increased productivity But this has affected the labour force differentially with the greatest Positive effects Negative effects Cheaper imports of relatively labourintensive manufactures promote greater economic efficiency through the demand side while releasing labour for higher productivity sectors Growth in developing countries through industry relocation and exportgenerated income leads to a increased demand for industrialized country exports and b shifts in production in industrialized countries from lower to highervalued consumer goods to more capital andor skillintensive manufacturing and services Particularly in relatively labourintensive industries the rising imports from developing countries together with competitiondriven changes in technology and other factors lead to inevitable losses in employment andor quality of jobs including real wages This increases inequality between skilled and unskilled workers and causes extreme redeployment difficulties Employment gains from rising industrialized country exports are unlikely to compensate fully for the job losses especially if a industrialized country wages remain well above those of the NIEs and other emerging developing countries and b the rates of world economic growth are relatively low andor excessively concentrated in East and South East Asia Employment growth and job quality improvement for skilled workers are likely to be significant in the short and medium term even though in the long run the effects are unclear Relocation of production andor imports causes negative shortterm effects on workers but promotes labour market flexibility and efficiency through greater mobility of workers within countries and to a lesser extent within regional economic spaces to economic activities and areas with relative scarcity of labour The employment growth and job quality improvement for skilled workers will dwindle in the long run as a result of relatively cheaper and more productive skilled labour in the NIEs Increased trade will further reduce demand for unskilled labour This exacerbates unemployment because in a world of mobile capital the industrialized countries no longer retain a capital based comparative advantage Figure 1617 A balance sheet of effects of globalizing processes on employment in developed economies Source based on ILO 1996 Table Int 1 16Dicken4084Ch16indd 504 19102010 111032 AM Where You Live Really Matters 505 relative losses of jobs and of income falling on the least skilled least educated work ers The geographies of such effects are highly uneven depending on the particular circumstances of individual regional and local economies In summary Figure 1617 sets out a rough balance sheet of the positive and negative effects of the globalizing processes on employment in developed economies Employment and unemployment in developing countries Changing employment structures As in the case of developed countries the employment structures of developing countries have undergone considerable transformation over the past few dec ades Some as we saw in Chapter 2 have become highly significant manufac turing centres others have begun to develop important higherlevel service sectors Nevertheless allowing for such cases most developing countries remain predominantly agricultural economies More than 50 per cent of the labour force in the lowestincome countries is employed in agriculture compared with 4 per cent in the highincome developed economies Even in the upper middleincome group in which most industrial development has occurred agri culture employs almost 20 per cent of the labour force In each category the relative importance of agriculture has declined even though in absolute terms the numbers employed in agriculture continue to grow The balance of employment has shifted towards the other sectors in the economy industry and services However as Figure 1618 shows there is a clear geography to these developing country employment structures Some of the biggest changes are taking place within Asia which contains as we have seen some of the most rapidly growing economies in the world According to a recent ILO report The rapid transition from predominantly rural and agricultural employment to urbanbased manufacturing and serviceoriented activities in developing Asian countries will continue and the trend is expected to even accelerate in some countries Between 2006 and 2015 total employment in agriculture is expected to contract by nearly 160 million with employment in industry and services expanding by 172 million and 198 million respectively Not only will the services sector be the main source of job creation but by 2015 will also become the largest sector representing about 407 per cent of the regions total employment Yet given its size and importance for poverty alleviation agriculture will remain an important sector even though the main engines of the regions growth will be elsewhere The stage and speed of the structural change will vary across the region54 As in the case of developed countries there has also been a trend towards increased participation by women in the labour force quite apart from their 16Dicken4084Ch16indd 505 19102010 111032 AM Part Four Winning and Losing in the Global Economy 506 huge role in the informal sector see below But its extent varies enormously between different developing countries ranging from East Asia and sub Saharan Africa where around twothirds of women of working age are in the labour force to onequarter in North Africa and the Middle East Within Asia itself female participation rates are lowest in South Asia around onethird These broad structural changes in employment in developing countries have to be seen within the broader context of growth in the overall size of the labour force The contrast with the experience of the industrialized countries in the nine teenth century is especially sharp During that earlier period the European labour force increased by less than 1 per cent per year on average in todays developing countries the labour force is growing at more than 2 per cent every year Thus the labour force in the developing world has doubled roughly every 30 years compared with the 90 years taken in the nineteenth century for the European labour force to double Hence it is very much more difficult for developing coun tries to absorb the exceptionally rapid growth of the labour force into the economy The problem is not likely to ease in the near future because labour force growth is determined mainly by past population growth with a lag of about 15 years As we will see later in this chapter virtually all of the worlds population growth since around 1950 more than 90 per cent of it has occurred in the developing countries Agriculture Agriculture Agriculture Agriculture Industry Industry Industry Industry Services Services Services Services 0 0 0 0 25 25 25 25 50 50 50 50 75 75 75 Employment in sector as a percentage of total employment 75 East Asia South Asia Latin America Caribbean SubSaharan Africa 1995 2005 Figure 1618 Geographical variations in employment structures in developing countries Source ILO 2006a Table 5 16Dicken4084Ch16indd 506 19102010 111032 AM Part Four Winning and Losing in the Global Economy 508 problem in developing countries is underemployment whereby people may be able to find work of varying kinds on a transitory basis for example in seasonal agriculture as casual labour in workshops or in services but not permanent employment Positive and negative effects of globalizing processes on developing country employment There is no question that the magnitude of the employment and unemployment problem in developing countries is infinitely greater than that facing the older indus trialized countries The high rate of labour force growth in many developing coun tries continues to exert enormous pressures on the labour markets of both rural and urban areas Such pressures are unlikely to be alleviated very much by the develop ment of manufacturing industry alone Despite its considerable development in at least some developing countries manufacturing industry has made barely a dent in the unemployment and underemployment problems of most developing countries Only in small essentially urban NIEs like Hong Kong and Singapore has manu facturing growth absorbed large numbers of people Indeed Singapore has a labour shortage and has had to resort to controlled inmigration while Hong Kong firms have had to relocate most of their manufacturing production to southern China In most other cases the problem is not so much that large numbers of people have not been absorbed into employment they have but that the rate of absorption cannot keep pace with the growth of the labour force Globalizing processes whilst offering some considerable employment benefits to some developing countries are again a doubleedged sword as Figure 1619 shows Overdependence on a narrow economic base There is no single explanation for the deep poverty of lowincome countries and of some of the lowermiddleincome countries too There is no doubt for example that problems of inadequate internal governance including corruption play a major role in some cases But in the context of the global economy one factor is especially significant an overdependence on a very narrow economic base together with the nature of the conditions of trade We saw earlier Figure 1618 that the overwhelming majority of the labour force in lowincome countries is employed in agriculture This together with the extraction of other primary prod ucts forms the basis of these countries involvement in the world economy Two thirds of developing countries have more than a 50 per cent dependence on commodity exports including agricultural food and nonfood products ferrous metals industrial raw materials and energy In most subSaharan African countries the level of dependence is around 80 per cent Apart from the more successful of the East Asian NIEs therefore the exports of developing countries are still concentrated on the exploita tion of natural resources or unskilled labour these products generally lack dynamism in world markets56 16Dicken4084Ch16indd 508 19102010 111032 AM Part Four Winning and Losing in the Global Economy 510 conditions do not hold In the first place there is a longterm tendency for the composition of demand to change as incomes rise Thus the growth in demand for manufactured goods and services tends to be greater than the growth in demand for primary products This immediately builds a bias into trade relation ships between the two groups of countries favouring the industrialized countries at the expense of the primary producers Over time these inequalities tend to be reinforced through the operation of the cumulative processes of economic growth The prices of manufactured goods tend to increase more rapidly than those of primary products and therefore the terms of trade for manufactured and primary products tend to diverge The terms of trade are simply the ratio of export prices to import prices for any particular country or group of countries As the price of manufactured goods increases relative to the price of primary products the terms of trade move against the primary producers and in favour of the industrial producers For the primary producers it becomes necessary to export a larger quantity of goods in order to buy the same or even a smaller quantity of manufactured goods In other words they have to run faster just to stand still or to avoid going backwards Although the terms of trade do indeed fluctuate over time as the recent commodities boom demonstrated see Chapter 8 there is no doubt that they have generally and systematically deteriorated for the nonoil primary producing countries over many years57 Table 162 illustrates the seriousness of this problem for some African countries each of which is heavily dependent on a single commodity for export earnings There was a dramatic deterioration of the terms of trade for these countries at the end of the 1990s although as suggested above this was nothing especially new The figures show how the effects of the deepening slowdown in Western econo mies at the end of the 1990s and in the early 2000s were transmitted to these commodity producers In other words one of the major problems facing these economies especially those rich in extractive resources is that of the socalled resource curse58 This is the apparent paradox that an abundant endowment of resources does not necessarily create rapid economic growth and development Table 162 Deteriorating terms of trade for primary producing countries Country 1998 1999 2000 Main commodity Exports Uganda 5 17 34 Coffee 56 Zambia 20 26 25 Copper 56 Mali 11 23 28 Cotton 46 Rwanda 6 11 25 Coffee 45 Chad 6 15 20 Cotton 42 Burkina Faso 4 16 25 Cotton 39 Guyana 0 7 14 Gold 16 Tanzania 1 7 13 Coffee 11 Source based on material in the Financial Times 30 January 2002 16Dicken4084Ch16indd 510 19102010 111033 AM Where You Live Really Matters 511 In a study covering a sample of 95 developing countries a negative relationship was found between naturalresourcebased exports including agricultural products metallic minerals and energy minerals and economic growth during the period 19701990 relatively poor per capita growth per formance has generally characterized resourcerich developing countries especially mineralexporting countries Oil exporters have not been immune either to the resource curse in terms of low growth Many studies also emphasize that countries rich in oil and solid minerals have performed worse in terms of alleviating poverty compared with countries with little or no such mineral wealth59 The reason seems to be that the apparent ease of exploitation of natural resources makes it a soft option and that such lowgrowth commodities tend to crowd out potentially more profitable activities60 Populations on the move The contours of world population Geographical variations in population growth rates in the age composition of the population and in migration exert an extremely important influence on how globalizing processes are worked out in different places They also relate very clearly to issues of poverty to the ability of people in different places to make a living through employment and to issues of environmental impact Population growth At the beginning of the twentyfirst century the worlds population reached a total of 61 billion One hundred years earlier it was less than 2 billion Not unrea sonably then was the twentieth century called the century of population and the explosion of population cited as one of its defining characteristics61 This is an absolute increase that far exceeds that which has occurred in any other period of human experience It took until 1825 to reach one billion humans in toto it took only the next 100 years to double and the next 50 years to double again to 4 billion in 1975 A quarter of a century later as we were celebrating the millennium the total jumped to six billion True the pace of increase has been slowing in the last decade or so but like a large oil tanker decelerating at sea that slowdown is a protracted process62 The UNs latest medium projection is that world population in 2050 will be around 92 billion although it could be as high as 105 billion or as low as 8 billion depending on what happens to fertility rates63 The most striking feature of world population growth is that it now occurs overwhelmingly in developing countries In 2005 81 per cent of the worlds 16Dicken4084Ch16indd 511 19102010 111033 AM Part Four Winning and Losing in the Global Economy 512 65 billion population was in the developing countries Figure 1620 shows this massive and accelerating divergence in population growth between developed and developing countries The year 1950 was an especially significant turning point That year marked the beginnings of the population explosion brought about by the rapid fall in death rates in Africa Asia and Latin America coupled with continuing high fertility rates in those areas Since then the contrast between the very low population growth rates of the developed countries and the very high rates in many developing countries has become even more marked Just to replace an existing population requires a fertility rate of 21 children per woman In most developed countries fertility rates are now well below the replace ment level at 156 and declining although with an expected rise in the mid twentyfirst century to just below replacement levels In contrast fertility rates in the developing world as a whole are currently at 29 although the UN estimates a pos sible decline to 257 by 204550 In one or two cases they are now a little lower for example China is now actually below replacement level But fertility rates remain exceptionally high in the very poorest countries 502 in 20005 Despite high mortality rates through HIVAIDS in many of these poorest countries their population is expected to grow from 762 million to 167 billion by 2050 For devel oping countries as a whole the 2050 population is predicted to be about 79 billion that compares with a total world population in 2005 of 65 billion Old and young populations Persistent unevenness in fertility rates between developed and developing coun tries creates significant differentials in the age composition of the population Put in 1750 1800 1850 1900 2000 1950 2050 0 1 2 3 4 5 Population billions 6 7 8 More developed countries Less developed countries based on medium fertility variant Figure 1620 World population growth Source based on data in UN Population Division World Population Prospects 2009 16Dicken4084Ch16indd 512 19102010 111033 AM Where You Live Really Matters 513 a nutshell developed countries are ageing while most developing countries continue to be youthful in population terms Table 163 shows the marked geo graphical variations in the relative importance of different age groups Europe North America and Japan all have relatively old populations young countries in population terms are overwhelmingly in the developing world particularly in Africa which is the youngest region in the world Over the next few decades both the Japanese and European populations will age very significantly Such wide variations in age structure are enormously important for economic and social development especially in terms of the dependency of an ageing population on support from the working population An urban explosion The urban population of the world is estimated to increase from 286 billion in 2000 to 498 billion by 2030 By comparison the size of the rural population is expected to grow only very marginally going from 319 billion in 2000 to 229 billion in 203064 In 2007 a major threshold was passed more than half of the worlds total popula tion lived in cities The extent to which populations are urbanized however var ies significantly from one part of the world to another Not only is most of the worlds population and population growth located in developing countries but also that population is increasingly concentrated in cities In complete contrast to the older industrialized countries therefore where a growing counterurbanization trend has been evident for some years urban growth in most developing countries has continued to accelerate The highest rates of urban growth are now in devel oping countries where the number of very large cities has increased enormously Figure 1621 shows that threequarters of the worlds megacities populations of more than 10 million are in developing countries and this is projected to increase to fourfifths by 2025 Table 163 Geographical variations in the age composition of the population in region Under 15 years 1564 years Over 65 years Region 2005 2050 2005 2050 2005 2050 World 282 202 645 637 74 161 Africa 415 287 551 647 34 67 Asia 278 183 658 643 64 175 Japan 138 112 663 509 199 378 Europe 159 150 683 574 159 276 Latin America Caribbean 300 181 639 636 61 184 North America 205 171 671 618 124 211 Oceania 248 180 651 627 100 193 Source based on data in UN Population Division World Population Prospects 2009 16Dicken4084Ch16indd 513 19102010 111033 AM Part Four Winning and Losing in the Global Economy 514 In some cases notably the cities within the newly industrializing economies of East Asia urban growth is driven and sustained by the forces of economic dyna mism But in most cases the link between economic growth and urban growth is less clear and owes more to high rates of population fertility coupled with rural poverty which drive millions of people towards what are seen to be the economic honeypots of the city In these latter cases therefore what we have is a process of overurbanization circumstances where the basic physical social and economic infrastructures are not commensurate with the sheer size and rate of growth The sprawling shantytowns endemic throughout the developing world are the physical expression of this explosive growth In the developing countries virtually all industrial growth is in the big cities Stark polarization between rich and poor is one of the most striking features of developing country cities United Nations data show that 80 per cent of the urban population of the 30 least developed countries live in slums65 Increasingly very high levels of poverty tend to be concentrated in urban areas Whereas rural dwell ers may be able to feed themselves and their families from the land such an option is not available in the cities In addition there is a whole syndrome of urban pathologies to contend with 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 35676 19040 19028 18978 18845 15926 14987 14787 13485 12795 12500 12130 11893 11748 11294 11106 11100 10452 10061 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 36400 26385 22498 22015 21428 21009 20628 20560 19412 19095 16762 15796 15561 14808 14545 13768 13672 13413 12363 12102 11835 11368 10526 10512 10196 10129 Tokyo Mexico São Paulo Delhi Shanghai Kolkata Buenos Aires Los Angeles Karachi Rio de Janeiro OsakaKobe Beijing Manila Moscow Istanbul New YorkNewark Mumbai Dhaka Cairo Tokyo Mexico City New YorkNewark Shanghai Buenos Aires Los Angeles Rio de Janeiro Jakarta OsakaKobe Moscow Lahore Shenzhen Chennai Mumbai Delhi Dhaka São Paulo Kolkata Karachi Kinshasa Lagos Cairo Manila Beijing Istanbul Guangzhou Rank 2007 Rank 2025 Urban agglomeration Urban agglomeration Population thousands Population thousands Figure 1621 The worlds megacities 2007 and 2025 Source based on data in UNHABITAT 2008 16Dicken4084Ch16indd 514 19102010 111033 AM Where You Live Really Matters 515 About 220 million urban dwellers 13 per cent of the worlds urban population do not have access to safe drinking water and about twice this number lack even the simplest of latrines Women suffer the most from these deficiencies poverty also includes exposure to contaminated environments and being at risk of criminal victimization Poverty is closely linked to the wide spread of preventable diseases and health risks in urban areas66 People on the move migration Global migration trends The subtitle of this chapter is where you live really matters It reflects the fact that most people stay close to where they are born According to the International Organization for Migration67 the number of international migrants in the world represents only around 3 per cent of the total global population This is significantly lower than in the nineteenth century when international migrants accounted for 10 per cent of the world population68 On the other hand in absolute terms international migration is higher today than it has ever been There are more than 200 million international migrants to which must be added a further 2030 million unauthorized migrants Some inter national migrants asylum seekers are fleeing various kinds of persecution and these tend to reflect very specific political social and religious conditions in their home countries But the majority of international migrants are migrant workers The geographical distances over which international migration occurs are enormously varied A large proportion of migrant flows are to countries close to the place of origin for fairly obvious reasons including cost greater knowledge of closer opportunities possibly greater cultural compatibility But over and above such shortdistance migrations are the longdistance often intercontinental flows Certain migration paths are especially important as Figure 1622 indicates for the worlds major regions In the case of large countries like China there is also a vast amount of internal migration whose geographical scale is greater than much crossborder migration The Chinese government estimates that there are 130 mil lion internal migrant workers in China of whom around 80 million have moved from poorer interior regions to the coastal cities69 Table 164 shows the major migrant destinations One of the most important results of international migration is the creation of geographically dispersed transnational migrant communities particularly in cities in developed countries70 These complex networks created by migrants especially labour migrants between their places of origin and their places of settlement constitute particular kinds of transnational social spaces held together by financial remittances and social networks derived from ethnic ties Such transnational com munities play an extremely significant role not only in channelling subsequent migrant flows but also in investment patterns and in the creation of distinctive forms of entrepreneurship 16Dicken4084Ch16indd 515 19102010 111033 AM Part Four Winning and Losing in the Global Economy 516 Homecountry implications of outmigration At one level the decision to migrate abroad in search of work is an individual decision made in the context of social and family circumstances When it is successful that is when the migrant succeeds in obtaining work and building a Migration characteristics of regions population Migrants millions Region Substantial migration from outside but most is internal migration within the EU Large flows from east following enlargement of EU Huge intraregional flows of migrant workers both between Asian countries and within large countries China has 130 million internal migrant workers Asia is worlds largest source of temporary contractual migrant workers Dominated by very strong southnorth migrant flows from Latin AmericaCaribbean to US and Canada Increasing flows to Europe from Latin America Most migration is to other African countries Most important migration foci are Southern Africa the Maghreb and West Africa Australia and New Zealand are the large destination countries with increasing migration from Asian countries Europe Asia North America Latin America Africa Oceania 641 533 445 67 67 5 88 14 135 12 12 152 Figure 1622 International migration trends by region Source based on data in wwwiomintjahiaJahiaaboutmigrationfactsandfigures press reports Table 164 Major migrant destinations 2005 Host country Migrants millions of world migrant stock US 384 201 Russian Federation 121 63 Germany 101 53 Ukraine 68 36 France 65 34 Saudi Arabia 64 34 Canada 61 32 India 57 30 UK 54 28 Spain 48 25 Australia 41 22 Source based on wwwiomintjahiaJahiaaboutmigrationfactsandfigures 16Dicken4084Ch16indd 516 19102010 111033 AM Where You Live Really Matters 517 life in a new environment the benefits to the individual and hisher family are clear although there may be problems of dislocation and emotional stress There is invariably as well discrimination against migrant workers in host countries In many cases migrants are employed in very lowgrade occupations they may have few if any rights and their employment security is often nonexistent They may also be subject to abuse and maltreatment But what are the effects of outmigration on the exporting country From a positive perspective outmigration helps to reduce pressures in local labour mar kets In addition the remittances sent back home by migrant workers make a huge contribution not only to the individual recipients and their local com munities but also to the home countrys balance of payments position and to its foreign exchange situation Indeed migrants remittances have reached epic proportions almost 300 billion in 2006 Annual remittances to Latin America and the Caribbean 54 billion in 2005 are greater than the combined flows of foreign direct investment and development aid71 In many cases the value of foreign remittances is equivalent to a large share of the countrys export earnings Figure 1623 In a few cases remittances are worth between one and three times more than their total exports More commonly remittances can account for between onefifth and onehalf of exports However migrant remittances are highly susceptible to downturns in the host economy For example the annual growth of remittances from the US to Latin America fell from 25 per cent in early 2006 to zero in early 200872 Paradoxically such remittances do not always help the poorest people back home as recent Mexican research indicates For some people remittances allow them to buy a basic basket of essential goods says Rodolfo Tuiran of Sedesol Mexicos social development ministry But overall in terms of poverty remittances do not have a significant impact They do however have an important impact on inequality they increase it Of every 100 received 75 goes to homes that arent poor Anecdotal evi dence supports this In areas of high migration the houses in good repair with a satellite dish are the ones that receive remittances73 On the other hand again in Mexico there are schemes which capitalize on the fact that migrants from the same home town often tend to cluster together in their host country As a result there is now a network of Mexican home town associations across the US Collective remittances to a hometown in several Mexican states are organized in a threeforone programme where each dollar from the home town association for a development project is matched by a dollar each from the munici pal state and federal governments74 However the 2008 financial crisis has had a disastrous effect on remittances as labour migrants lose their jobs and incomes The other side of the outmigration coin is less attractive for the labour exporting countries there are important negative consequences The migrants are often the young and most active members of the population Further 16Dicken4084Ch16indd 517 19102010 111034 AM Part Four Winning and Losing in the Global Economy 518 Figure 1623 Migrant workers remittances Source based on World Bank 2009a Tables 44 617 1 20 10 5 35 Migrant workers remittances billions 2549 100 1124 5099 010 Percentage of merchandise exports returning migrants are rarely bearers of initiative and generators of employment Only a small number acquire appropriate vocational training most are trapped in deadend jobs and their prime interest on return is to enhance their social status This they attempt to achieve by disdaining manual employ ment by early retirement by the construction of a new house by the pur chase of land a car and other consumer durables or by taking over a small service establishment like a bar or taxi business there is also a tendency for formerly rural dwellers to settle in urban centres There is thus a reinforcement of the very conditions that promoted emigration in the first place It is ironic that those migrants who are potentially most valuable for stimulating develop ment in their home area the minority who have acquired valuable skills abroad are the very ones who because of successful adaptation abroad are least likely to return There are also problems of demographic imbalance stemming from the selective nature of emigration75 Of course there are important exceptions to this pattern One is the large number of ethnic Chinese part of the Chinese diaspora after 1949 who have returned to their homeland as the Chinese economy has opened up Another is what Saxenian calls the new Argonauts of Silicon Valley A small but meaningful proportion of individuals who left their home countries for greater opportunities abroad have now reversed course transforming a brain drain into a brain circulation They are returning home to establish busi ness relationships or to start new companies while maintaining their profes sional and social ties to the US In the early 1980s emigrants returning from Silicon Valley began to transfer the model of earlystage highrisk investing 16Dicken4084Ch16indd 518 19102010 111034 AM Where You Live Really Matters 519 to Taiwan and Israel These native born investors brought cultural and linguistic knowhow as well as the capital needed to operate profitably in these markets They also brought technical and operating experience knowledge of new business models and networks of contacts in the US Today Israel and Taiwan boast the largest venture capital industries outside of North America and both support high rates of new firm formation76 Hostcountry implications of inmigration Without migration the population of more developed regions as a whole would start declining in 2003 rather than in 2025 and by 2050 it would be 126 million less than the 118 billion projected under the assumption of continued migration77 It may seem paradoxical to think of migration as helping to solve the adjustment problems of the older industrialized countries After all especially in Europe we have been talking about not enough jobs to meet the demands of the existing populations To add further to what appears to be an oversupplied labour market seems perverse to say the least It is such considerations together with fears of social unrest between indigenous and immigrant populations that have made cur rent immigration policies in most developed countries so rigid But as ever things are not as simple as aggregate figures suggest In addition to humanitarian concerns for refugees asylum seekers or people simply trying to improve their lives there are two reasons why developed countries need to create a sensible policy towards inmigration One is immediate the other is longer term The immediate reason for asserting the need for more enlightened immigration policies is the fact that in most developed countries there is a severe shortage of labour This applies as much in highskill sectors such as IT and healthcare as in some low skill service sectors The longerterm reason is that the populations of such countries are getting older see Table 162 Their active populations are shrinking There will not be enough people of working age to support future dependent populations For both short and longerterm reasons then there is a pressing need to rethink immi gration policies But of course there are major political obstacles to doing so Fears sometimes justified often not of being squeezed out of jobs by incomers or of local cultures and practices being diluted by foreign ways generate powerful forces of opposition Such fears are easily exploited by political groups of the extreme right as can be seen today in many European countries as well as in the US Labour force displacement does indeed happen But not invariably so and not on the scale so often imagined One of the biggest obstacles to popular support for more liberal migration policies is that the size of the host countrys immigrant population tends to be greatly over estimated78 As Figure 1624 shows foreign work ers make up a very small percentage of the working population in EU states Of course the distribution of immigrants tends to be highly uneven within individual countries and this is an important factor in peoples perceptions Specific transnational 16Dicken4084Ch16indd 519 19102010 111034 AM Part Four Winning and Losing in the Global Economy 520 communities tend to develop specific geographies some of which are more appar ent than others and that is where the greatest tension tends to develop Controls on immigration are now much tighter than in the past Despite the fact that labour migration is an integral part of the European Union the enlarge ment of 2005 to incorporate a further 10 countries mostly from the former Soviet bloc led to 12 of the existing 15 EU member states imposing transitional restrictions on migration from Eastern Europe the exceptions are the UK Sweden and Ireland This is despite pleas from the European Commission for an open door policy for new members and the fact that in most EU15 countries workers from the new members make up less than 1 of the workforce79 Similar Foreign workers as a share of working age population Figure 1624 Foreign workers as a percentage of working age population in Europe Source based on European Commission data cited in the Financial Times 3 February 2006 16Dicken4084Ch16indd 520 19102010 111034 AM Where You Live Really Matters 521 problems exist in the case of Mexican migration into the US Indeed proposals to build a more robust physical barrier along the border to reduce the roughly 400000 Mexicans who cross the border into the US illegally every year appear to be supported by a majority of the US population Yet many parts of the European and US economies as well as many public services simply could not operate without the employment of migrant workers The need for an influx of new workers will not go away On the contrary given the demographic trends in all the developed countries the need will increase It can also be argued that not only does inmigration fill important needs often performing tasks that otherwise will go unperformed but also it need not have the negative effects claimed by opponents A recent study of Europe claims that increased immigration leads to economic expansion rather than to job losses80 Indeed the sharp decline in the value of the UK pound against the Euro in 2008 led to large numbers of Eastern European nationals returning home81 Migration is indeed a highly volatile process NOTES 1 Higbee 1970 10910 2 UNDP 2005 19 21 3 Scott 1998 68 70 4 Veltz 1996 For an elaboration of this concept within a GPN framework see Hess 2009 5 Amin 2004 218 6 One of the surprising developments of recent years has been the return to the old and totally discredited environmental explanations of differences in economic development by the historian Landes 1998 and the economist Sachs 1997 7 Sen 1999 20 8 Bairoch quoted in Cohen 1998 17 9 Sutcliffe 2009 764 10 See for example Basu 2006 Crow et al 2009 Edward 2006 Kaplinsky 2001 Wade 2004b Wolf 2004 Chapter 9 11 UNDP 2008 Table 3 12 Ito 2001 77 13 Henderson 1998 3567 14 Financial Times 19 February 2009 15 Cited in the Financial Times 29 June 2009 16 Sen 1999 21 17 US Census Bureau Historical Income Inequality Tables wwwcensusgovhheswww incomehistoricineqtochtml 18 Kapstein 1999 101 19 See Friedmann 1986 Sassen 2001 20 Sassen 2001 270 16Dicken4084Ch16indd 521 19102010 111035 AM Part Four Winning and Losing in the Global Economy 522 21 The Economist 17 September 2005 22 Kapstein 1999 118 23 Kapstein 1999 119 24 Wu and Perloff 2005 23 25 Sklair 2001 26 Carroll and Carson 2003 Carroll 2007 27 Sklair 2001 1823 quotation is from that work 28 Department of International Development 2000 12 29 Sen 1999 106 30 ILO 2006a 2 31 Ghose et al 2009 1 32 ILO Press Release 24 January 2006 33 wwwiloorgjobcrisis 34 See Rowthorn and Ramaswamy 1997 Treganna 2009 35 Sassen 2001 Chapters 8 and 9 provides much detailed empirical data on London New York and Tokyo 36 Sassen 2001 289 290 37 Sassen 2001 294 38 Sassen 2001 306 39 Sassen 2001 309 40 Financial Times 22 June 2001 41 See ILO 2004b 42 Financial Times 31 March 2009 43 Financial Times 22 January 2010 44 ILO 2001 1401 45 Levy and Murname 2004 46 The Economist 2 July 2005 47 Kaplinsky 2001 567 48 See for example Cline 1997 ILO 1997 Kaplinsky 2001 Kapstein 1999 2000 Rigby and Breau 2006 Silva and Leichenko 2004 Wood 1994 49 Wood 1994 8 11 13 50 ILO 1997 71 73 51 Silva and Leichenko 2004 52 Silva and Leichenko 2004 283 53 Rigby and Breau 2006 18 54 ILO 2007b 10 55 The Economist 14 January 2006 Financial Times 7 October 2005 56 UNCTAD 2002 53 57 Kaplinsky 2004 789 58 See Bridge 2008b Sachs and Warner 2001 UNCTAD 2007 934 59 UNCTAD 2007 Box III3 p 94 60 Sachs and Warner 2001 833 61 Population Reference Bureau 1999 1 62 Kennedy 2002 3 63 UN Population Division 2009 64 Cohen 2004 27 16Dicken4084Ch16indd 522 19102010 111035 AM Where You Live Really Matters 523 65 UN Centre for Human Settlements 2003 66 UN Centre for Human Settlements 2001 14 67 International Organization for Migration 2009 Facts and Figures wwwiomint jahiaJahiaaboutmigrationfactsandfigures 68 Castles and Miller 2009 provide a comprehensive review of migration See also UNDP 2009 69 Financial Times 8 January 2009 70 Coe et al 2003 71 Financial Times 30 March 2006 72 Financial Times 4 June 2008 73 Financial Times 13 December 2005 74 Financial Times 13 December 2005 75 Jones 1990 250 76 Saxenian 2006 78 77 UN Population Division 2001 vii 78 Dustmann and Glitz 2005 79 The Economist 11 February 2006 80 Dustmann and Glitz 2005 81 Pollard et al 2008 16Dicken4084Ch16indd 523 19102010 111035 AM Seventeen MAKING THE WORLD A BETTER PLACE CHAPTER OUTLINE Global shifts pasts and futures The best of all possible worlds Globalization and its discontents emergence of a global civil society TNCs and states bear the major responsibility TNCs and corporate social responsibility The business of business is business Approaches to corporate social responsibility International corporate social responsibility and GPNs Types of code of conduct How effective are codes of conduct States and issues of global governance Globalnational tensions Regulating the global fi nancial system The established architecture of the global fi nancial system Towards a new global fi nancial architecture Regulating international trade The evolution of world trade regulations Battles within the WTO Global environmental regulation climate change The evolution of climate change initiatives Burning issues A better world Alternative economies To be globalized or not to be globalized that is the question Eradicating extreme poverty the UN Millennium Development Project Goals aspirations and collective will 17Dicken4084Ch17indd 524 19102010 111046 AM Making the World a Better Place 525 Global shifts pasts and futures During the past 60 years the world economy has experienced enormous cyclical variation in economic activity The unparalleled growth of the long boom lasting from the early 1950s to the mid 1970s has been followed by periods of rapid growth interspersed with recession stagnation and some deep and unanticipated traumas most notably and most recently the 2008 financial crisis Cyclical volatil ity is indeed the norm boom and bust have certainly not been eradicated Underlying these global cyclical trends however are deeper longerterm struc tural changes global shifts creating the geographical rescaling local national regional global of economic activities Geographically the global economy has become increasingly multipolar New centres of production new geographical divisions of labour have emerged in parts of what had been historically the periphery and semiperiphery of the world economy There have been big changes in the relative growth rates of different parts of the world At the same time many parts of the world remain to a greater or lesser degree disarticulated from the engines of economic growth The geography of the world economy is indeed a mosaic of unevenness in a continual state of flux Without doubt the biggest single global shift reshaping the contours of the global economic map is the resurgence of East Asia to a position of global sig nificance commensurate with its importance before the West overtook it in the nineteenth century But this has not been a sudden event Like the tectonic processes that reshape the earths crust the buildup takes time before we become aware of the true magnitude of the change As we saw in Chapter 2 the resurgence of East Asia since the 1960s was manifested initially in the rise of Japan whose spectacu lar growth across a whole range of manufacturing sectors transformed competitive relationships in the global economy The relative decline of the Japanese economy in the 1990s was however counterbalanced by the spectacular reemergence of China At the same time the original four tiger economies continued to con solidate their strengths The result is an undoubted shift in the centre of gravity of the world economy a shift that seems now to be on solid foundations and not a mere passing phase But what of the future It is always tempting to look at recent trends and to extrapolate them into the future There is of course some logic in this After all there is a strong element of path dependency in human affairs But it isnt as simple as that Path dependency does not mean determinacy All paths have branching points some go off in unex pected directions others into deadends This means that we need both a good map and a clear sense of the direction we wish to travel The first requires a better understanding of how the world actually works thats what this book has been about The second requires an ethical and moral vision It is about values1 It is about where we want to be 17Dicken4084Ch17indd 525 19102010 111046 AM Part Four Winning and Losing in the Global Economy 526 Unfortunately we are not very good at making predictions Every year at least new books or articles appear claiming to set out what the world will be like in X years time Most are soon forgotten usually for the very good reason that what was predicted hasnt actually happened It is very difficult indeed to identify which contemporary events and circumstances are likely to have longlasting effects For example when the East Asian financial crisis broke with such suddenness in 1997 the literature was full of prophecies of doom the end of the East Asian miracle had arrived The future of the region was dire Few would make those same pre dictions today But what of the outcome of the 2008 financial crisis Because we are still in the thick of it we cannot really see how the world will look in a few years time Will it be back to the future or will there really be a new world based on more than the immorality of the free market Similarly looking a little further back in time who from the standpoint of 1960 would have predicted that Japan would soon challenge the US as an economic power and in some respects overtake it to the extent that in the 1980s doomsayers in the US were lamenting the demise of the US as the worlds leading economy Japan bashing became a national pastime and not only in the US there were outbreaks in Europe too especially in France Who would have predicted that the Japanese economy itself would suddenly find itself deep in economic recession lasting for more than a decade and a half Who would have predicted that South Korea would become one of the worlds most dynamic economies within the space of 20 years or so After all in 1960 South Korea was one of the poorest countries in the world with a per capita income comparable with that of Ghana Which observer in the early 1970s would have predicted that China would open up its economy and become in a very short time the most dynamic economy in the world Or that the command economies of the Soviet Union and Eastern Europe would by the end of the 1980s begin to be transformed into capitalist market economies or that Germany would be reunited Such examples should make us wary of prediction But we dont learn Todays big bets are on Chinese world economic dominance within the next few decades We are seduced far too easily by big numbers We focus too eagerly on the quantitative rather than the qualitative dimensions and processes of change This raises a much bigger question will the tendency towards an increasingly highly interconnected and interdependent global economy intensify Is globalization an inexorable and unstoppable force Not inevitably as the period between 1919 and 1939 shows During that time the unprecedented openness of the world economy that had come into being in the period between 1870 and 1913 was largely reversed through the actions of states responding to recession through increased protectionism It took several decades to return to a similar degree of openness by which time the world was a very different place Of course the interconnections within the global economy are now much deeper and faster than in the past because of the ways in which the processes 17Dicken4084Ch17indd 526 19102010 111046 AM Making the World a Better Place 527 of production and distribution have been transformed Development of the highly complex geographically extensive global production networks which have figured so prominently throughout this book epitomizes this But such increased interde pendence may itself be a source of vulnerability2 Unforeseen damage to one part of the system will inevitably have implications for the other parts The sources of such potential damage are many and varied ranging from natural phenomena like volcanoes and earthquakes to the humanmade phenomena of geopolitical and religious conflicts But there are wider geopolitical issues both directly and indirectly related to the economy In the former case there is undoubtedly a threat of renewed trade wars not least between the US and China The Doha Round of trade negotia tions is in serious trouble and it is unlikely that anything other than a secondbest agreement will be achieved Not least this is because of deep tensions that cut across the developeddeveloping country divide In particular there is continuing friction between the worlds biggest trading areas the US and the EU Within parts of the EU notably in France and Italy as well as in some of the new Eastern European member states there are renewed calls to protect national companies from foreign takeover even from other EU firms In the US the bid by the Dubai Port Authority to purchase PO and its port facilities in the United States in 2006 was withdrawn in the face of intense US opposition partly fuelled by security fears in a post9ll world And simmering away beneath the surface are the huge and ultimately unsustainable trade imbalances between in particular China and the US These cases draw attention to the impossibility of separating out the geoeco nomic from the geopolitical Three big geopolitical issues are especially relevant here The first and most obvious is the set of issues that includes the post911 US shift towards preemptive action and regime change the Iraq War the nuclear standoff with Iran the continuing impasse over an IsraelPalestine settlement and the disturbing rise in religious fundamentalism of all kinds associated with these intractable problems The implications are farreaching and go beyond the human tragedies of those most closely affected by these conflicts From a global economic perspective the most obvious is the effect on the con tinued supply and price of oil the energy source which has underpinned the global economy for almost a century Of course this makes the need for energy efficiency and for the development of alternative renewable energy resources even more urgent In the short run however the effects could be serious As we have seen not the least of the implications of the spectacular economic growth of China is its vastly increased need for energy and other natural resources The second major geopolitical issue is again not unconnected to the rise of China and more broadly to political developments in East Asia as whole Ever since the end of the Second World War in 1945 the US has been deeply involved in the AsiaPacific for both security and economic reasons Until recently this was very much in the context of the Cold War Indeed the post1945 economic 17Dicken4084Ch17indd 527 19102010 111046 AM Part Four Winning and Losing in the Global Economy 528 revitalization of Japan Korea Taiwan and other parts of East Asia was strongly facilitated by US activities and financial aid With the collapse of the Soviet empire and the opening up of China economically the position changed Significant geopolitical problems therefore remain in what is now the worlds most dynamic economic region The US still sees China as a potential military threat as well as an economic rival The question of Taiwan is always there as a source of potential conflict even though economic relations between China and Taiwan have improved markedly and there is huge Taiwanese investment in China Relations between Japan and China remain extremely sensitive not least because of Japans reluctance to recognize some of the atrocities it perpetrated when it occupied China in the Second World War and during its longer period of involve ment in China More broadly Japans own future geopolitical intentions within East Asia are far from clear Lastly there is the intractable question of relationships between North Korea and South Korea especially the nuclear issue The third big geopolitical issue is that of failed dysfunctional or inadequate states3 Although many of the problems facing developing countries especially the poorest arise from their position in the global economy and their very weak power base in international negotiations other problems are undoubtedly home grown There are substantial internal problems of governance corruption and inhuman treatment of minority populations in some developing countries which cannot be ignored The best of all possible worlds The world has indeed changed and will continue to change in far from predict able ways But is it a better world Voltaire the eighteenthcentury French writer wrote a wonderful satirical novel Candide in which the eponymous hero lives in a world of immense suffering and hardship yet whose tutor Dr Pangloss insists that Candides world is the best of all possible worlds where everything is con nected and arranged for the best4 This Panglossian view of the world is not far removed from those to whom an unfettered capitalist market system based on the unhindered flow of commodities goods services and investment capital constitutes the best of all possible worlds Although its proponents agree that globalization is a savage process they also argue that it is a beneficial one in which they claim the winners far outnumber the losers5 Without doubt large numbers of people in the developed economies and also in the rapidly growing economies of East Asia have benefited from muchin creased material affluence There has been immense growth in the production and consumption of goods and services and through international trade a huge increase in the variety of goods available But the evidence discussed in Chapters 14 to 16 suggests a very different reality for a substantial proportion of the worlds 17Dicken4084Ch17indd 528 19102010 111046 AM Making the World a Better Place 529 population particularly in the poorest countries and regions but also among certain sectors of the population in affluent countries who have not benefited or benefited very little from the overall rise in material wellbeing There remains vast inequality between the haves and the havenots And that gap has been widening despite the operation of precisely those globalizing processes that are supposed to create benefits for everybody The 2008 financial crisis greatly exacerbated this problem What can or should be done about such large and pressing issues How can the world be made a better place for all including those at the bottom of the heap There is of course no simple answer Much depends on ones political and ideo logical point of view In terms of making the world a better place one persons utopia is another persons dystopia Of course choices are rarely if ever unconstrained We are all deeply embedded in specific contexts structures and places and constrained by our knowledge and resources As we have seen the map of such constraints is immensely uneven for many people in many parts of the world the exercise of choice is extremely limited Globalization and its discontents emergence of a global civil society Such divergences of position and viewpoint are encapsulated in the huge diversity of stances taken by the various GCSOs see Chapter 36 Within these groups general focus on the costs of globalization there is huge variation both in their agendas and in how those agendas are pursued from vociferous often violent confrontation through to more reformist movements The anticapitalist groups advocate nothing less than the replacement of the capitalist system although pre cisely what the alternative should be varies between groups For some it would be a democratically elected world government for some a structure in which the means of production were controlled by a nationally elected government For others it would be a system of locally selfsufficient communities in which long distance trade would be minimized This is the position for example of the deep green environmental groups For some the focus is on fair rather than free trade although who decides what is fair is a crucial issue For the more nationalist populist groups and for some of the labour unions the agenda is one of protect ing domestic industries and jobs from external competition especially from developing countries and restricting immigration For some the objective is removing the burden of debt from the worlds poorest countries or improving labour standards in the developing world especially of child labour The problem is that very often these agendas are contradictory There are some very unholy alliances involved Not surprisingly GCSOs have themselves attracted considerable criticism from some quarters questioning their legitimacy and in some cases their abilities to 17Dicken4084Ch17indd 529 19102010 111046 AM Part Four Winning and Losing in the Global Economy 530 further economic and social development goals for the poor7 Although the proliferation of GCSOs has unquestionably projected the globalization debate into the popular political consciousness in important ways the movements themselves have a severe democratic deficit representing humanity ultimately requires legitimation through some sort of peoples mandate8 Despite the phe nomenal recent growth of GCSOs see Figure 37 we certainly do not have a truly or even a partial global civil society Nevertheless GCSOs undoubtedly force people including politicians and business leaders to recognize and to engage with the uncomfortable reality that both the benefits and the costs of globalization are very unevenly distributed and that there are severe and pressing problems that need resolution The advocatory movements of global civil society are the originators advo cates and judges of global values and norms The way they create and hone this everyday local and global awareness of values is by sparking public outrage and generating global public indignation over spectacular norm violations This they do by focusing on individual cases9 TNCs and states bear the major responsibility Globalization is a multidimensional syndrome of processes grounded in and help ing to create specific geographies involving multiple actors engaged in processes of both conflict and collaboration and connected through asymmetrical power rela tionships see Figure 31 The central argument of this book is that among the multiplicity of actors involved in the global economy two in particular TNCs and states are responsible for much of the shaping and reshaping of the global eco nomic map As such they bear the primary responsibility for improving the lives and livelihoods of people throughout the world For that reason they form the focus of the next two sections of this chapter First we will look at the role of TNCs in terms of their corporate social responsibility CSR Second we will focus on states in the context of global governance issues relating to finance trade and the environment TNCs and corporate social responsibility The business of business is business This statement generally attributed to Milton Friedman the free market econo mist implies that the primary purpose of firms is to maximize shareholder value In other words the only actors who matter are the shareholders stockholders the ultimate owners of the company Everybody and everything else employees 17Dicken4084Ch17indd 530 19102010 111046 AM Part Four Winning and Losing in the Global Economy 532 International corporate social responsibility and GPNs As we have seen throughout this book the production distribution and consump tion of goods and services is primarily organized within global production net works usually controlled and coordinated by TNCs Such networks raise important questions particularly those regarding the relationships between lead firms and suppliers and the treatment of labour throughout the network In Chapter 14 we discussed the developmental implications of involvement or non involvement in GPNs for people and businesses in local economies using the criterion of various types of upgrading Of these social upgrading relates specifically to work and labour standards This includes a whole spectrum of social economic and ethical issues including pay work conditions occupational health and safety and human rights Questions of corporate social responsibility therefore are intrin sically involved in the operation of GPNs12 We looked briefly at some examples in the cases of agrofood Chapter 9 and clothing Chapter 10 in the context of consumer resistances to unethical corporate practices Here we take a rather more detailed examination The primary mechanism for attempting to ensure social upgrading in GPNs is the code of conduct Such codes have proliferated to the extent that they often over lap in highly confusing ways In 2006 for example it was estimated that there were around 10000 different codes of labour practice13 Twothirds of the 100 largest firms in the world operated a code of conduct by the early 2000s14 Without doubt a major reason for such proliferation is the increased geographical extent and organizational complexity of GPNs Corporate self responsibility Inactive Reactive Active Prointeractive Corporate social responsiveness Corporate social responsibility Corporate societal responsibility Utilitarian legal compliance Negative duty Positive duty or virtue based Interactive duty Profit maximization Insidein Doing things right Doing well Outsidein Dont do things wrong Doing well and doing good Insideout Doing the right things Doing good Inoutsideinout Doing the right things right Doing well by doing good Quarterly profits and market capitalization Longterm profitability Mediumterm profitability and sustainability Narrow internal CSR Economic wealthoriented Broad external CSR Social welfareoriented Scope Nature of responsibility Figure 171 Differing approaches to corporate social responsibility Source based on van Tulder with Van der Zwart 2006 Table 81 van Tulder et al 2009 Table I 17Dicken4084Ch17indd 532 19102010 111046 AM Making the World a Better Place 533 Codifications are triggered by intrinsic motivations including the greater strategic need to coordinate and control the firms activities spread over a large number of countries and constituencies This is often the area of internal codes of conduct or codes of ethics The strategic need for the formulation and implementation of external codes of conduct as a coordina tion mechanism becomes bigger when firms engage in sourcing out activities to dependent affiliates offshoring or to independent suppliers outsourcing in developing countries where the governance quality is often relatively low and the cultural and institutional distance is relatively high A large num ber of procurement codes thus addresses supply chain issues such as human rights labour standards or the right to association In this case firms have an incentive not only to formulate codes of conduct but also to implement them Extrinsic motivations for TNCs are gaining in impor tance as well the risk of reputation damage triggered by critical NGOs precipitates TNCs to formulate international codes of conduct or principles of corporate citizenship15 Figure 172 sets out the different kinds of CSR supplier strategy associated with the four types of CSR discussed above see Figure 171 The upper part of Figure 172 sets out the variations in supply chain relationships between different Corporate self responsibility Inactive Reactive Active Prointeractive Corporate social responsiveness Corporate social responsibility Corporate societal responsibility Price only Strong competition for customers Active use of power position in chain Suppliers responsible for labour conditions Price and quality Suppliers responsible for labour conditions Fair prices and high quality Suppliers selected on basis of approach to eg labour conditions Joint responsibilities Prices and quality set together Definition of fair wages and labour conditions based on consultation and strategic dialogues CSR only if not too costly and does not mean higher purchasing prices Cost control risk aversion Below 5 CSR of purchases Buy Global Internal Specific supplier General supplier Jointdialogues Low Mediumhigh Mediumlow High Low Mediumlow Mediumhigh High Low Mediumlow Mediumhigh High Cost control quality Below 25 CSR of purchases Make or buy Global Control and quality Target of 2560 CSR of purchases Make Regional Codevelopment and quality Target of 60100 CSR of purchases Cooperate Local CSR only if needed andor available and does not mean higher purchasing prices Upgrading according to own standards Upgrading according to joint andor open standards Chain liability Chain responsibility Type of code Specificity Compliance Implementation Supply chain relationships Codes of conduct strategy Figure 172 Types of CSR strategy towards suppliers Source based on van Tulder et al 2009 Table II van Tulder 2009Table 4 17Dicken4084Ch17indd 533 19102010 111046 AM Part Four Winning and Losing in the Global Economy 536 such codes will amount to little more than a gesture or that companies will be able to influence how the process works In one sense of course anything that contributes to better conditions for people and communities should be welcomed Whilst in themselves codes of labour practice are limited they do have a role in wider strategies to promote economic and social rights of vulnerable workers But they are not sufficient nor have they aimed to achieve more sustainable systems of global production that address inherent inequalities and poverty The issue therefore is whether and how codes contribute to a wider process that promotes the rights of the most vulnerable workers22 Very often the impacts are mixed For example a study of the effects of the Ethical Trading Initiative reached the following conclusions ETI company codes had had a positive impact in relation to certain code prin ciples particularly health and safety documented minimum not living wages and employment benefits Company codes were found to have had little or no impact on other code principles particularly freedom to join an independent trade union collective bargaining and discrimination In general permanent and regular workers were found to have fared better from company codes of labour practice However whilst there had been positive impacts on regular workers codes of labour practice were failing to reach more vulnerable casual migrant and contract workers many of whom were women23 Two important factors in the implementation of codes of conduct seem to be first the extent to which the various stakeholders participate in the formulation of the codes and second the firms country of origin Both of these were evident in a detailed analysis of global framework agreements involving firms from the US Europe and Japan24 First the involvement of stakeholders in the codification clearly results in different levels of implementation likelihood and hence different types of codes it leads to a sort of compromise in terms of the issues addressed but on the other hand increases the compliance likelihood considerably Second implemented codes reveal a country of origin effect All Japanese firms scored low on both specificity and compliance indicating inactive codes whereas the only examples of high specificity and compliance ie active codes could be found with European firms The US companies fall somewhere in between and generally represent the reactive CSR strat egy The difference in approach between US and European companies is particularly remarkable but could be largely explained by the bigger involve ment of stakeholders The implementation likelihood of almost all European codes is higher than that of their American or Japanese counterparts25 Codes of conduct therefore are useful mechanisms in the progress to greater corporate social responsibility They are clearly better than nothing But they are 17Dicken4084Ch17indd 536 19102010 111047 AM Making the World a Better Place 537 insufficient not least because they are partial in terms of both their coverage and their essentially voluntary nature States and issues of global governance Globalnational tensions The worlds economy is global its politics are national This in a nutshell is the dilemma of global governance26 While the world has become much more highly integrated economically the mechanisms for managing the system in a stable sustainable way have lagged behind27 Virtually the entire world economy is now a global capitalist market economy although as we saw in Chapter 6 there are several variants on this theme The collapse of the state socialist systems at the end of the 1980s and the headlong rush to embrace the market together with the more controlled opening up of the Chinese economy after 1979 created a very different global system from the one which emerged after the Second World War The massive flows of goods services and especially finance in its increasingly bewildering variety created a world whose rules of governance have not kept pace with such changes In Chapter 3 see Figure 32 we noted the thickening web of public and private institutions that make up the institutional macrostructures of the global economy In Figure 174 we focus on the core institutions The fundamental prob lem is that these institutions are a mixture of bodies established in different circumstances and at different times in the seven decades since the end of the Second World War They consist of widely differing memberships with widely different WTO International standards organizations UN IMF World Bank EU G8 G20 G7 Russia Germany Brazil Turkey Italy Argentina Saudi Arabia UK South Africa France India Mexico US Indonesia South Korea Canada Australia China Japan Figure 174 The core of global governance institutions 17Dicken4084Ch17indd 537 19102010 111047 AM Part Four Winning and Losing in the Global Economy 540 weaknesses in the debtor countries and accordingly place the onus of responsibility for reform firmly on their shoulders By contrast little attention is given to the role played by institutions and policies in creditor countries in triggering international financial crises31 In fact the IMFs and World Banks conditionality medicine often made the patient worse rather than better By imposing massive financial stringency on countries in difficulty including raising domestic interest rates insisting on increased openness of the domestic economy reducing social spending and the like it became extremely difficult for countries to help themselves out of difficulty Conditionality at least in the manner and extent to which it has been used by the IMF is a bad idea there is little evidence that it leads to improved eco nomic policy but it does have adverse political effects because countries resent having conditions imposed on them In some cases it even reduced the likelihood of repayment32 In the absence of a more coordinated and institutionalized system the global financial system could easily spiral out of control Indeed this is what appeared to be happening following the East Asian financial crisis of 1997 with its subsequent spillover effects on countries like Russia and Brazil There was particular concern over the volatile nature of global capital flows in terms of their impact on both the financial system itself and also on the individual countries and their popula tions most seriously affected by volatile flows of hot money To many observers especially in the West the causes of the 1997 East Asian crisis lay in structures and practices inside the affected countries including socalled crony capitalism The remedy was obvious apply the usual Washington Consensus formula in which all answers lie in the unfettered operation of markets and in the conditionality applied to financial assistance In fact the major though not the only cause of the East Asian crisis was to be found in flows of speculative capital into and then out of the region It also transpired that corrupt financial practices were by no means unique to East Asia The collapse of two massive US companies LTCM and Enron demonstrated this in graphic terms Not surprisingly there were calls for a new or reformed financial architecture to ensure that a similar crisis could not recur In fact very little happened It was back to business as usual and the further headlong growth and diversification of finan cial markets and esoteric financial products discussed in Chapter 12 From a broad developmental viewpoint the problem still remained that the global financial market is heavily dominated by financial interests in the industrialized countries The governments of these countries especially the economically strongest determine the rules governing the market through their influence on the IFIs international financial institutions These latter institutions in turn exercise great leverage over the macroeconomic and finan cial policies of developing countries At the same time the banks and financial 17Dicken4084Ch17indd 540 19102010 111047 AM Part Four Winning and Losing in the Global Economy 542 Each of them is politically contentious and naturally mostly opposed by bankers The cry of unworkability is widely heard However there is strong popular sup port in most countries for measures to limit the excesses of the financial sector Perhaps the most important development however has been the emergence of the G20 as the central focus of attempts to build a reformed global financial sys tem The significance of the G20 lies in its much wider membership the 19 countries shown in Figure 174 plus the EU and especially the involvement of developing countries which hitherto were not part of groups like the G7 and G8 The G20 was created in 1999 in the aftermath of the East Asian crisis but it was not until 2007 that it came to real prominence when the G20 finance ministers agreed to pump liquidity into financial markets at the beginning of the global financial crisis In subsequent meetings in 2008 and 2009 the G20 was at the centre of initiatives to deal with the crisis At its London summit in April 2009 500 billion was committed to refinance the IMF at the Pittsburgh summit in September 2009 the national leaders agreed to expand the G20s role placing it at the centre of international economic policymaking Figure 175 outlines the major aspects of global financial governance being examined by the G20 Again it will take time before we know what actually happens but at least the G20s Financial regulation Implement higher global standards consistently to ensure a level playing field and avoid fragmentation of markets protectionism and regulatory arbitrage Establish Financial Stability Board FSB Includes all G20 countries plus Spain and the EC with strengthened mandate to promote financial stability enhance openness and transparency of the financial sector implement international financial standards International cooperation Collaborate with IMF to conduct early warning exercises of potential macroeconomic and financial risks Home authorities of each major financial institution should ensure that the group of authorities with a common interest in that financial institution meets at least annually Systemically important financial firms should develop internationallyconsistent firmspecific contingency and resolution plans Establish supervisory colleges for significant crossborder firms Advanced economies the IMF and other international organizations should provide capacitybuilding programmes for emerging market economies and developing countries on the formulation and implementation of new major regulations consistent with international standards Prudential regulation Raise the quality consistency and transparency of the Tier 1 capital base Require banks to build buffers of resources in good times that they can draw on when conditions deteriorate Level of capital in the banking system to be raised relative to precrisis levels All major G20 countries to adopt the Basel II capital framework Financial institutions should provide enhanced risk disclosures in all their reporting Compensation Align compensation with longterm valuecreation not excessive risktaking by i avoiding multiyear guaranteed bonuses ii requiring a significant portion of variable compensation to be deferred tied to performance and subject to appropriate clawback iii making firms compensation policies transparent through disclosure requirements iv ensure compensation committees can act independently Area Purpose Figure 175 Examples of measures proposed by the G20 to reform the global financial system Source based on Progress Report on the Actions to Promote Financial Regulatory Reform wwwg20org 17Dicken4084Ch17indd 542 19102010 111048 AM Making the World a Better Place 543 Framework for Strong Sustainable and Balanced Growth represents a really significant global attempt to create a new financial structure for the global economy with an explicit developmental basis Regulating international trade The evolution of world trade regulations Compared with the international financial system the governance of international trade is much clearer though just as controversial35 In 1947 the General Agreement on Tariffs and Trade GATT was established as the third international institution formed in the aftermath of the Second World War along with the IMF and the World Bank completing what some have called the unholy trinity36 Establishment of the GATT reflected the view that the beggarmyneighbour protectionist policies of the 1930s should not be allowed to recur The objective was to be free trade based upon the principle of comparative advantage first intro duced by David Ricardo in 1817 This states that a country or any geographical area should specialize in producing and exporting those products in which it has a comparative or relative cost advantage compared with other countries and should import those goods in which it has a comparative disadvantage Out of such specialization it is argued will accrue greater benefit for all Whether or not there is such a thing as free trade is highly debatable In order to work it needs some degree of equality between trading partners and this as we have seen at the global scale simply does not exist The purpose of the GATT was to create a set of multilateral rules to facilitate free trade through the reduction of tariff barriers and other types of trade discrimination The GATT was eventually replaced by the World Trade Organization WTO in 1995 an institutional change which greatly broadened the remit of the trade regulator Today there are 153 member states in the WTO and around 97 per cent of world trade is covered by the WTO framework Figure 176 traces its evolution Since 1947 there have been nine rounds of multilateral trade negotiations including the current Doha Round initiated in 2001 and still not completed see below Prior to the mid 1960s the GATT was mostly concerned with trade of manufactures between developed nations As a result widespread dissatisfaction emerged among developing countries A particularly sensitive issue was the lack of access of developing country exports to developed country markets Pressure led in 1965 to the adoption within the GATT of a generalized system of prefer ences GSP under which exports of manufactured and semimanufactured goods from developing countries were granted preferential access to developed country markets In fact there were a number of exclusions from the GSP of which one of the most important was textiles and clothing separately regulated under the MFA see Chapter 10 As Figure 176 shows the first seven GATT rounds were both quite brief and also very limited in scope although the Kennedy and Tokyo rounds had slightly more 17Dicken4084Ch17indd 543 19102010 111048 AM Part Four Winning and Losing in the Global Economy 544 extensive agendas However it was the Uruguay Round started in 1986 and eventu ally concluded in 1994 which constituted the most ambitious and wideranging of all the GATT rounds to that point For the first time a number of additional trade issues was addressed Notably agriculture textiles and clothing were brought into the GATT and special agreements were concluded in services GATS the General Agreement on Trade in Services intellectual property TRIPS Trade Related Aspects of Intellectual Property Rights and investment TRIMS Trade Related Investment Measures There was a further large reduction in overall tariff levels The major organizational change was the creation of a new World Trade Organization The WTO like the GATT constitutes a ruleoriented approach to multilateral trade cooperation Ruleoriented approaches focus not on outcomes but on the rules of the game and involve agreements on the level of trade barriers that are permitted as well as attempts to establish the general conditions of competition facing foreign producers in export markets37 Figure 176 Evolution of the international trade regulatory framework from the GATT to the WTO 0 0 10 40 20 80 Average tariff percent Number of members 30 120 40 160 1940 1950 1960 1970 1980 1990 2000 Geneva Annecy Geneva Kennedy Torquay Dillon Tokyo Uruguay Doha Tariffs Tariffs Tariffs Tariffs Antidumping measures Tariffs Tariffs Tariffs Nontariff barriers NTBs Specific framework agreements Tariffs NTBs Agriculture textiles clothing Services GATS Intellectual property TRIPs Traderelated investment TRIMs Creation of WTO Development round 194748 1949 195556 196367 195051 196061 197379 198694 2001 Length of round GATT WTO 17Dicken4084Ch17indd 544 19102010 111048 AM Part Four Winning and Losing in the Global Economy 546 regulations such as the use of child labour poor health and safety conditions repression of labour unions and workers rights and in environmental standards and regulations such as industrial pollution the unsafe use of toxic materials in production processes distort the trading system and create unfair advantages Several countries led primarily by the US but also including some European countries have attempted to incorporate the issue of labour standards into the WTO The attempt has failed partly because not all industrialized countries sup port it but also because developing countries are vehemently opposed The argu ment of those opposed to its inclusion within the WTOs remit is that labour standards are the responsibility of the International Labour Organization ILO Indeed all members of the ILO have agreed to a set of core principles The counterargument is that the ILO lacks any powers of enforcement It is also notable that the United States despite its current position on including labour standards in trade agreements has not signed up to many of the ILOs core labour conventions arguing that they do not comply with US law Similar questions apply to the relationship between trade regulations and the environment To what extent should variations in environmental standards be incor porated into international trade regulations At one level the problem is exactly the same as that of labour standards If a country allows lax environmental stand ards it is argued then it should not be able to use what is in effect a subsidy on firms located there to be able to sell its products more cheaply on the international market The question then becomes one of whether the solution lies in using international trade regulations or in some other forms of regulation These labour and environmental questions posed by some developed countries arose in the aftermath of the Uruguay Round in the mid 1990s But three quarters of the WTOs membership consists of developing countries They face as we have seen in previous chapters immense economic and social problems The Uruguay Round helped them in some respects but created major difficulties in others In particular of the three big agreements coming out of the Uruguay Round on invest ment measures TRIMS trade in services GATS and intellectual property rights TRIPS the first two limit the authority of developing country gov ernments to constrain the choices of companies operating in their territory while the third requires the governments to enforce rigorous property rights of foreign generally Western firms Together the agreements make comprehensively illegal many of the industrial policy instruments used in the successful East Asian developers to nurture their own industrial and technological capacities41 In November 1999 a WTO meeting was held in Seattle to try to initiate a new round of trade negotiations The meeting failed not so much because of the now notorious antiWTO and antiglobalization protests but as the UN Secretary General Kofi Annan argued because it failed to initiate a 17Dicken4084Ch17indd 546 19102010 111048 AM Making the World a Better Place 547 development round that would at last deliver to the developing countries the benefits they have so often been promised from free trade instead we saw governments particularly those of the worlds leading economic powers unable to agree on their priorities As a result no round was launched at all The developed country governments all favour free trade in principle but too often they lack the political strength to confront those within their own countries who have come to rely on protectionist arrangements They have not yet succeeded in putting across to their peoples the wider interest that we all share in having a global market from which everyone not just the lucky few can benefit42 It was not until the end of 2001 that a new global trade round was announced at Doha in Qatar with the official title of the Doha Development Agenda to be concluded by 2004 However such good intentions have not been fulfilled The Doha Round has been possibly even more acrimonious than the Uruguay Round43 Deadlines have been missed with unimpressive regularity The make or break Ministerial Meeting at Cancun in 2003 collapsed without producing any significant results Subsequent meetings in Hong Kong 2005 and Geneva 2006 2008 made very little progress Although negotiations rumble on in a lowkey manner in fact for all the talk of development the development aspects of the round have been increasingly boiled down to a focus on agriculture with a few additional sweeteners such as Aid for Trade thrown in along the way While it is clear that a conclusion to the round will not occur unless movement on agricultural liberalisation is forthcoming the quid pro quo more than likely greater non agricultural market access to developing country markets will ensure that the deal struck remains of relatively greater value to the industrial countries The result is thus likely to be of little benefit to the WTOs poorest and most vulnerable members44 In its communiqué from the London Summit in 2009 the G20 stated its commit ment to reaching an ambitious and balanced conclusion to the Doha Development Round noting that it is urgently needed But whether such rhetoric will make a difference is far from clear The G20 also reaffirmed its commitment not to raise new barriers to trade However 17 of the 20 G20 members introduced some kind of trade protectionist measure in 2008945 Global environmental regulation climate change As we saw in some detail in Chapter 15 the processes of production distribution and consumption articulated within and through global production networks have the potential to create enormous and longlasting environmental damage And yet compared with finance and trade regulation there were few systematic attempts to build an appropriate global regulatory structure for the environment 17Dicken4084Ch17indd 547 19102010 111048 AM Part Four Winning and Losing in the Global Economy 550 is that most of the growth in emissions in the future will be in developing countries especially China India and Brazil Given the 2C bottom line the major goals of the Copenhagen meeting were to reach agreement on the following issues and to embed them into a binding UN treaty with precise numbers and a timescale developed countries to cut their CO2 emissions developing countries to curb their emissions and provision by developed countries of financial and technological assistance to developing coun tries to enable them to achieve their emission targets On every issue of course views differed widely between different interest groups developed and developing countries environmental groups and other GCSOs and business firms Despite all the premeeting hype and all the dire warnings no binding agreement was reached on a new climate treaty At the last minute and after highly acrimonious negotiations an Accord was reached based primarily on a deal put together by a small group of countries the US Brazil China India and South Africa Figure 177 summarizes the major elements of the Copenhagen Accord Its most striking aspect is its vagueness The only numbers relate to the commit ment of financial assistance to developing countries The FCCC tried to put a brave face on the outcome Three key things that Copenhagen produced are 1 It raised climate change to the highest level of government 2 The Copenhagen Accord reflects a political consensus on the longterm global response to climate change 3 The nego tiations brought an almost full set of decisions to implement rapid climate action near to completion were now in a cooling off sic period that gives countries useful and needed time to resume their discussion with each other If countries follow up the outcomes of Copenhagen calmly with eyes firmly on the advan tage of collective action they have every chance of completing the job52 The negotiating process continues but is made more difficult by the prevailing state of the global economy and its effects on individual countries willingness andor ability to reach firm and meaningful agreement on such uncertain and contentious issues A better world The future map of the global economy is far from clear Although the chances are that globalizing processes will continue to operate and that the world will become increasingly interconnected there is a huge amount of uncertainty We should certainly not simply extrapolate from past trends Most of all however we need to think about the kind of world we and our children would want to live in The key question is not so much what the world might be like in the future but what it should be like There are choices to be made What might these be After all globalization is not a force of nature it is a social process53 What are the choices In theory they are infinite in practice they are not 17Dicken4084Ch17indd 550 19102010 111049 AM Making the World a Better Place 551 Alternative economies In thinking about alternative futures in the context of globalization debates there is a depressing tendency towards polarization of positions of the kind we identi fied in Chapter 1 The gungho neoliberal hyperglobalizers see the solution in REDDplus Reduced Emissions from Deforestation and Forest Degradation We call for an assessment of the implementation of this Accord to be completed by 2015 including in light of the Conventions ultimate objective In order to enhance action on development and transfer of technology we decide to establish a Technology Mechanism to accelerate technology development and transfer in support of action on adaptation and mitigation that will be guided by a countrydriven approach and be based on national circumstances and priorities We decide that the Copenhagen Green Climate Fund shall be established as an operating entity of the financial mechanism of the Convention to support projects programme policies and other activities in developing countries related to mitigation including REDDplus adaptation capacitybuilding technology development and transfer Scaled up new and additional predictable and adequate funding as well as improved access shall be provided to developing countries The collective commitment by developed countries is to provide new and additional resources including forestry and investments through international institutions approaching USD 30 billion for the period 20102012 with balanced allocation between adaptation and mitigation Funding for adaptation will be prioritized for the most vulnerable developing countries such as the least developed countries small island developing States and Africa In the context of meaningful mitigation actions and transparency on implementation developed countries commit to a goal of mobilizing jointly USD 100 billion dollars a year by 2020 to address the needs of developing countries This funding will come from a wide variety of sources public and private bilateral and multilateral including alternative sources of finance We decide to pursue various approaches including opportunities to use markets to enhance the cost effectiveness of and to promote mitigation actions Developing countries especially those with low emitting economies should be provided incentives to continue to develop on a low emission pathway We recognize the crucial role of reducing emission from deforestation and forest degradation and the need to enhance removals of greenhouse gas emission by forests and agree on the need to provide positive incentives to such actions through the immediate establishment of a mechanism including REDDplus to enable the mobilization of financial resources from developed countries Adaptation to the adverse effects of climate change and the potential impacts of response measures is a challenge faced by all countries Enhanced action and international cooperation on adaptation is urgently required to ensure the implementation of the Convention by enabling and supporting the implementation of adaptation actions aimed at reducing vulnerability and building resilience in developing countries especially in those that are particularly vulnerable especially least developed countries small island developing States and Africa We agree that developed countries shall provide adequate predictable and sustainable financial resources technology and capacitybuilding to support the implementation of adaptation action in developing countries We agree that deep cuts in global emissions are required according to science with a view to reduce global emissions so as to hold the increase in global temperature below 2 degrees Celsius and take action to meet this objective consistent with science and on the basis of equity We should cooperate in achieving the peaking of global and national emissions as soon as possible recognizing that the time frame for peaking will be longer in developing countries and bearing in mind that social and economic development and poverty eradication are the first and overriding priorities of developing countries and that a lowemission development strategy is indispensable to sustainable development We underline that climate change is one of the greatest challenges of our time We emphasize our strong political will to urgently combat climate change in accordance with the principle of common but differentiated responsibilities and respective capabilities To achieve the ultimate objective of the Convention to stabilize greenhouse gas concentration in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system we shall recognizing the scientific view that the increase in global temperature should be below 2 degrees Celsius on the basis of equity and in the context of sustainable development enhance our longterm cooperative action to combat climate change We recognize the critical impacts of climate change and the potential impacts of response measures on countries particularly vulnerable to its adverse effects and stress the need to establish a comprehensive adaptation programme including international support The Copenhagen Accord Figure 177 Major elements of the Copenhagen Accord 2009 Source wwwdenmarkdkenmenuClimateEnergyCOP15Copenhagen2009cop15html 17Dicken4084Ch17indd 551 19102010 111049 AM Part Four Winning and Losing in the Global Economy 552 yet more openness of markets in unfettered flows of goods services and capital In other words much much more of the same The antiglobalizers argue for exactly the opposite Whereas the first strategy would almost certainly create a world of even greater inequality as well as environmental damage the second embodies the dangers of reverting to a set of medieval subsistence economies The diametrical opposition of these two positions can be illustrated by their polarized attitudes towards trade To the hyperglobalizers it is a central tenet that trade should be allowed to flourish without hindrance The antiglobalizers posi tion is that the pursuit of everincreasing international trade which is clearly encouraged by a free trade regime like the WTO should be totally abandoned not merely regulated The argument here is basically that sustainable development is incompatible with the pursuit of further economic growth An economic sys tem based upon very high levels of geographical specialization inevitably depends upon and generates everincreasing trade in materials and products A central criticism is that the energy costs of transporting materials and goods across the world are not taken into account in setting the prices of traded goods and that in effect trade is being massively subsidized at a huge shortterm and longterm environmental cost More than half of all international trade involves the simultaneous import and export of essentially the same goods For example Americans import Danish sugar cookies and Danes import American sugar cookies Exchanging recipes would surely be more efficient54 But by no means all environmentalists agree with this kind of viewpoint As David Pearce argues Unquestionably there are environmental problems inherent in the existing trading system But there is also extensive confusion in the environmentalist critique of free trade Given the potentially large gains to be obtained from free trade adopting restrictions on trade for environmental purposes is a policy that needs to be approached with caution Most importantly all other approaches to reducing environmental damage should be exhausted before trade policy measures are contemplated the policy implication of a negative association between freer trade and environmental degradation is not that freer trade should be halted What matters is the adoption of the most cost effective policies to optimize the externality Restricting trade is unlikely to be the most efficient way of controlling the problem The losses can best be minimized by firm domestic environmental policy design to uncouple the envi ronmental impacts from economic activity The first best approach to cor recting externalities is to tackle them directly through implementation of the polluter pays principle PPP not through restrictions on the level of trade Where the PPP is not feasible eg if the exporter is a poor developing coun try it is likely to be preferable to engage in cooperative policies eg making clean technology transfers assisting with cleanup policies etc rather than adopting import restrictions55 17Dicken4084Ch17indd 552 19102010 111049 AM Making the World a Better Place 553 There is thus intense disagreement both over the impact of globalization processes and trade on the environment and also over what should or can be done56 There are in other words very different shades of green ranging from the position that human ingenuity and new technologies will find the solutions without necessitating a change in lifestyles the Panglossian view through to the deep green arguments that only a return to a totally different smallscale highly localized mode of existence will suffice But such a path rather than improving the position for the poor in the world economy would condemn the vast major ity of people to a miserable future at best on the margins of the bare minimum of physical existence57 It is not a socially acceptable policy The alternative to an economic system that involves trade is not bucolic sim plicity and hardy selfsufficiency but extreme poverty South Korea has plenty of problems but not nearly so many as its neighbour to the north58 But this emphatically does not mean that local economies are irrelevant On the contrary There is in fact a wide diversity of economies59 offering different kinds of possibilities and which may occupy different positions in relation to the larger global economy Many of these are essentially community economies Figure 178 summarizes the main ways in which such economies differ from the mainstream economy In some cases these communities are geographically confined to the local while in others they span the global60 The fair trade networks discussed in Chapter 19 are examples of the latter The Mondragón Cooperative Corporation is an example of a complex of cooperatives spread across 14 countries but grounded in the Basque region of Spain and organized on workerowned principles The LETS Local Exchange Trading Systems uses local currencies to facilitate the exchange of services and selfproduced or selfearned goods within a network of members in a local community61 A microfinance scheme which began as a local initiative in Bangladesh in the 1970s subsequently spread across many other coun tries and has been a huge contributor to poverty reduction62 The diversity of economies that exists in the world offers significant possibilities for creating fulfilling and fair communities and more generally for reconsidering globalization as a transformable social process and not a force of nature But they are by definition mostly small in scale and often highly local in scope They raise impor tant issues of how such economies connect into the bigger picture unless they decide to opt out And it is the bigger picture that still demands our primary attention To be globalized or not to be globalized that is the question The main losers in todays very unequal world are not those who are too much exposed to globalization They are those who have been left out63 17Dicken4084Ch17indd 553 19102010 111049 AM Part Four Winning and Losing in the Global Economy 554 Is the problem actually globalization or notglobalization Is the difficulty being part of the system or not being part of it How can globalization be the source of problems for those excluded from it64 It is abundantly clear that the position of many of the worlds poorest countries is highly marginal in terms of the global economy The usual prescription of the IMF and World Bank doctors is that they should open their economies more for example by positively encouraging exports and by liberalizing their regulatory structures For policymakers around the world the appeal of opening up to global mar kets is based on a simple but powerful promise international economic inte gration will improve economic performance The trouble is that there is no convincing evidence that openness in the sense of low barriers to trade and capital flows systematically produces these consequences In practice the links between openness and economic growth tend to be weak and con tingent on the presence of complementary policies and institutions65 Openness then is the name of the game But this will only work if the play ing field is relatively level which it clearly is not And it also has to work both Placeattached Diversified Multiple Small scale Cooperative Decentred Culturally distinctive Socially embedded Local ownership Dispersed Autonomous Oriented to local market Values longterm investment Vitality oriented Recirculates value locally Community owned Community led Community controlled Communal appropriation and distribution of surplus Environmentally sustainable Whole Ethical Harmonious Locally selfreliant Aspatialglobal Specialized Singular Large scale Competitive Centred Acultural Socially disembedded Nonlocal ownership Agglomerative Integrated Exportoriented Privileges shortterm return Growth oriented Outflow of extracted value Privately owned Management led Controlled by private board Private appropriation and distribution of surplus Environmentally unsustainable Fragmented Amoral Crisisridden Participates in a spatial division of labour Community economy Mainstream economy Figure 178 Contrasting characteristics of mainstream and community economies Source based on GibsonGraham 2006 Figure 23 17Dicken4084Ch17indd 554 19102010 111049 AM Making the World a Better Place 555 ways which clearly it does not Tariffs imposed by the developed countries on imports of many developing country products remain very high It is common for tariffs to increase with the degree of processing socalled tariff escalation so that highervalue products from developing countries are discriminated against At the same time agricultural subsidies make imports from developing countries uncompetitive In other words the odds are stacked against them66 The human costs of unfair trade are immense If Africa South Asia and Latin America were each to increase their share of world exports by one per cent the resulting gains in income could lift 128 million people out of poverty When developing countries export to richcountry markets they face tariff barriers that are four times higher than those encountered by rich countries Those barriers cost them 100bn a year twice as much as they receive in aid67 Simply opening up a developing economy on its own however will almost cer tainly lead to further disaster There is the danger of local businesses being wiped out by more efficient foreign competition before they can get a toehold in the wider world Hence a prerequisite for positive and beneficial engagement with the global economy is the development of robust internal structures the development of a national economy is more about internal integration than about external integration68 Eradicating extreme poverty the UN Millennium Development Project Poverty as we discussed in Chapter 16 is the major problem in many parts of the world For many years aid programmes have been devised to help alleviate its major manifestations but such aid has generally fallen far below needs In 2006 for example for the group of lowincome countries aid amounted to only 35 per head69 In 2002 a meeting of heads of state in New York adopted the UN Millennium Declaration whose aim is nothing less than the eradication of extreme poverty as part of a broad and comprehensive development programme Ending this scourge will require the combined efforts of all governments civil society organizations and the private sector in the context of a stronger and more effective global partnership for development The Millennium Development Goals set timebound targets by which progress in reducing income poverty hunger disease lack of adequate shelter and exclusion while promoting gender equality health education and environmental sustainability can be measured They also embody basic human rights the rights of each person on the planet to health education shelter and security The Goals are ambitious but feasible and together with the comprehensive United Nations development agenda set the course for the worlds efforts to alleviate extreme poverty by 201570 17Dicken4084Ch17indd 555 19102010 111049 AM Part Four Winning and Losing in the Global Economy 556 The precise goals and targets of the UN project are set out in Figure 179 They are indeed extremely ambitious especially in the light of the implications of the 2008 global financial crisis Goals aspirations and collective will Society is faced with a profound dilemma To resist growth is to risk economic and social collapse To pursue it relentlessly is to endanger the ecosystems on which we depend for longterm survival71 The major global challenge is to meet the material needs of the world community as a whole in ways that reduce rather than increase inequality and which do so 1 2 3 4 5 6 7 8 Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Improve maternal health Combat HIVAIDS malaria and other diseases Ensure environmental sustainability Develop a global partnership for development GOAL TARGET Halve between 1990 and 2015 the proportion of people whose income is less than 1 a day Achieve full and productive employment and decent work for all including women and young people Halve between 1990 and 2015 the proportion of people who suffer from hunger 1 2 3 1 1 1 1 2 1 2 3 1 2 3 4 1 2 3 4 5 Address the special needs of least developed countries landlocked countries and small island developing states Develop further an open rulebased predictable nondiscriminatory trading and financial system Deal comprehensively with developing countries debt In cooperation with pharmaceutical companies provide access to affordable essential drugs in developing countries In cooperation with the private sector make available benefits of new technologies especially information and communications Integrate the principles of sustainable development into country policies and programmes and reverse the loss of environmental resources Reduce biodiversity loss achieving by 2010 a significant reduction in the rate of loss Halve by 2015 the proportion of the population without sustainable access to safe drinking water and basic sanitation By 2020 to have achieved a significant improvement in the lives of at least 100 million slum dwellers Have halted by 2015 and begun to reverse the spread of HIVAIDS Achieve by 2010 universal access to treatment for HIVAIDS for all those who need it Have halted by 2015 and begun to reverse the incidence of malaria and other major diseases Reduce by two thirds between 1990 and 2015 the underfive mortality rate Reduce by three quarters the maternal mortality ratio Achieve universal access to reproductive health Ensure that by 2015 children everywhere boys and girls alike will be able to complete a full course of primary schooling Eliminate gender disparity in primary and secondary education preferably by 2005 and in all levels of education no later than 2015 Figure 179 The UN Millennium Development Goals Source wwwunorgmillenniumgoalshtml 17Dicken4084Ch17indd 556 19102010 111049 AM Making the World a Better Place 557 without destroying the environment That of course is far easier said than done It requires the involvement of all major actors business firms states international institutions civil society organizations in establishing mechanisms to capture the gains of globalization for the majority and not just for the powerful minority Such a system has to be built on world trading and financial systems that are equitable This must involve reform of such institutions as the WTO the World Bank and the IMF or alternatively their replacement by more effective and more widely accountable institutions It must involve an equitable and accountable glo bal environmental organization The emergence of the G20 is a small step in the right direction but it is little more than that Much more needs to be done As we have seen the exercise of developed country power through the various kinds of conditionality and tradeopening requirements imposed on poorer countries has seriously negative results Without doubt trade is one of the most effective ways of enhancing material wellbeing but it has to be based upon a genuinely fairer footing than at present The poorer countries must be allowed to open up their markets in a manner and at a pace appropriate to their needs and conditions After all that is precisely what the US and European countries did during their phases of industrialization as did Japan and the East Asian NIEs at a later date At the same time developed countries must operate a fairer system of access to their own markets for poor countries Of course this will cause problems for some people and communities in the developed countries and these should not be underestimated As we saw in Chapter 16 there are indeed many losers in the otherwise affluent economies Globalization increases objective and subjective insecurities among a great many workers and producers different faces of economic globalization can be expected to have different implications for risk For instance some faces of globalization more than others are visible direct and palpable with respect to job risks for instance via threats of outsourcing by companies rather than via trade competition72 Surveys of US workers have shown that lesseducated lowerincome workers are much more likely to oppose policies aimed at freer trade and immigration73 although this is changing as more highereducated workers are increasingly affected People who feel threatened by globalization must be assisted effectively whether this involves financial assistance or education and retraining Governments must design and implement appropriate adjustment policies for such groups if trade policies helpful to developing countries are to be acceptable politically Equally governments of developing countries must engage in their own internal reforms to strengthen domestic institutions enhance civil society increase politi cal participation remove corruption raise the quality of education and reduce internal social polarization Although difficult such policies are not impossible if the social and political will is there Will the populations of the rich countries be prepared to make some sacrifices for the greater global good The signs are not very promising Even at the best of 17Dicken4084Ch17indd 557 19102010 111050 AM Part Four Winning and Losing in the Global Economy 558 times it is difficult to persuade people to look beyond their own needs and wants And these are emphatically not the best of times The chaos wrought by the near collapse of the financial system and the debt burdens piling up to deal with its aftermath have increased general feelings of insecurity However even increased material affluence has not necessarily made people happier in proportion to their increased wealth74 A number of reasons have been suggested to explain this appar ent paradox Research by the ILO75 suggests that it is economic security rather than wealth that promotes happiness The global distribution of economic security does not correspond to the global distribution of income South and South East Asia have greater shares of economic security than their share of the worlds income By contrast Latin American countries provide their citizens with much less economic security than could be expected from their relative income levels income security is a major determinant of other forms of labourrelated security and income inequality worsens economic security in several ways highly unequal societies are unlikely to achieve much by way of economic security or decent work76 As we saw in Chapter 16 the trend in many countries has been for inequality to be widening rather than narrowing However there is a more general argument that prosperity needs to be defined in broader terms than just gross domestic product that wellbeing is about more than just material affluence A number of proposals to measure wellbeing have emerged beginning with the rather exotic case of the Kingdom of Bhutan which introduced the concept of GNH Gross National Happiness in the 1970s Recently there has been a renewed upsurge of interest For example a commis sion appointed by the French government proposed that the components that go into the measurement of GDP need to be broadened to incorporate a whole range of other measures such as health education security social connectedness and environmental sustainability77 A rather more subjective set of measures pro posed for national accounts focuses on two dimensions personal wellbeing and social wellbeing78 Whether or not such wellbeing measures will replace or sup plement the conventional measures like GDP is hard to say But the fact that we must define growth prosperity and wellbeing in more meaningful terms is incontrovertible if we are to build a better world The imperatives facing us are both practical and moral In practical terms the continued existence across the world of vast numbers of people who are impoverished but who can see the manifestations of immense wealth elsewhere through the electronic media poses a serious threat to social and political stabil ity But the moral argument is I believe more powerful It is utterly repellent that so many people live in such abject poverty and deprivation whilst at the same time others live in immense luxury This is not an argument for levelling down 17Dicken4084Ch17indd 558 19102010 111050 AM Making the World a Better Place 559 but for raising up The means for doing this are there What matters is the will to do it the real acceptance of to use David Smiths words the imperative of developing more caring relations with others especially those most vulnerable whoever and wherever they are within a more egalitarian and environmentally sustainable way of life in which some of the traditional strengths of community can be realised and spatially extended79 We all have a responsibility to ensure that the contours of the global economic map in the twentyfirst century are not as steep as those of the twentieth century We all have a responsibility to treat others as equals In a global context this means being sensitive to the immense diversity that exists to the world as a mosaic of people equally deserving of the good life Paradoxically the 2008 global financial crisis could offer a real opportunity For the first time in several decades both the economic inefficiencies and the social limitations of free unregulated markets have been exposed for all to see In par ticular an economic system based so heavily on financial speculation is in any social and moral sense dysfunctional It has failed The opportunity must be taken to build a new system to redress the imbalance that has developed between states and markets Such a project is global in both scale and scope hence the need for coordinated international policy initiatives rather than individual national meas ures that would lead to destructive competition rather than collaboration At the height of the crisis in 20089 it seemed that such a rebuilding might indeed be on the agenda But as the worst seemed to be over or is it there is a real danger of going back to the future It would be a tragedy if that were to happen Carpe diem NOTES 1 See Lee 2007 Lee and Smith 2004 Smith 2000 2 For a UScentric analysis of this problem see Lynn 2005 3 Wolf 2004 4 Voltaire 1947 8 5 Micklethwait and Wooldridge 2000 ix 6 The term globalization and its discontents has been used by several authors notably Sassen 1998 and Stiglitz 2002 7 See Williamson 2005 for a review of this issue 8 Taylor et al 2002 1516 9 Beck 2005 238 10 Van Tulder with van der Zwart 2006 Parts II and III provide a comprehensive analysis of ICSR 11 Van Tulder with van der Zwart 2006 1435 Numbers in parentheses refer to pages in that study 17Dicken4084Ch17indd 559 19102010 111050 AM Part Four Winning and Losing in the Global Economy 560 12 Van Tulder 2009 van Tulder et al 2009 Barrientos 2008 Hughes et al 2008 13 Barrientos 2008 979 14 Van Tulder et al 2009 399 15 Van Tulder 2009 10 16 Van Tulder et al 2009 402 Numbers in parentheses refer to pages in that study 17 Gereffi et al 2001 18 Van Tulder et al 2009 Cumbers et al 2008 3804 19 Barrientos 2008 Hughes et al 2008 20 See Rasche 2009 21 Barrientos 2008 978 22 Barrientos 2008 978 23 Barrientos 2008 980 24 Van Tulder et al 2009 25 Van Tulder et al 2009 408 See also Maignan and Ralston 2002 26 Wolf 2007 27 Commission on Global Governance 1995 1356 28 Gritsch 2005 29 Levy and Prakash 2003 143 144 30 Hirst et al 2009 31 UNCTAD 2001 vivii emphasis added 32 Stiglitz 2002 44 33 ILO 2004b 88 89 34 See the debate in Prospect September 2009 3441 35 See Deese 2008 Hoekman and Kostecki 1995 Peet et al 2003 Chapter 5 Sampson 2001 36 Peet et al 2003 37 Hoekman and Kostecki 1995 24 38 Hoekman and Kostecki 1995 26 39 See for example Deese 2008 Peet et al 2003 Chapter 5 Singer 2004 Chapter 3 40 Sampson 2001 78 emphasis added 41 Wade 2003 621 42 Quoted in Sampson 2001 19 43 Stiglitz and Charlton 2005 present a detailed critique of the Doha Round and show how fair trade and development can go together 44 Wilkinson 2009 45 Gamberoni and Newfarmer 2009 46 See Braithwaite and Drahos 2000 Chapter 12 Pearce 1995 47 Braithwaite and Drahos 2000 257 48 IPCC website www1ipccchaboutindexhtml emphasis added 49 Quoted in Pearce 1995 149 50 httpunfcccintkyotoprotocolitems2830php 51 Address to UN Summit on Climate Change New York September 2009 wwwunorgwcmcontentsiteclimatechangelangengp 52 UNFCCC Press Briefing wwwunfcccint2860php 53 Massey 2000 24 54 Daly 1993 25 17Dicken4084Ch17indd 560 19102010 111050 AM 561 Making the World a Better Place 55 Pearce 1995 74 77 78 56 See Hudson 2001 31521 Turner et al 1994 Chapter 2 57 Hudson 2001 315 58 Elliott 2002 See also Elliott 2000 59 GibsonGraham 2006 60 GibsonGraham 2006 80 61 Lee 1996 62 Hulme and Arun 2009 63 Kofi Annan UN SecretaryGeneral Speech to UNCTAD Meeting in Bangkok 2000 64 Mittelman 2000 241 65 Rodrik 1999 1367 emphasis added 66 See UNCTAD 2002 67 Oxfam 2002 1 68 Wade 2003 635 69 World Bank 2009b Table 4 70 Statement by UN SecretaryGeneral Ban Kimoon wwwunorgmillenniumgoals bkgdshtml 71 Jackson 2009 187 72 Burgoon 2009 148 73 Scheve and Slaughter 2001 87 74 Jackson 2009 James 2007 Layard 2005 Oswald 1997 Wilkinson and Pickett 2009 75 ILO 2004a See also Scheve and Slaughter 2004 76 ILO press release wwwiloorg 77 Stiglitz and Fitoussi 2009 78 New Economics Foundation 2009 79 Smith 2000 208 17Dicken4084Ch17indd 561 19102010 111050 AM BIBLIOGRAPHY Abernathy F Dunlop J Hammond JH and Weil D 1999 A Stitch in Time Lean Retailing and the Transformation of Manufacturing Lessons from the Apparel and Textile Industry New York Oxford University Press Abernathy FH Dunlop JT Hammond JH and Weil D 2004 Globalization in the apparel and textile industries what is new and what is not In M Kenney and R Florida eds Locating Global Advantage Industry Dynamics in the International Economy Stanford Stanford University Press Chapter 2 ABNAMRO 2000 European Auto Components Driven by Technology London 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stimulus packages 181 USA 27 Washington Consensus 541 accountancy firms 370 371 381 acid rain 462 acquisitions see mergers and acquisitions active CSR 531 533 active embeddedness 231 actorcentred networks 545 GPNs 60 advanced business services 58 70 36798 advertising 373 mass media 91 Africa development gap 3 double exposure problem 466 extractive industries 260 income 480 482 terms of trade 510 AFTA ASEAN Free Trade Agreement 207 21516 ageing populations 51213 aggregate economic growth 1618 agriculture global map 25 38 41 subsidies 2868 US 27 agrofood industries 270300 consumer choices 27982 corporate strategies 28893 GM food 2712 2801 283 286 production circuits 2725 specialization 274 2901 state role 2858 technology 2823 Ahold 294 AIG 353 air transportation 85 410 41112 airports cargo 4234 Amazon 407 ANCOM Andean Common Market 207 Andean Community 214 antiglobalization protests 68 antiglobalizers 56 529 552 APEC AsiaPacific Economic Cooperation 21617 Argentina 35 Mercosur 207 214 ASEAN 207 215 216 293 364 Asia see also East Asia individual countries automobile industry 338 clothing industry 3045 3214 328 development gap 3 employment 5057 EPZs 193 GDP 14 16 income 483 interconnectedness 20 Nike suppliers 151 152 reemergence 16 research and development 1389 resurgence 2934 Asian Development Bank 191 484 aspirational goods 337 338 assembly industries 332 assetbased logistic providers 415 asset orientation TNCs 11116 ATT 411 atmospheric damage see pollution Australia 216 Austria EU membership 207 210 authoritarian capitalism 177 automobile industry 126 2345 33166 acquisitions and mergers 344 consumption patterns 3379 corporate strategies 34456 leading exportersimporters 336 production circuits 3324 production systems 100 state role 3424 supplier relationships 3324 34650 technological change 33942 TNCs 2345 B2B businesstobusiness 4078 B2C businesstoconsumer 4078 backoffice functions 394 BAIC Beijing Automotive Industrial Corp 356 bandwidth 88 90 94 Bank for International Settlements BIS 539 banking see also financial services 2008 crisis 170 5412 acquisitions and mergers 3813 development 3701 primary functions 370 transnationalization 3838 bar code systems 4056 bargaining processes TNCs and states 22536 barriers to entry clothing industry 302 304 extractive industries 262 GPNs 44950 Key words and terms are in bold 19Dicken4084Indexindd 594 19102010 111108 AM Index 595 barriers to exit 161 barriers to movement 401 Basel II Accord 539 Basel Convention 468 Belgium 207 benchmarking 161 Benetton 319 320 BHP Billiton 253 2623 birthplace importance 475523 BMW 344 345 361 364 445 bonded warehouses 193 born globals 11920 151 BP 262 brands agrofood industries 2912 financial services 386 identity 297 Brazil 346 agriculture 26 chicken production 2756 coffee 279 fruit and vegetables 276 278 GDP 26 income distribution 488 industrial condominiums 349 Mercosur 207 214 Bretton Woods agreement 377 5389 BRICs Brazil Russia India China 26 35 199 bricksandmortar model 409 British Airways 149 broadband 90 Brunei ASEAN 207 215 bubble economy 30 190 381 497 Bulgaria 207 buyerdriven industries 303 buyerdriven production circuits 316 Cambodia AFTA 207 215 Canada ASEAN 216 automobile industry 35961 362 NAFTA 207 21113 oil sands project 2545 trucking 412 CanadaUS Free Trade Agreement CUSFTA 211 35960 379 capital circuits 110 flows 53940 hypermobility 62 injection 4336 and labour 432 TNCs 64 capitalism 56 casino 368 crony 540 global market economy 537 marketdriven 1 neoliberal 177 178 485 social market 177 187 stakeholder 531 TNCs 110 variegated 1778 187 captive direct offshoring 395 captive production networks 150 151 155 carbon dioxide emissions 45867 54950 Caribbean clothing industry 326 income 480 remittances 517 Caribbean Basin Initiative 326 CARICOM Caribbean Community 207 Carrefour 2945 296 297 421 422 534 Cathay Pacific 412 Cayman Islands 396 cellular network organizations 153 Central American Free Trade Agreement CAFTA 213 chaebols 1245 126 1945 356 chance 200 201 Chevron 259 262 chicken production 2756 Tyson Foods 2901 US production circuit 2723 Chile 35 ASEAN 216 copper 248 250 income distribution 489 China 30 149 5278 see also BRICs APEC 216 ASEAN 207 216 authoritarian capitalism 177 automobile industry 235 3347 338 341 3556 362 3645 carbon dioxide emissions 461 chicken production 275 clothing industry 302 304 305 314 320 322 324 326 327 copper 248 250 252 economic policies 1979 economic stimulus package 181 emergence 16 47 EPZs 193 EU clothing market 327 extractive industries 260 China cont financial deregulation 378 financial services 384 fruit and vegetables 276 GDP 26 32 income 480 483 490 logistics and distribution 401 manufacturing 3 Mexican threat 35 migration 515 519 oil 248 patents 103 population growth 512 production networks 151 153 reemergence 313 166 525 526 TNCs 119 126 trade competition 502 trade conflict 527 trade surplus 22 US bonds 27 US clothing market 324 326 waste 4723 Chinalco 262 Chindia 34 chlorofluorocarbons CFCs 462 Chrysler 136 343 3456 361 circulation processes 81 circulation services financial services 368 Citicorp 394 cities ABS 3904 as foci of economic activity 434 global 135 4956 Internet 93 95 key 45 megacities 513 migrant communities 515 population size 63 urban explosion 51315 Citigroup 381 383 civil society 52930 civil society organizations CSOs 3 689 72 clean development mechanism 548 climate change 45867 54850 clothing industry 30130 consumption patterns 3067 corporate strategies 31422 labour standards 307 30910 leading exporters 305 MFA 302 305 31214 322 328 production 30812 320 production circuits 3024 308 312 315 316 19Dicken4084Indexindd 595 19102010 111108 AM Index 596 clusters asset orientation 113 bases 6970 cities as foci of economic activity 43 development 701 generalized 6970 industry policies 186 localization 6971 localized knowledge 1036 specialized 6970 transborder 447 Codelco 262 codes of conduct 307 5327 Codex Alimentarius 285 codified knowledge 104 440 coffee 2745 279 collaboration automobile industry 346 states 20217 strategic alliances 1558 TNCs 68 22136 collective competition 156 collectivism 174 command economies China 198 commercial outsourcing 1445 Common Agricultural Policy CAP 210 287 common markets 205 communication 3 pipelines 106 systems 81 technology 801 8697 102 104 106 uneven 937 wireless 923 956 community economies 553 554 comparative advantage principle of 543 competition advantage 2002 bidding 200 225 2279 332 collective 156 financial services 3723 states 199202 TNCs 110 complementary outsourcing 145 complete knockdown plants CKD 363 complexity tangled webs 5174 TNC organization 12733 compliance regime 549 component systems automobile industry 340 computers see also information and communications technology computers cont ewaste 469 logistics and distribution 40610 technologies 801 concentration 256 agrofood industries 28991 automobile industry 3446 clothing industry 315 core competencies 149 extractive industries 2603 financial services 3802 logistics services 414 production 140 consolidation agrofood industries 28991 automobile industry 3446 extractive industries 2603 financial services 3802 consumer choices agrofood industry 27982 consumer goodsservices 64 consumers GPNs 646 consumption agrofood industries 271 280 automobile industry 3379 clothing industry 3067 GPNs 646 4547 scale 3 container ports 4234 containerization 856 contract manufacturing 1545 controlled atmosphere technology 282 coordinated market economy 177 coordination transnational production networks 1506 copper extractive industries 2456 24852 258 waste 468 coreperiphery configuration 1415 core workers 445 corporate headquarters 1346 139 corporate social responsibility TNCs 5307 corporate strategies agrofood industries 28893 automobile industry 34456 clothing industry 31422 extractive industries 2606 financial services 3809 logistics and distribution 41322 corridors transborder 446 costsaving outsourcing 145 Costa Rica 440 costs see also production costs sunk 162 Council for Mutual Economic Assistance CMEA 204 Covisint 407 craft production 100 101 credit card companies 371 crossdistribution agreements 1567 crossdocking 406 crosslicensing agreements 156 culture financial centres 392 natural resources 244 state 1746 customs unions 205 cycles economic growth 789 525 Cyprus EU membership 207 210 Czech Republic EU membership 207 Daewoo 345 Daimler 136 3445 361 DaimlerChrysler 136 222 3445 346 decentralization financial services 3946 deindustrialization 4945 502 Dell 407 409 Delphi 345 demand conditions 2001 demanddeficient unemployment 500 Denmark EU membership 207 210 euro 20910 dependent linkages 4378 deregulation 180 financial markets 3723 financial services 3779 382 385 3901 logistics and distribution 41013 UK 378 derivatives markets 3756 379 designer labels 307 Deutsche Post World Net 415 developed countries 3 557 affluence 4789 4834 age composition 519 agriculture 2889 climate change clothing industry 302 31314 environmental regulation 5489 income inequality 4847 migration 51921 population growth 51213 unemployment 493 494505 waste trading 472 developing countries 557 see also newly industrializing economies NIEs 19Dicken4084Indexindd 596 19102010 111108 AM Index 597 developing countries cont clothing industry 302 31314 communications 957 environmental regulation 5489 EPZs 1934 FDI 25 GDP 25 global economic map 25 inequality 4789 48890 labour force 310 offshore accounts 397 population growth 51113 poverty 3 484 trade competition 5024 unemployment 493 50411 WTO 546 development paths TNCs 11620 developmental capitalism 177 developmental linkages 4378 developmental states 189 DHL 415 416 424 digital divide 957 digitization 7881 direct jobs 441 discretionary goods 337 disintermediation financial services 372 distribution agrofood industries 271 centres 298 405 406 409 422 extractive industries 255 GPNs 4547 scale 3 distribution services 399425 corporate strategies 41322 market dynamics 4034 production circuits 4004 state role 41013 technology 40410 diversification extractive industries 2645 financial services 3823 division of labour 1415 47 302 509 525 divisional structure TNC organization 1278 dotcom crisis 18 double exposure problem 4647 dropshipment model 409 dual sourcing 142 ecommerce 40610 413 etailers 4023 407 ewaste 469 East Asia 2933 47 see also Asia individual countries automobile industry 3625 East Asia clothing production network 3214 327 328 449 culture 176 employment 507 financial crisis 17 29 31 195 21617 355 526 540 financial deregulation 378 financial services 394 income 480 483 48890 industrialization 1912 194 logistics 4234 population growth 514 production networks 151 regional integration 21417 regionalization 1656 resurgence 525 TNCs 1235 136 EastWest division 1516 Eastern Europe 289 automobile industry 357 3589 clothing industry 305 309 eBay 407 eclectic theory 116 economic crisis see 2008 global financial crisis economic growth BRICs 26 China 32 cycles 525 Europe 27 golden age 17 18 population growth 514 rollercoaster 1624 economic integration 67 economic rent 432 economic and technological development zones ETDZs 198 economic unions 205 2089 economic upgrading within GPNs 449451 economies as archipelago 477 economies of scale financial services 392 394 specialization 141 education asset orientation 11314 EFTA European Free Trade Association 204 207 electronic data interchange EDI 405 406 electronic mass media 912 electronicpointofsale EPOS clothing industry 312 electronic product code EPC 406 electronics automobile industry 340 embeddedness active 231 extractive industries 2556 263 GPNs 623 obligated 231 of TNCs 121 1227 231 employment see also labour unemployment agrofood industries 2835 automobile industry 332 clothing industry 302 304 30810 global cities 4956 quality of living 139 recruitment 3889 4434 Enron 471 540 environment see also pollution agrofood industries 271 automobile industry 341 3434 global regulation 54750 GPNs 45474 WTO 5456 Estonia EU membership 207 Ethical Trading Initiative ETI 534 536 ethics agrofood industry 281 euro 20910 Eurocurrency 396 Eurodollars 378 385 Europe see also individual countries agrofood industry 286 287 automobile industry 352 3545 3569 carbon dioxide emissions 461 clothing industry 31821 3268 economic strategy 188 financial services 383 global economic map 278 growth axis 45 46 interconnectedness 20 labour market 186 migrant workers 51921 regional integration 20711 regionalization 164 165 RTAs 2034 European Central Bank ECB 209 European Commission GM food 281 European Economic Community EEC 204 208 209 European Monetary Union EMU 20910 European Single Market 357 European Union EU 62 1656 205 20711 agrofood industry 2867 19Dicken4084Indexindd 597 19102010 111108 AM Index 598 European Union EU cont automobile industry 3434 357 362 CAP 210 287 clothing industry 305 31314 327 competitive bidding 228 Constitution 21011 economic strategy 188 endoflife vehicles 344 extractive industries 260 financial services 379 food regulation 286 GM food 286 GPNs 4445 logistics and distribution 412 Maastricht Treaty 209 4445 migrant workers 519 OPT 327 retailing 413 trade conflict 527 Exel 41415 exportorientation Singapore 196 exportoriented industrialization EOI 1904 export processing zones EPZs 1924 438 export stimulus effect XE 447 exports bases 148 platform 142 externalities clusters 69 externalized relationships TNCs 14558 externalized transactions TNCs 612 extraterritorial trade legislation 188 extractive industries 24369 production circuits 2456 state 25560 262 ExxonMobil 222 253 262 facetoface contact 70 factor conditions 200 fair trade 2735 281 553 familism Japan 189 fast food 280 FedEx 412 415 423 femininity 174 fertility rates 512 Fiat 346 3545 fibreoptic cables 95 financial markets movement speed 7 technology effects 7 financial services 36798 acquisitions and mergers 3813 corporate strategies 3809 financial services cont geographies 3907 markets 372373 production circuits 36798 state role 368 377380 structure 36971 technology 373376 financial systems global governance 53843 financialization GPNs 589 Finland EU membership 207 210 firm strategy structure and rivalry 201 firmplace relationships 431 First Auto Works FAW 364 fiscal policies 179 flexibility labour markets 186 mass production 1001 102 specialization 100 Flextronics 143 1545 flows regional trading blocs 203 food agrofood industries 270300 safety 2712 2856 subsidies 2868 Ford 65 222 2345 236 339 3446 347 3501 357 363 364 407 Fordism 99 1001 foreign direct investment FDI China 197 1989 developing countries 43 Europe 278 global map 2436 42 industrialization 192 interconnections 202 Japan 189 Korea 195 Mexico 433 regional integration 2079 Singapore 196 strategies 1834 structural imbalance 22 TNCs 111 229 2378 trade divergence 20 USA 27 Framework Convention on Climate Change FCCC 548 France 315 agrofood industry 287 automobile industry 343 355 economic strategy 188 EU 207 208 210 financial deregulation 378 Paris 135 136 393 RTAs 204 waste 472 franchises clothing industry 318 319 Frankfurt 393 free markets 12 56 59 170 free ports 193 196 free trade 190 Free Trade Area of the Americas FTAA 214 free trade areas 193 2045 21114 frontoffice functions 394 fruit agrofood industry 2768 fullpackage production 325 functional structure TNCs 127 functional upgrading 449 G7 group 55 538 539 G8 group 3 539 G20 group 55 538 539 5423 547 557 Gap 534 Gate Gourmet 149 General Agreement on Tariffs and Trade GATT 183 187 204 5434 545 General Agreement on Trade in Services GATS 544 546 General Motors 222 230 3446 3501 355 361 363 407 Europe 357 359 government aid 343 platform sharing 340 Spain 235 generalized clusters 6970 generalized system of preferences GSP 543 genetically modified GM food 2712 2801 283 286 GeoLogistics 416 Germany 28 automobile industry 343 358 359 clothing industry 315 318 327 copper 250 economic stimulus package 181 economic strategy 188 EU membership 207 208 financial deregulation 378 income gap 484 485 production networks 153 reunification 28 TNCs 123 1267 waste 472 Zollverein 2034 Gini coefficient 4845 GlassSteagall Act 1999 378 Global 500 136 19Dicken4084Indexindd 598 19102010 111108 AM Index 599 Global Alliance for Workers and Communities 534 global cities 135 4956 global civil society organizations GCSOs 667 52930 535 global cool chains 282 484 global corporation myth 1626 global economic map 14 2448 global framework agreements GFAs 534 536 global grid structure 129 global integration 15960 global integrator firms 1489 globallocal dichotomy 54 globallocal question 15961 globallocal tension agrofood industries 292 global matrix structure 129 global network alliance 157 global organization model 129 131 132 global product organization 128 global production networks GPNs 7 5668 723 4767 corporate social responsibility 5327 economic and social upgrading in 449451 employment 501 value capture 42953 value destruction 45474 global scanners 161 Global Social Compliance Programme 534 global village 92 global warming 45867 54850 golden age 17 18 Google 81 95 governance global 53750 global environment 54750 global financial system 53843 globalnational tensions 5378 international trade 5437 Greece 2008 crisis 210 EU membership 207 210 Green Revolution 283 greenhouse gases 45867 54950 gross domestic product GDP Asia 14 16 China 26 32 criteria 558 developing countries 25 EU members 210 Europe 27 global shifts 1415 India 26 34 gross domestic product GDP cont interconnectedness 1819 212 Japan 30 Latin America 35 state policies 180 structural imbalance 224 TNCs and states 222 UK 28 USA 14 16 27 Gross National Happiness GNH 558 gross national income GNI 4801 grounded network approach 71 growth axis Europe 45 46 growth clusters 186 hazardous waste 4689 472 HBOS 3812 headhunting 3889 headquartersubsidiary relationships 133 134 headquarters 1346 139 strategic control 1346 health 284 nutriceuticals 286 HelmsBurton law 188 heterarchical structure 132 133 430 hierarchical production networks 150 155 highvalue foods HVFs 271 272 27598 home delivery model 409 home office effect 447 homeworking 307 Honda 344 351 357 361 Hong Kong 30 31 air transportation 412 clothing industry 3223 employment 508 host market production 1401 hot money 540 541 Hugo Boss 318 Hungary EU membership 207 Ford 236 hypercompetition TNCs 110 hyperglobalists 46 69 102 1623 170 171 5512 Hyundai 344 3556 359 361 362 364 IATA 412 IBM 136 1745 199 415 Iceland 207 IKEA 422 importsubstituting industrialization ISI 1904 imports bases 148 quotas 302 313 in situ adjustment 162 inactive CSR 531 533 income clothing industry 3067 distribution 432 gap 47992 inequality 47992 independent producers 265 independent transporters 265 India 34 see also BRICs ASEAN 216 automobile industry 341 3556 foreign retailers 286 fruit and veg 276 GDP 26 34 IT service industries 3 offshoring 3956 production networks 153 TNCs 119 Union Carbide plant 471 indirect jobs 441 Inditex 31920 individualism 174 Indonesia 30 31 ASEAN 207 215 coffee 279 income 483 industrial condominiums 349 industrial districts 70 1456 153 industrial outsourcing 1456 industrial upgrading 44950 industrialization 14 agrofood industry 271 283 paths 1912 194 industrialized countries deregulation 180 economic strategies 18790 industry policies state 1856 inequality 4769 infomediaries 408 information and communications technology ICT digitization 7881 financial services 3736 390 394 India 34 information spread 3 process innovation 989 production flexibility 99102 production networks 1545 service industries 3 unemployment 5001 information distribution 400 infrastructure state provision 180 223 19Dicken4084Indexindd 599 19102010 111108 AM Index 600 innovation 76 1026 see also technology incremental 77 national systems 1023 open 138 process 979 product 979 500 radical 77 research and development 1369 innovative milieu 104 105 106 inputs GPNs 568 insurance companies 371 integrated network organization model 129 1312 intellectual autonomy 175 Intelsat system 87 interfirm relationships 1568 431 436 GPNs 5960 62 TNCs 1234 intersectoral upgrading 449 interconnections 16 1824 712 interconnectivity networks 524 speed 6 interdependency traded 70 untraded 70 105 138 Intergovernmental Panel on Climate Change IPCC 548 intermediation financial services 370 intermittent outsourcing 145 internal networks reshaping 15862 internalized transactions TNCs 612 International Civil Aviation Organization ICAO 411 International Confederation of Free Trade Unions ICFTU 444 international divisions of TNCs 128 international interdependent RD laboratories 1378 International Labour Organization ILO 1923 237 307 494 5001 503 505 535 546 558 International Maritime Organization IMO 41011 International Monetary Fund IMF 55 62 195 377 379 53840 542 543 545 554 557 International Organization for Migration 515 international organization model 129 130 International Panel on Climate Change IPCC 458 461 international spanners 148 International Telecommunications Union ITU 411 International Youth Foundation 534 internationalization financial markets 373 internationalizing processes 78 Internet 80 174 consumer choice 65 ecommerce 40610 413 growth 90 technology 88 90 unevenness 937 web hotels 95 409 intrafirm relationships 431 GPNs 5960 62 intrafirm trade 7 201 intraindustry trade 7 inventories logistics and distribution 400 4056 409 inventory pooling model 409 investment see also foreign direct investment FDI inward 183 outward 183 inward investment 183 iPod 432 Ireland EU membership 207 210 islands of relative prosperity 477 Italy clothing industry 31819 327 EU membership 207 production networks 151 Japan 526 528 agrofood industry 287 ASEAN 216 automobile industry 3346 344 351 353 355 357 361 362 3634 bubble economy 30 190 381 497 clothing industry 315 321 copper 250 economic policies 18990 economic stimulus package 181 financial deregulation 378 financial services 383 393 GPNs 4389 income 484 keiretsu 1234 126 417 manufacturing 14 postwar 30 regionalization 1656 retail stores 286 retailing 413 rise 525 Japan cont sogo shosha 41718 TNCs 119 1234 TNI 164 unemployment 4979 joint bidding consortia 156 Joint Implementation mechanism 549 joint manufacturing agreements 156 joint ventures 297 JP Morgan Chase 381 382 383 justincase system 147 justintime JIT system 1478 agrofood industries 272 automobile industry 346 logistics and distribution 405 Kazahkstan 234 2589 keiretsu 1234 126 417 Kenya 272 Kia 356 359 361 364 knowledge 1036 asset orientation 113 diffusion 43940 innovation 102 knowledge businesses 154 Kondratiev waves 789 100 102 Korea see North Korea South Korea Kraft 290 292 Kyoto Protocol on Climate Change 548 549 labour see also employment agrofood industry 2835 asset orientation 113 availability 492511 and capital 432 casual 284 4956 clothing industry 30810 controllability 114 costs 3089 deregulation 180 extractive industries 253 formal sector 5078 global division 1415 GPNs 634 4408 informal sector 5078 market strategies 186 migrant workers 284 309 515 51621 mobility 64 productivity 114 Singapore 196 social upgrading 449 532 standards 5456 TNCs 233 2378 19Dicken4084Indexindd 600 19102010 111108 AM Index 601 labour unions 114 196 307 529 GFAs 534 TNCs 4435 Laos AFTA 207 215 Latin America 346 development gap 3 income 480 4889 industrialization 1912 194 interconnectedness 20 regional integration 21112 214 remittances 517 Latin American Free Trade Area LAFTA 214 Latin American Integration Association LAIA 214 Latvia EU membership 207 lean distribution 405 lean production 99102 148 284 automobile industry 33941 clothing industry 316 logistics and distribution 405 legal services 3868 Lehman Brothers 1 379 382 384 Lenovo 199 Levi Strauss 31718 Li Fung 318 321 419 liberal market economy 177 Lichtenstein 207 life expectancy poverty 481 Lisbon Treaty 21011 Lithuania EU membership 207 local content regulations automobile industry 342 local economies 553 GPNs 43352 local exchange trading system LETS 553 local firms GPNs 4369 local implementer role 133 local integrator firms 148 local production agrofood industries 271 274 281 local responsiveness 15960 local scale 476 localization agrofood industry 281 clusters 6971 1036 economies 70 globallocal question 15961 knowledge 1036 processes 78 locally integrated RD laboratories 137 location headquarters 1356 importance of where you live 475523 locationspecific characteristics 113 141 locational shifts 162 locational tournaments 2279 logistics service providers 402 41416 logistics services 399425 corporate strategies 41322 market dynamics 4034 places 4234 production services 4004 state role 41013 technology 404406 London 136 financial services 3934 income inequality 488 TNCs 135 136 unemployment 4956 Luen Thai Holdings 322 Luxembourg EU membership 207 Maastricht Treaty 2089 4445 McDonalds 280 machinofacture 99 100 McJobs 496 macrostructures institutional 546 macroeconomic policy 179 Maersk 414 415 Malaysia 30 31 ASEAN 207 215 GPNs 43940 442 income 480 483 Malta EU membership 207 210 manufacturing agrofood industries 271 Asia 30 31 China 3 323 coreperiphery configuration 1415 employment 4945 508 510 Europe 28 global map 25 36 India 34 process 99 regionalization 165 Russia 29 triangle 323 US 267 maquiladora 46 193 plants 438 production 325 marketdriven capitalism 1 market dynamics logistics and distribution 4034 market fundamentalism 170 marketled monetary system 539 541 market liberalization 180 market orientation TNCs 111 115 marketoriented capitalism 187 market production networks 150 market saturation 372 marketing TNCs 13940 marketization state 180 Marks and Spencer 3201 421 masculinity 174 mass media electronic 8892 mass production automobile industry 339 flexible 1001 102 logistics and distribution 405 Mattel 149 merchandise global map 39 Mercosur Southern Cone Common Market 207 214 mergers and acquisitions agrofood industries 2901 292 automobile industry 344 extractive industries 2613 financial services 3813 logistics and distribution 41416 TNC development paths 119 Metro 421 534 Mexico 35 165 207 21113 see also NAFTA ASEAN 216 automobile industry 361 clothing industry 3245 copper 248 double exposure problem 466 FDI 433 financial deregulation 379 GPNs 442 income distribution 488 interconnectedness 20 maquiladora 46 325 438 migration 5201 remittances 517 trucking 41213 US border zone 456 47 471 microscale cities as foci of economic activity 434 migration 6 64 global trends 51516 home country implications 51619 host country implications 51921 migrant workers 284 309 515 51621 remittances 51718 mining industries 2456 24852 258 2625 see also extractive industries specialist services 266 waste 468 19Dicken4084Indexindd 601 19102010 111109 AM Index 602 Ministry for Economy Trade and Industry METI 189 Ministry of International Trade and Industry MITI 189 Mitsubishi 346 418 Mitsubishi UFJ Financial Group 381 mixed economies 180 mobile telephones 923 956 mobility labour 64 modularity 102 automobile industry 340 production networks 150 1546 Momenta Corporation 120 Mondragón Cooperative Corporation 553 monetary policies 179 Monsanto 28990 mortgagebased securities MBS 376 mostfavoured nation principle MFN 545 MultiFibre Arrangement MFA 302 305 31214 322 328 Multilateral Agreement on Investment MAI 237 multinational organization model 129 130 multiple sourcing 142 municipal solid waste MSW 46870 Myanmar 207 215 myths global corporation 1626 of globalization 8 NAFTA North American Free Trade Agreement 62 1656 207 21113 379 automobile industry 360 362 clothing industry 3245 logistics and distribution 41213 nationstate 54 170 see also state definition 1712 global economic map 25 hyperglobalists 4 territoriality 62 national treatment rule 545 nationalization 170 extractive industries 2567 258 naturalresourceoriented foreign investment 111 113 Nedlloyd 414 415 negative externalities environment 4557 neoliberal market capitalism 177 178 485 neoliberalism 5 Nestlé 139 290 2913 Netherlands 315 EU membership 207 networkbased logistic providers 41516 networks see also global production networks production networks alliances 1556 modularity 102 of networks 713 supply 1489 tangled webs 5274 TNCs 12162 430 world cities 44 New York 136 financial services 3934 income inequality 488 TNCs 135 136 unemployment 4956 New Zealand 216 newly agriculturalizing countries global economic map 256 newly industrializing economies NIEs Asia 31 34 clothing production network 3223 division of labour 14 economic policies 196 employment 508 global economic map 256 population growth 514 state 1912 1947 Nien Hsing 321 Nike 151 152 534 Nissan 126 340 341 344 346 351 355 357 361 Nomura 382 384 noncore workers 445 nongovernmental organizations NGOs 667 codes of conduct 5345 nonrenewable resources 244 266 nontariff barriers NTBs 1823 187 208 automobile industry 342 China 198 North America see also individual countries automobile industry 35962 clothing industry 3246 interconnectedness 20 regional integration 21113 regionalization 165 North Korea 528 Norway 207 nutriceuticals 286 obligated embeddedness 231 obsolescing bargain 234 258 259 OECD 180 GDP 180 jobs 496 499 OFCs 3967 TNCs 2378 offshore financial centres OFCs 3967 offshore markets 378 offshore production clothing industry 312 317 318 321 322 323 offshore sourcing 142 1434 offshoring 3 1601 3946 5012 oil 527 see also extractive industries bunker fuel 464 demand volatility 2513 extractive industries 2459 2513 2545 257 25962 nationalization 257 peak 266 purity 254 specialist services 265 vertical integration 264 OPEC Organization of the Petroleum Exporting Countries 2568 optical fibre cables 878 organic food 272 292 organizational architectures TNCs 12744 organizational ecology of places 4301 outputs GPNs 568 outsourcing 14450 see also subcontracting clothing industry 316 costbenefits 14950 outward investment 183 Outward Processing Trade OPT 327 328 Oxfam 2845 397 ozone layer 462 PO 527 Paraguay 207 Paris 393 TNCs 135 136 patents 103 path dependency 14 525 clusters 71 innovative milieu 105 organizational architectures 132 19Dicken4084Indexindd 602 19102010 111109 AM Index 603 peripheral economies 367 permanent global summertime PGST 271 281 PeugeotCitroen PSA 346 347 355 359 Philippines 207 215 43940 483 place GPNs 42932 logistics 4234 space of 62 placeplace relationships 431 Poland EU membership 207 210 politics barriers to movement 401 global division 1516 natural resources 244 pollution automobile industry 3434 GPNs 45474 havens 471 NIEs populations age composition 51213 cities 44 growth 506 51112 urban explosion 51315 Porter diamond 2002 portfolio investment 20 Portugal EU membership 207 positional goods 65 poverty 47992 529 5589 UN Millennium Development Project 5556 urban population 514 power relationships extractive industries 256 25860 GPNs 62 68 432 networks 52 power distance 174 power resources 2323 preferential trading arrangements PTAs 2024 price control extractive industries 2578 privatization 170 180 188 extractive industries 258 262 proglobalizers 5 proactive CSR 531 533 process innovation 979 process upgrading 449 producerdriven industries 244 333 producer goodsservices 645 product innovation 979 500 product lifecycle PLC 979 11618 product turnover rate 308 product upgrading 449 production see also lean production mass production agrofood industry 271 2801 2825 automobiles 3327 33941 clothing industry 30812 320 concentration 140 141 coreperiphery configuration 14 craft 100 101 employment 5012 extractive industries 243 flexible mass 102 global economic map 2436 host market 1401 mass 102 scale 3 system flexibility 99102 production circuits 71 81 agrofood industries 2725 automobile industry 3324 clothing industry 3024 308 312 315 316 extractive industries 2456 financial services 36798 GPNs 432 455 logistics and distribution 4004 production costs clothing industry 30812 TNCs 11516 117 production displacement effect 447 production networks 71 see also global production networks transnational production networks automobile industry 35665 captive 150 151 155 clothing industry 320 3228 distribution 400 financial services 372 hierarchical 150 154 market 150 modularity 150 1546 regionalization 1646 3228 35665 relational 150 1514 155 vertical integration 61 723 production units 1404 profit TNCs 110 protectionism 183 185 190 191 196 210 543 agrofood industry 286 2878 Japan 189 Proteome Systems Ltd PSL 120 protest movements 34 68 race labour market 496 499 radio 91 radio frequency identification RFID technology 4056 railways 82 86 reactive CSR 531 533 recruitment 3889 4434 recycling 4701 regional headquarters 1356 control 1356 marketing 141 regional trade agreements RTAs 2024 2057 21114 regionalization automobile industry 35665 clothing industry 3228 production networks 1646 3228 35665 regionalizing processes 78 regulation agrofood industries 285286 financial services 3779 global environment 54750 global financial system 53843 global governance 53750 international trade 5437 logistics and distribution 41013 TNCs 225 2378 regulatory arbitrage 225 236 related industries 201 relational production networks 1514 155 Renault 126 341 343 344 346 352 355 360 research and development strategic alliances 1556 TNCs 1369 439 442 resources curse 245 51011 extractive industries 2668 natural 244 restructuring 413 extractive industries 2636 TNCs 15862 retailers 4023 404 agrofood industries 286 28998 clothing industry 303 31422 globalizing 4202 supermarket chains 272 280 281 284 291 2948 sweatshops 307 Rio Tinto 2623 Rome Agreement 1934 204 routinization 102 Royal Dutch Shell 222 262 ruleoriented approach 5445 Russian Federation 289 see also BRICs GDP 26 19Dicken4084Indexindd 603 19102010 111109 AM Index 604 safety TNCs 4712 SAIC Shanghai Automotive Industrial Corp 356 364 sales TNCs 13940 satellites 878 broadcasting 91 sceptical internationalists 6 scientific management 99 100 securities firms 3856 securitization financial services 3701 segmentation automobile industry 337 3389 347 358 Seminis 28990 September 11th attacks 18 service companies 2656 service industries 3 global economic map 25 37 40 GPNs 58 India 34 jobs 496 US 27 shared platforms automobile industry 33940 Shell 471 ships containerization 856 pollution 4624 Singapore 30 31 ASEAN 207 215 economic policies 1957 employment 508 FDI 183 financial deregulation 378 headquarters 136 income 480 Single European Act 208 Single European Market 208 210 379 412 413 skillsbased logistic providers 416 Skoda 340 358 Slovakia EU membership 207 Slovenia EU membership 207 social market capitalism 177 187 social market economy 188 social responsibility TNCs 5307 social upgrading 449 532 sogo shosha 41718 Solectron 1434 1545 South America Community of Nations 214 South Korea 30 31 526 528 agrofood industry 287 ASEAN 216 automobile industry 3556 3623 clothing industry 322 economic policies 1945 South Korea cont income 480 489 TNCs 1245 126 sovereign wealth funds SWF 37980 Soviet Union collapse 16 172 EastWest division 16 space of placesflows 62 Spain automobile industry 3545 clothing industry 31920 EU membership 207 Ford 2345 special economic zones SEZ 193 197 speciality outsourcing 145 specialization 100 102 agrofood industry 274 2901 clothing industry 315 comparative advantage principle 543 extractive industries 2656 product 1412 turnkey suppliers 154 specialized clusters 6970 specialized contributor role 133 speculative dealings 369 spillovers environment 4557 sports utility vehicles SUVs 3378 Stability and Growth Pact 209 standardization 102 Starbucks 280 state 169220 agrofood industries 2858 automobile industry 332 3424 clothing industry 31214 as collaborator 20217 as competitor 199202 as container 1728 224 definition 1712 extractive industries 25560 262 financial services 368 global governance 53750 land grabs 288 logistics and distribution 41013 as regulator 17899 224 social responsibility 530 stateowned enterprises SOEs 198 TNCs relationship 63 68 22139 stateowned enterprises SOEs extractive industries 244 Stockholm Conference on the Human Environment 548 strategic alliances 1558 automobile industry 35960 strategic coupling process 451 subcontracting clothing industry 307 315 316 318 319 321 327 outsourcing 14450 subsidiaries roles 133 TNCs 1212 134 subsidies 2868 sunk costs 162 supermarket chains 272 280 281 284 291 2948 supplier parks 349 suppliers automobile industry 3324 34650 clothing industry 31517 3202 CSR strategy 531 5334 GPNs 432 4367 outsourcing 14450 production networks 1516 supermarkets 2978 turnkey 154 supply linkages 4368 support laboratories 137 1389 supporting firm effect 447 supporting industries 201 sweatshop conditions 307 30910 Sweden EU membership 207 210 euro 210 Switzerland 207 TNCs 119 tacit knowledge 104 440 Taiwan 30 31 528 APEC 216 clothing industry 322 income 480 48990 production networks 151 TNCs 124 125 TAL Apparel 3212 tariffs 182 automobile industry 342 China 198 escalation 555 Ford 2345 trade policies 187 5434 Tata 341 346 356 Tata Consultancy Services TCS 395 tax havens 3967 incentives 2289 insurance levy 541 TNCs 436 Tobin 541 Taylorism 99 100 19Dicken4084Indexindd 604 19102010 111109 AM Index 605 technoeconomic paradigm 77 technology 3 see also information and communications technology ICT agrofood industries 2823 asset orientation 113 automobile industry 33942 change 75108 clothing industry 30812 economic transformation 76 employment 5001 evolutionary perspective 7681 extractive industries 2535 financial services 3736 Kondratiev waves 789 100 102 logistics and distribution 40410 process innovation 979 product innovation 979 system changes 77 timespace shrinking 814 telecommunications 87 923 956 157 411 telephones 87 956 mobile 923 956 television 912 territorial view of scale 54 terrorism 18 Tesco 295 296 297 421 534 Thailand 30 31 ASEAN 207 215 automobile industry 364 GPNs 43940 442 income 483 Tibbett and Britton 415 time GPNs 437 logistics and distribution 400 timespace relationships 814 86 93 TNT 415 Tokyo financial services 393 TNCs 135 topological view of scale 54 Total 262 Toyota 253 339 340 341 344 346 347 351 357 359 361 364 trade agrofood industry 2868 automobiles 3327 China 323 creation 203 deficits 27 28 30 305 3356 diversion 202 environmental cost 5523 Europe 28 financial services 369 trade cont GDP ratio 1819 global economic map 2436 interconnectedness 1822 international regulation 5437 intraindustry and intrafirm 7 Japan 30 state 1878 strategies 1823 structural imbalance 224 terms of 510 theory 21 509 USA 27 1878 TradeRelated Aspects of Intellectual Property Rights TRIPS 544 546 TradeRelated Investment Measures TRIMS 237 238 544 546 trade unions see labour unions traded interdependencies 70 trading companies 402 41720 transborder clusters and corridors 436 transfer pricing 22931 transition economies 289 bargaining power 2356 transnational capital class 4912 transnational civic networks 667 transnational corporations TNCs 10968 agrofood industries 28998 air transport 85 automobile industry 3645 corporate social responsibility 5307 definition 110 development paths 11620 domestic country effects 4458 employment 501 504 externalized relationships 14458 extractive industries 244 256 2604 financial services 3819 geographical embeddedness 121 1227 global corporation myth 1626 GPNs 608 4301 43352 homecountry influences 1225 interconnectedness 201 internalized operations 12745 logistics 41416 mobility 226 networks 12162 organizational architectures 12744 regulation 225 2378 retailers 4201 RTAs 203 transnational corporations TNCs cont safety practices 4712 state relationship 22139 transnational migrant communities 515 transnational production networks TPNs 224 agrofood industries 271 272 coordination 1506 globallocal question 15961 regionalization 1646 vertical integration 141 1423 transnational strategic alliances 1558 transnationality index TNI 1634 transnationalization automobile industry 3506 transportation agrofood industry 282 companies 402 41416 environmental cost 552 technology 816 104 Treaty on European Union TEU 208 triangle manufacturing 323 Trinidad and Tobago 440 Turkey clothing industry 327 328 EU membership 210 turnkey suppliers 154 Tyson Foods 2901 uncertainty avoidance 174 UNCTAD 20 unemployment developed countries 493 494505 developing countries 493 50511 global economy 4924 Japan 4979 youth 499 UNEP 468 472 unilateralism USA 1878 Unilever 136 290 291 292 293 Union Carbide plant 471 United Kingdom UK 28 315 see also London air transportation 41112 automobile industry 337 343 357 clothing industry 3201 economic strategy 187 188 Ethical Trading Initiative 534 536 EU membership 207 210 euro 210 FDI 25 financial deregulation 378 19Dicken4084Indexindd 605 19102010 111109 AM Index 606 United Kingdom UK cont financial services 379 food regulation 285 income gap 4857 job creation 497 migrant workers 5201 opening hours 413 research and development 139 RTAs 204 telecommunications 411 transfer pricing 231 waste 4723 United Nations UN 237 Copenhagen conference 549 5501 environment regulation 5489 Global Compact 535 Human Development Report 476 Millennium Development Project 5556 urban population 514 world population 511 United States of America USA 207 see also NAFTA New York agrofood industry 2723 2756 287 28990 air transportation 41112 ASEAN 216 AsiaPacific 5278 automobile industry 334 336 3378 343 3501 355 35962 carbon dioxide emissions 461 chicken production 2723 2756 clothing industry 305 31314 315 31718 3246 current account deficit 24 domination 267 economic stimulus package 181 187 economic strategy 1878 extractive industries 260 farm subsidies 288 FDI 25 financial deregulation 378 financial services 379 3834 food regulation 286 fruit and veg 276 GDP 14 16 27 GM food 286 headquarters 136 income gap 4847 job creation 186 4967 Kyoto Protocol 548 United Nations UN cont labour standards 546 Mexican relations 35 Mexico border zone 456 47 471 migrant workers 517 519 520 modular production networks 1545 pollution 4712 postwar 16 product lifecycle 11617 production networks 151 regional integration 21113 regionalization 165 research and development 139 retailing 413 telecommunications 411 TNCs 124 1267 2267 TNI 164 trade 1878 trade competition 503 trade tensions 527 transfer pricing 2301 TRIMs 237 trucking 41213 waste 472 untraded interdependencies 70 105 138 UPS 415 4234 urbanization 51315 counter 513 economies 70 over 514 Uruguay 207 Vale 262 value capture GPNs 42953 value destruction GPNs 45474 vegetables agrofood industry 2768 production circuits 2724 vendor direct outsourcing 395 vendor indirect offshoring 395 Venezuela 207 vertical integration Asia 1234 automobile industry 332 clothing industry 319 325 extractive industries 264 GPNs 436 production networks 61 723 TNCs 61 transnational production 141 1423 vs modularity 155 Vietnam AFTA 207 215 coffee 279 Virgin Islands 396 virtual firms 153 Visteon 345 347 VW 340 346 352 355 358 360 361 364 wages asset orientation 114 GPNs 4424 WalMart 149 222 290 291 294 296 2978 405 406 421 422 CSR 534 staff 253 warehouses logistics and distribution 405 Washington Consensus 1 5 170 540 541 waste 46773 waves economic growth 789 wholesalers 402 wireless communications 923 956 women jobs 64 302 309 310 496 499 5056 missing 492 poverty 492 TNCs 444 Woolworths 420 World Bank 55 191 484 534 557 formation 53840 543 world mandate 133 World Trade Organization WTO 55 62 183 187 204 5447 552 554 557 agrofood industries 271 China 198 clothing industry 305 313 EU 210 extractive industries 260 farm subsidies 2878 global protest movements 3 RTAs 202 trade regulation 543 youth unemployment 499 Zara 31920 Zimbabwe 272 Zollverein 2034 19Dicken4084Indexindd 606 19102010 111109 AM About the Author Peter Dicken is Emeritus Professor of Economic Geography in the School of Environment and Development at the University of Manchester United Kingdom He has held visiting academic appointments at universities and research institutes in Australia Canada China Hong Kong Mexico Singapore Sweden and the United States and lectured in many other countries throughout Europe and Asia He is an Academician of the Social Sciences is a recipient of the Victoria Medal of the Royal Geographical Society with the Institute of British Geographers and of the Centenary Medal of the Royal Scottish Geographical Society and holds an Honorary Doctorate from the University of Uppsala Sweden 20Dicken4084About the authorindd 607 20102010 24823 PM 20Dicken4084About the authorindd 608 20102010 24823 PM