Human Geography – The Globalisation of Economic Activity

1. Uneven Development in the Global Economy

· Globalisation

· Characteristics

· Processes

· Impact on the world economy

· Uneven global distribution of activities

- Illustrate how globalisation has affected the economies of LDCs, DCs and NIEs

· NIDL

· Causes of the emergence of a new NIDL

· Impact of the emergence of NIDL on the global economic activities

· Impact of new technologies on work

· Job specialisation, multi-skilled production, changes in production and labour

· Impact of global economic change

· Rise in new service sectors: tertiary, quaternary and quinary

· Locational trends in producer and consumer services

· Internationalisation of service firms

· Rise of SMEs

· Privatisation / Deregulation of public services

2. Transnational Corporations

· Characteristics of TNCs

· Spatial organisation of TNC’s activities

· Linkages with host economy

· FDI and influence on national and regional economies

· Case study of TNC

3. Role of the State and Supranational Bodies

· Role of state in economic development and its impact on national economies

· Supranational bodies and their impact on national and regional economies

· Trading blocs / regional blocs

· International institutions

1. Uneven Development in the Global Economy

Globalisation

· Discuss the characteristics and processes of globalisation.

· Discuss the impact of globalisation on the world economy.

What is globalisation?

· Increasing interconnectedness & interdependency of people, cultures, economics and politics at all spatial scales.

· More functionally integrated and independent. The compression of the world.

Processes involved in globalisation

· Economic: Flow of capital and goods: production and investments by TNCs, etc., the changing structure of firms

· Social: Movement of people: migration, tourism, demographic changes, multicultural states.

· Cultural: Diffusion of information and cultures: InfoTech like internet, cultural forms (movies, brands), cultural homogenisation

· Political: Rise of international organisations: UN, IMF, ASEAN, EU etc. Supranational organisations, trade blocs, FTAs

Globalisation is driven by:

· Improvements in transport – air freights, shipping.

· Improvements in communication – Internet, phones, email

· The search for new, unsaturated markets by economic agents like firms

· Need to find the most efficient methods of production – comparative advantages

The impacts of globalisation on the world economy

· Shrinkage of distance – a ‘Shrinking World’

· Spatial division of the global economy

· Spatial interdependence – the global supply chain

· Increased mobility and flexibility – increased flow of funds, capital

· Accentuation of regional disparities

· Convergence and divergence of economic activities

Reasons for economic globalisation

PUSH FACTORS from home country

Expensive labour on standardised goods

· For textile companies, the hourly operation cost in Switzerland is US$35, compared to US$12 in Sri Lanka or $11 in Bangladesh.

Strong unions

· In the US, in addition to health care, unions fought for and gained retirement plans, compensated sick days, and defined benefits plans. The median weekly income of a union worker is $917 compared to $717 for non-union workers.

High expenses on labour welfare

Saturated markets

· The technology market in the US or Japan are far more saturated in comparison.

PULL FACTORS from host country

Cheaper labour

· In China, wages are a fraction of those in the US, and six times cheaper than Mexico - averaging about 40 US cents an hour for a factory worker.

‘Standardisation’ of products

· Mass production technology – Fordist car assembly lines

Cheap raw materials

· Oil production in Nigeria by Shell – cheap oil.

Cheap land, low taxes, laxer laws

· Union Carbide moving to Bhopal, India to take advantage of laxer environmental laws to produce otherwise banned chemicals.

·

Increased mobility, transport and communications

· The increased ubiquity of shipping or air routes, email and Internet technology.

Search for new markets

· China has a large consumer base, having a population of 1.3 billion.

The Reason for Standardisation of Products

Theodore Levitt (1983) put his focus on marketing of standardised products and brands worldwide as:

1. Customer needs and interests are becoming increasingly homogenous worldwide.

2. People around the world are willing to sacrifice preferences in product features, functions, design, and the like for lower prices at high quality.

3. Substantial economies of scale in production and marketing can be achieved through supplying global markets.

TYS Questions:

2009 H1 Q7 Either: Describe the processes that contribute to globalisation. [9m]

2009 H2 Q5 Either: With the help of examples, explain the concept of “a shrinking world”. [9m]

2010 H2 Q5 Either: With the help of examples, explain how technological change has contributed to globalisation. [9m]

Uneven Global Distribution of Economic Activities

· Discuss what is meant by ‘the globalisation of economic activity’.

· Discuss the global, regional and national variations in economic wealth.

· Discuss the development gap.

· Evaluate the usefulness of various indicators used to measure the level of development.

The globalisation of economic activity

It is the process of merging between domestic economies, businesses and societies. The phrase relates to economic activity that indicates that globalization involves the participation of companies and corporations actively contributing to the integration of international businesses. The features of the globalization of economic activity include an international development of trade, production, investments and flow of workforce.

International Trade

International trade relates to the exchange of capital and goods in the global market. It is an essential component of the globalization of economic activity as business acts on an international level mainly to ensure benefiting from participation in the global trade system. Imports and exports are the aspects of international trade – countries and corporations producing more than they can consume focus on exporting goods to countries which demand production. For example, a report by the European Central Bank indicates that through the satisfaction of foreign demand, countries like China and India have massively expanded their economies. These destinations are now a major focus for businesses looking to buy goods and import them in countries that require production, such as the U.S. and the E.U.

International Production

International production in the global economy – or exported production – is when businesses start producing their goods in countries with cheaper labour and more relaxed tax systems. This allows big companies to produce more and pay less for the labour and the country housing their production facilities and activities. For example, the German car industry giants, as indicated by Turkish economist Lale Duruiz, have already exported their production in Turkey, benefiting from the economic treaty of the country with the E.U. for free movement of goods. Thus, the German producers pay no import fees when delivering their production in Europe and save up from labour costs and taxation.

International Investments

Investing on an international level allows companies and financial organizations to participate in projects in different areas in the world depending on profitability and market situation. For example, where financial organizations from the developed world seek to expand their influence on an international level, they would offer to invest in the developing economies to either have a share in the production or to receive a fixed interest upon the investment they have made. This has happened in the relationships between United Arab Emirates and the United States as described by the U.A.E - U.S. Business Council. When first started investing in the developing Arab Union in the late 1990s, the U.S. input $540 million in investments. Seven years later, the U.S. investments had already grown by 724 percent, thus turning the Emirates into one of the most successful destinations American financial institutions have ever participated in. This increase in the investment value has contributed to the development of stronger ties between the countries and stable trade relations between businesses from both sides.

Workforce

The globalization of economic activity includes the integration of people willing to work in foreign economies. The most advanced example of such integration is the European Union – every citizen of the Union is allowed to participate and exercise a profession in all the member states of the organization through a freedom of movement legislation.

What is the development gap?

Traditionally known as the North-South divide which is shown by the Brandt Line, it splits the countries of the world into two sides, with DCs in the “North” and LDCs in the “South”. N and S are merely categories and are not defined geographically. More recently, it has been termed the development continuum gap. (Blue is N, Red is S)

Development in this case is mostly defined as economic development. It refers to advancements in technology, a transition from an economy based largely on agriculture to one based on industry and an improvement in living standards. Other factors that are included in the conceptualization of what a developed country is include life expectancy and the levels of education, poverty and employment in that country. It is essentially measured by the HDI, which includes GDP/capita, education (adult literacy rate and primary, secondary and tertiary education) and life expectancy at birth.

Globalization as the leading cause for global inequality: globalization enhances social and economic gaps between countries, since it requires economies and societies to adapt in a very rapid manner, and because this almost never happens in an equal fashion, some nations grow faster than others. Rich countries exploit poorer countries to a point where developing countries become dependent on developed countries for survival. The very structure and process of globalization perpetuates and reproduces unequal relationships and opportunities between the North and the South, it tends to "favour the privileged and further marginalize the already disadvantaged".

Impacts on Economically Less Developed Countries (LDCs)

Positive Economic

Negative Economic

· Industrialisation

· 4 Asian tigers: From 1980-2000, South Korea industrialised by 20-25%.

· Employment – direct job creation

· Shell in Nigeria has employed 5000 locals directly to work in oil extracting plants and another 20000 indirectly, increasing employment in the local delta area and per capita income.

· Nike pays around 5 times the minimum wage and 3 times the minimum wage in Indonesia. Those working in export factories in Dhaka earn 86% more than those who do not.

· Improvement of technology and skills

· Intel, IBM, Microsoft and Texas Instruments invested in research centers in India to train and employ thousands of Indian engineers at low costs.

· Farmers in India taking Monsanto’s gene technology via cross-breeding to improve their other crops.

· Financial income for country

· Taxes: In Nigeria, Oil is a very important part of the country’s economy, accounting for 20% of GDP and 95% of its export earnings. The foreign MNC Shell produces half the country’s oil output.

· Industrial Linkages: Coca Cola has an estimated multiplier effect in China of 414 000 people, like local glass suppliers.

· Investor Confidence: General Electric setting up in Singapore’s Jurong Industrial Park was a big plus that improved credibility, such that even as labour costs were rising in the 1990s, firms such as Seagate still located in Singapore.

· Increased income for workers

· China’s disposable income grew from 46 dollars in 1978 to 10493 in 2005.

· Mexican rural poverty falls from 24.2 to 17.6, overall poverty falls from 42% to 27.9% in the maquiladora regions.

· Local producers unable to compete

· Produce farmers in Africa unable to penetrate tariffs protecting the EU agricultural market. Many African and Asian dairy, tomato and poultry farmers cannot keep up with cheap competition from Europe, thus their incomes can no longer provide for their families. They end up relying heavily on imports, which are often the EU's subsidized exports.

· Exploitation of workers

· Child labour: forced, unsafe employment of children in the textile industry in Bangladesh.

· Sweatshop phenomenon: Nike’s employees forced to work for extremely long hours with comparably little pay – working 40 hours overtime a week with $2.46 a day.

· Brain drain

· Brain drain has cost the African continent over $4.1 billion in the employment of 150,000 expatriate professionals annually.

· Indian students going abroad for their higher studies costs India a foreign exchange outflow of $10 billion annually.

· There is only one doctor for every 10000 people in Kenya. It takes $150,000 to train a doctor, who leaves after an internship, and Africa has lost everything that goes with it.

· Encourages dependency

· Remittances to the Philippines from domestic workers abroad makes up more than 10% of its GDP ($17.3 billion), which has resulted in dependency and laziness.

· Remittances

· Not all income generated by TNCs goes to host country – most of it is remitted to its home country.

Positive Social

Negative Social

· Increase in literacy rates

· To help with export led growth, the government of South Korea increased literacy rates via education from 22% in 1945 to 87.6% in 1970.

· Improve sanitation and healthcare

· Better infrastructure and technology transfer has caused IMR in the UN’s list of least developed countries to fall by half in 1960 from 180 to 2005 at 90.

· Decreased child labour

· Improvements in income are generally spent on education – globalisation can accelerate this e.g. Dhaka, India.

· Urbanisation

· Due to manufacturing jobs in cities made available by globalization, urbanization in China has grown from 18% to 39%.

· Health and safety issues

· Bhopal, India, 1984, a gas leak from a pesticide plant, Union Carbide in the heart of the city killed many thousands of people and injured half a million people.

· In the Ramatex textiles factory in Namibia, workers are not provided with protective clothing. Some workers have developed chest problems whereas others have had allergic reactions, creating added personal medical costs to the individual and government as they are not covered by the TNC.

· Inequality

· Poor people’s incomes grew at an average rate of 3% in China from 1960 to 1990, but rich people’s incomes grew at a rate of 5% (50:50 percentile)

· A UN report states that in sub-Saharan Africa alone, the number of poor people increased by almost 90 million in little more than a decade from 1990 to 2001.

Positive Environmental

Negative Environmental

· Responsible companies promoting better environmental practices

· TNCs in Mexico, Morocco and Venezuela and Ivory Coast are significantly less pollutive than local plants as they have the technology to so do.

· Perhaps foreign firms have a greater incentive to be less pollutive due to more restrictive government oversight and licensing.

· Environmental degradation

· In Nigeria, lax policies have increased air pollution, with gas flaring a common practice (the burning of gas which cannot be collected).

· Deforestation in Nigeria to clear land for the production of oil and gas has greatly reduced local forests used to supply foodstuffs and fuels.

· Monsanto dumping of PCBs and other poisonous materials at Brofiscin quarry in Newport, Cardiff, England. Traces of PCBs reported in wildlife, water and fish.

· Expansion of coastal shrimp farming in Ecuador and Colombia resulted in polluting effluents and intrusion of salt water into fresh water.

Impacts on Economically Developed Countries (DCs)

Positive Economic

Negative Economic

· Better reallocation of resources

· Labour intensive industries such as textiles and assembly have shifted to China, Bangladesh, Vietnam and other places with cheap labour – comparative advantage

· Tertiarisation

· 1990s: Layoffs in the US from manufacturing sector was made up by the net creation of 22 million jobs in the service sector.

· The number of multinational R&D centres in China up from 200 in 2002 to 750 in 2008.

· Decentralisation and globalisation of services

· Suburbanisation due to improved communications

· Pittsburg Suburban Business Park; Singapore Science Park; Doxford Business Park

· Communication improvements – Call centres, software development like Wipro.

· Growing quality of labour in LDCs like China and India that enable them to take up such service jobs

· Increasing standardization of services due to education, English and globally common needs

· Increased trade and capital flows

· Risk reduction via diversification

· Economies of scale by exporting goods to other countries.

· Deindustrialisation and stagnation

· Detroit and the car industry – the Rustbelt.

· UK Consett’s contraction in iron and steel industries

· High costs due to labour and strong unions, outmoded methods of production, saturated market for products.

· Loss of jobs

· Locals lose jobs as manufacturing and even service-based jobs are outsourced.

· Indian IT services giant Wipro grew through outsourcing by Western firms to them.

· Maxtor slashes 5500 jobs in Singapore

· Contagion easier to spread

· Greek and Irish debt crises in the euro region during the 2008 financial crisis

· Lehman Brothers incident

Positive Social

Negative Social

· Increased pluralism of culture

· Increased standard of living, leisure

· Cultural homogenisation

· “Americanisation” and “McDonaldisation”.

· Cultural imperialism – consumerism and media.

· Wiping out local cultures.

Positive Environmental

Negative Environmental

· Emphasis on environmental conservation at a global level

· India and China are working on reducing their carbon emissions and ecological footprint.

· In India, recycling systems in Hyderabad convert organic waste into fuel.

· China is working on alternative sources of energy (hydroelectric), as well as using more fuel efficient machines. Also, reducing the number of cars on the road in Beijing.

· Abuse and overuse of natural resources

· Depletion of natural resources – iron ore in South Wales, and Great Lakes, Pittsburgh (US)

Newly Industrialising Economies (NIEs)

NIEs are countries whose economies have not yet reached First World status but have, in a macroeconomic sense, outpaced their developing counterparts. Another characterization of NIEs is that of nations undergoing rapid economic growth (usually export-oriented). Incipient or ongoing industrialization is an important indicator of a NIE. In many NIEs, social upheaval can occur as primarily rural, or agricultural, populations migrate to the cities, where the growth of manufacturing concerns and factories can draw many thousands of labourers.

NIEs usually share some other common features, including:

· Increased social freedoms and civil rights.

· Strong political leaders.

· A switch from agricultural to industrial economies, especially in the manufacturing sector.

· An increasingly open-market economy, allowing free trade with other nations in the world.

· Large national corporations operating in several continents.

· Strong capital investment from foreign countries.

· Political leadership in their area of influence.

· Lowered poverty rates.

NIEs often receive support from international organizations such as the WTO and other internal support bodies. However, as environmental, labour and social standards tend to be significantly weaker in NIEs, many fair trade supporters have advocated standards for importing their products and criticized the outsourcing of jobs to NIEs.

NIEs usually benefit from comparatively low labour costs, which translate into lower input prices for suppliers. As a result, it is often easier for producers in NIEs to outperform and outproduce factories in developed countries, where the cost of living is higher, and labour unions and other organizations have more political sway. This comparative advantage is often criticized by advocates of the fair trade movement.

Current NIEs include: South Africa, Mexico, Brazil, China, Malaysia, India, Thailand, Philippines, and Turkey.

A look at NIEs – Taiwan and South Korea and the impacts of globalisation

Taiwan and Korea built their economies into developmental machines through mobilizing available domestic resources to pursue economic growth, led by the states through allocating resources to growth sectors and creating comparative advantages. They also played the role of safeguard to absorb both internal and external shocks and control risks from global and domestic environments.

However, problems will emerge once the state is no longer strong enough to prevent the economy from external risks.  Globalization erodes state strength and undermines state control.  Foreign factors can easily impact domestic economics through freer flows of capital and goods. Regulation of economic transactions across the globe needs to depend on super-national organizations, such as IMF and WTO.

Globalization also brings two possible dangers.  On the finance side, barriers to capital flows are tremendously lowered as a result of deregulation of financial markets and improvement in technology transactions.  Highly mobile capital is able to travel all over the world to look for best return, strengthening the interconnection between national financial markets and increases volatility of national currency. This kind of capital flows is especially fatal to the countries with seriously flawed or malfunctioning financial system.

On the production side, globalization brings different costs and benefits to the actors positioned in different places of the global division of labor. MNCs, usually head-quartered in industrialized countries, dominate technology, capital resources, and distribution channels of the global markets, setting their production facilities in multiple countries to efficiently exploit and coordinate different endowments and then minimize production and transaction costs. MNCs are the most possible candidates who can fully exploit the advantages brought by freer flows of capital, goods, and personnel due to their capability in engaging global management.

Globalisation and State Intervention: Government – Business Relations

Globalisation introduced external factors, including international organizations and MNCs, into the equation between government and business, complicating their interactions.  The tendency shows that foreign private actors may serve as better allies of local private actors than of local governments since they have a similar goal on lifting constrains from governments.  Also, the increasing importance of IGOs (intergovernmental organizations) unquestionably undermines governments' authority, but its relationship with governments need not be antagonistic.  Often, the rules set out by IGOs need a strong government to implement in the domestic arena, where IGOs are still unable to directly intervene. 

An example was the IMF's intervention in Korean restructuring during the Asian financial crisis.  During the 1990s, Korean business gained independence from government-controlled resources and their bargaining power increased, but the financial crisis weakened the strength of Korean private sector and gave advantages to the government.  Since the financial resource, including the IMF bailout, held by the government was the only available resource for the private sector during the crisis, the government obtained sufficient power to direct the action of private firms.  Under the pressure of the IMF, the government stopped rescuing sick chaebols and allowed their bankruptcy.  Without guaranteed rescue, businesses have to exchange their compliance for the rescue when they face financial difficulty.  Reducing the size of chaebols also undermined chaebols’ influence in political and economic decision-making.  The crisis and the IMF intervention moved the relationship between government and business in Korea toward the direction in favour of the government.

In addition, foreign investors are also entering the Korean economy.  The crisis made the Korean government relive its restraints on the entry of foreign investment. Foreign investors can purchase Korean companies through M&A, or invest in Korean stock market more easily.  Foreign ownership in Korean listed companies jumped from 13% in 1996 to over 30% at end-2000. By 2000, foreign investors owned 55% of the shares of Samsung Electronics and 44% of Hyundai Electronics.  The rapid growth of foreign investment in Korean companies increases foreign intervention in the economic development.   

Efficacy of State Control

In addition to maintaining macroeconomic stability, states were involved in the guidance of economic development towards rapid growth.  Thus, they were characterized by a more intensive government intervention. They allocated capital resources to selected growth sectors by means of credit control, subsidies, and tax-reduction, and maintained or created the advantages obtained from external exchanges through manipulation of exchange rates and maintenance of a low wage level.

Globalisation weakens the state’s control over capital allocation.  Due to high mobility and availability of capital in the global arena, capital resources can be easily secured from the global market, making the ones controlled by the states relatively insignificant to private enterprises.  To countries that heavily depend on capital allocation to conduct intervention such as Korea, globalization of finance disarms the states' instrument to control the private sector. Conglomerates in Korea can easily obtain alternative financial resources from global markets without depending on the supply from the government, shown by the increase of long-term external debt not guaranteed by the government.  The ratio of the private non-guaranteed long-term debt to the total long-term debt increased from 9.6% in 1970 to 48.7% in 1997.  A reason of chaebols’ resorting to foreign financial resources is governmental limitation of their access to domestic credits.  In order to curb chaebols’ expansion and pursue efficiency, President Kim Young Sam set quotas for their domestic loans.  This policy did not really stop the increase of chaebols’ debt; instead, it forced chaebols to turn to international markets to search for their financial input.

This study gives the second tier NIEs a signal that, under globalization, they are probably unable to adopt the same state-intervention strategies.  Hence these developmental patterns and strategies may be no longer suitable in the newly globalized world, and a new strategy that can properly cope with globalization is needed for other industrializing economies.

Globalisation and Economic Development: The Financial System

Globalization brings challenges, especially to the countries with a malfunctioning financial system or in the unfavorable places of the global division of labor.

Korea is notorious for the heavy debt burden of its companies. Between 1991 and 1996, the average debt/equity ratio of Korean firms in manufacturing sector was more than triple that of Taiwan and almost twice that of the U.S. The financial situation of the dominant chaebols in Korea suffered even heavier debt burden than did average firms.  The average debt/equity ratio of the top 30 chaebols was 403.8%, compared with 304.7% for the whole manufacturing sector.  By the end of 1997, the top 30 chaebols bore W 357 trillion debt, equivalent to 85 percent of GDP, and about two-thirds of the debt was carried by top 5 chaebols, indicating that Korean debt is also highly concentrated.

In the 1990s, the threshold of turning debt problems into crises was tremendously lowered due to the interconnection of financial markets. In the Asian financial crisis, the contagion of exchange rate plunge in the region weakened Korean capacity to repay the debt in dollars.  Even though the debt ratio in 1997 was not as high as the ones in the early 1980s, under the catalysis of exchange rate plunge, a mild debt problem may be quickly transformed into a crisis.   Korea did not maintain an amount of international reserves large enough to cover debt service and short-term debt.  In 1997, the amount of total external debt was 6.7 times and the amount of the short-term debt was 2.6 times larger than that of the international reserves. After the crisis, Korea has taken a series of measures to improve this situation, including lowering the debt ratio of chaebols, eliminating cross-debt guarantee, concentrating on core business, and purchase of non-performing loans, etc. The amount of bad loans as a percentage of total loans dropped from 12.9% in December 1999 to 5.01% in September 2001.  The debt ratio in manufacturing sectors decreased from 400% in 1997 to 200% in 2000.

The Production System

Taiwanese and Korean MNCs have actively sought multi-nationalization of their activities since the late 1980s but in different patterns and therefore own different abilities to take advantage of new global opportunities.

In terms of area, the majority of Taiwan’s investments went to China and Southeast Asia (52%), and the purpose of investing is to avoid increasing production costs for their labor-intensive goods. Although large in number, these MNCs have little significant meaning in enhancing Taiwan’s ability to cope with globalization, being limited to neighboring countries and still being engaged in production.  Foreign investments of Korean companies are spread all over the world and range from acquiring raw materials to market expansion.  Korea invested a large amount in the OECD countries.  From 1997 to 2001, Korean investment in Asia only accounted for 33% of all outward FDI, while investment in North America and Europe jumped to 45%. Marketing and research were the major functions carried by these investments. Due to chaebols’ selling networks worldwide and each major company having its own global marketing channels, they can easily distribute their products overseas. Korean MNCs are more prepared than Taiwanese ones to grasp the fruits of globalization.

A country’s inward FDI is also an indicator of the impact of globalization.  Greater FDI inflows means that a country owns stronger competitiveness that foreign investors would like to explore. Another important variable influencing inflow of FDI is government restriction, which reduces the opportunities of technology upgrade stimulated by foreign companies and the chance to attract more foreign capital. Korea’s Economic nationalism and fear of foreign dominance resulted in a strong tendency to refuse FDI entry. Taiwan held a much more open attitude toward FDI.  Many studies show that technological development in Taiwan benefitted a lot from the presence of foreign companies.  On average, inward FDI/GDCF (gross domestic capital formation) ratio in Taiwan was much higher than in Korea.  After the financial crisis, Korea changed its strategy to actively absorb FDI.  This made the ratio of Korea increase rapidly from 0.7% of 1991-1994 to 13.6% of 1999-2000, contributing to the successful recovery of the Korean economy.

A third way to explore the possible responses of a country's producers to globalization is examining the mode of their business.  Companies engaging in consumer markets have benefited more from globalization than have the ones in the OEM (original equipment manufacturing) markets, partly because accompanying the enlargement of the global markets, marketing costs (advertising and distribution) become increasingly high.  Superior brand-images of existing global marketing giants assist their products to be accepted by the customers of new markets, quickly occupying them. In Romania, for example, IBM was the leading computer seller in 1996, and in Poland, Hewlett Packard secured 73 percent of the ink-jet printer market in 1997.  In other words, globalization offers existing large firms more chance to bring their superior marketing capability into full play.

On the other hand, companies with only good production ability (e.g. OEM producers) need to be subject to frequent challenges of globalization. Under the trends of global technology diffusion and ever-changing production conditions, it is relatively easy for a new OEM firm to enter the market and for competitors to take away the advantage on production of existing firms, especially second tier NIEs with a much lower labor cost. In Taiwan, the personal computer industry had been recognized as one of the most successful industries in selling products with their own brand names (OBM, Original Brand-name Manufacturing), instead of OEM (37%) in 1988. However, this situation tremendously changed during the 1990s.  By 1997, at least 61% of Taiwanese export computers were sold on an OEM base.  It indicates that Taiwan have encountered serious difficulty when they tried to market their own products and develop their own global strategies.

In contrast, Korean major electronics firms have experienced a rapid increase in OBM production during the 1990s. In 1997, Samsung made 80 percent of its products under its own brand name, a sharp increase from 1993’s 55 percent. LG Electronics, one of the major electronics firms with a high OEM ratio in Korea, reduced their OEM business from 52 percent to 40 percent between 1995 and 1997. Global strategies not only create new sources of competitive advantage, but provide a better foundation for proactive innovation instead of passive response to foreign OEM customer requests. In the new global economy, a firm with less innovation ability will suffer huge disadvantage in international competitiveness.

The Development of the New Economy

With globalization, the capacity of innovation becomes a crucial source of competitiveness, and strengthening the capacity is a necessary approach to cope with globalization.  The other important element of the new economy is the application of information and communications technology (ICT).

For a long period of time, the R&D expenditure in Korea was higher than in Taiwan.  The expenditure in Korea by percentage of GDP is 25% higher than Taiwan.  However, if we look into the composition of R&D, we can find that in the manufacturing sector, Taiwan invested more portions in high-tech industry than Korea.  In fact, in 1999, Taiwan spent 58% of its total R&D expenditure in high-tech manufacturing, and there was 48% in Korea. In terms of numbers of patents granted by the USPTO, Taiwan is better than Korea.  In 2001, the number of patents granted to Taiwan was 6,545, ranking the fourth, comparing to Korea’s 3,763 and the eighth place.  However, the number of patents increased faster in Korea than in Taiwan.  From 1990 to 2001, the average increase rate in Taiwan was 20.25%, while in Korea, it was 26.24%.  According to an analysis by USPTO, in 1999, the major technological fields in which Taiwanese enterprises obtained the patents were semiconductor device manufacturing, electrical materials, static information storage and retrieval, and chairs and seats.  For Korea, they were liquid crystal, cell, elements and systems; static information storage and retrieval; semiconductor device manufacturing; dynamic magnetic information storage or retrieval.

With regard to the application of ICT, Korea is well known by its widespread of the use of the Internet.  It has the largest portion of national population who are Internet users in the world. Taiwan is also in the list of the first tier countries, but it still lags behind Korea. The percentage of the broadband users among population is 51.7% in Korea and 18.2% in Taiwan.  This is partly attributed to the promotion of the Korean government since the financial crisis. Compared to Taiwan, Korea spent more money on R&D, but most concentrated on the businesses that chaebols focus on.  Judged by the wide range and variety of Taiwan’s patents, Taiwan’s R&D may cover different fields of industries. The high number of patents indicates a country’s innovative capacity.  In addition, Korea’s advance in ICT application provides it with a solid foundation to cope with globalization. No matter in terms of production, marketing, or communication, the Internet is a necessary tool to extend business operation to the globe.

The Human Development Index (HDI)

The Human Development Index (HDI) is a composite statistic used to rank countries by level of "human development". The HDI is a comparative measure of life expectancy, literacy, education and standards of living for countries worldwide. It is a standard means of measuring well-being, especially child welfare. It is used to distinguish whether the country is a developed, a developing or an under-developed country, and also to measure the impact of economic policies on quality of life.

The HDI combines three dimensions:

· A long and healthy life: Life expectancy at birth

· Access to knowledge: Mean years of schooling and Expected years of schooling

· A decent standard of living: GNI per capita (PPP US$)

Advantages

Disadvantages

Easy measure and indicator of political competitiveness

Does not take into account poverty or other measures of deprivation

Reliable factors and indicators

PPP values change quickly and are likely to be misleading

Easy to collect data

Does not account for equity – GINI coefficient

Signifies future welfare – education and health are both supply side policies

Quality of life not closely linked – does not account for factors like war or oppression

Able to measure success of government policies

Human development is overall difficult to measure, even with selected indices

It is one value – allows for modelling and statistical analysis, thus practical

Assumes ceteris paribus – an isolated snapshot in time

Goodhart’s Law: Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes (1975).This has made the HDI potentially an unreliable indicator of development once countries begin to target only these indices.

TYS Questions

2007 H2 Q5 Either: Give the meaning of the term development gap. Describe the development gap experienced within one world region. [9m]

2008 H1 Q7 Either: How useful is the HDI as a measure of economic development? [9m]

2008 H2 Q5 Either: In 2002 the World Bank reported that in the 1990s, although the number of extreme poor (those living on less than US$1 per day) had decreased by 120 million, about 2 billion people “had been left out of the process of globalisation.” Explain why the impact of globalisation is uneven amongst LDCs and NIEs. [16m]

2009 H2 Q5 Either: In the UN list of HDI values for 177 countries in 2004, Norway, a DC in Europe, was ranked first with 0.965 and Niger, and LDC in Africa, was ranked last with 0.311. Assess the usefulness of HDI and of one more other indicators which may be use to measure development. [16m]

2010 H1 Q7 Or: Using examples to illustrate your answer, describe and explain what is meant by the term newly industrialising economy (NIE). [9m]

New International Division of Labour

· Discuss the causes for and impact of the emergence of the new international division of labour on the global economic activities.

NIDL

It is the global spread of labour-use across international borders in the face of increasing globalisation and industrial competition. It is the spatial division of labour which occurs when the process of production is no longer confined to national economies. This has led to a trend of transference, or what is also known as the "global industrial shift", in which production processes are relocated from developed countries to developing countries. This is because companies search for the cheapest locations to manufacture and assemble components, so low-cost labour-intensive parts of the manufacturing process are shifted to the developing world where costs are substantially lower. Companies do so by taking advantage of transportation and communications technology, as well as fragmentation and locational flexibility of production. From 1953 to the late 1990s, the industrialized economies' share of world manufacturing output declined from 95% to 77%, and the developing economies’ share more than quadrupled from 5% to 23%.

Characteristics of NIDL

It is TNC driven, as they have the capital required for global investments.

Hierarchical and tri-partite in relationship: core (DCs, HQ and R&D), semi periphery (NIEs, regional HQ) and periphery (LDCs, manufacturing plants)

Capital accumulation of profits is greatest at the top of the hierarchy, where R&D is located

Dynamic relationship – Producers at DC level can quickly and efficiently organise actors at LDC level to maximise efficiency in the search for cheaper factors of production

Causes of NIDL

PULL Factors

Search for cheap and efficient labour

· Labour cost in China is estimated to be 33 times lower than the US for textiles

· Vietnam’s factory wages of around $50-$60 a month, which is half that of Chinese workers in manufacturing centres along China’s coast, hence is attractive to even Chinese firms

Search for new markets

· Larger the size, more potential demand to be tapped. Also, demand for goods is likely to be labour intensive manufactured goods, and less of skilled manufactured goods and services

· China, due to its size. Larger consumer market, growing purchasing power of population.

· Cosmetics market 13bn in first half of 2010, leading firms like L’oreal and Olay to enter Chinese market in terms of shifting production and other processes

· Between 2002-2007, the Chinese car market grew by 21% on average, and is expected to grow tenfold by 2030 from 2009, even as it became the largest market for automobiles in the world

· Reduces supply chain and inventory supply risks

· Reduces transport costs

· Localising products to local markets – Lexus in the US luxury car market

Economies of scale

· E.g. Walmart – cheaper prices overall

· Wal-Mart's growth between 1985 and 2004 resulted in food-at-home prices that were 9.1% lower and overall prices (as measured by the Consumer Price Index) that were 3.1% lower than they would otherwise have been

· It distributed its merchandise from a vast network of distribution centers served by a private truck fleet, allowing them to restrict inventory while simultaneously open more stores. The inventory control system gave it another competitive advantage on the competition. Distribution channels were very efficient and allowed for lower pricing, thus creating another barrier to entry for firms who wished to enter the market.

Less environmental and legal concerns

· Hazardous industries such as textile, petrochemical and chemical production, as well as smelting and electronics, have migrated to Latin America, Africa, Asia and Eastern Europe. E.g. Union Carbide’s methyl isocyanate incident in Bhopal, India, killing 15000 and affecting 800000 more.

· In Indonesia, no rules or codes of conduct are observed, and workers work ridiculous overtime shifts, up to 24 hours at a go.

Little or weak labour unions

· Mexico has poor government regulations on workers’ rights. In some cases, TNCs can get away with not compensating workers for any accidents caused by the companies. Employers prefer to have women labour force as they are either not unionized or organized by weak state-controlled unions.

· In 1968, Singapore enacted a law that curtailed worker benefits and gave more power to companies to hire and fire, making the Singapore workforce more attractive to TNCs.

Role of state

· In 1995, the Namibian government passed a law called the export processing zone Act as part of its strategy to become an internationally competitive investment location. The government hoped that EPZs would attract foreign investments to Namibia, and boost the country’s manufacturing capacity.

· EDB Singapore in 1961 developed Jurong Industrial Park – tax incentives, ready-made factory building attracted Texas Instruments in 1969, as well as National and Fairchild shortly after.

Actions of economic agents (TNCs)

· Places which already have a suitable trained workforce for a high-technology industry

· Toyota chose the Burnaston site in Derby for its first factory in the EU for its long tradition of engineering and vehicle manufacturing and favourable working practices, as well as the excellent skilled and flexible workforce there – more than 20000 suitable job applications from workers living in the area

· Cheap Land in declining industrial areas

· Toyota build their plant in Burnaston on a disused airfield

· Well-developed transport facilities to market areas

· Toyota chose the UK as it had reliable industrial transport links to customers

· Supply chain concerns – faster delivery, efficiency

· U.S. Block Windows ships acrylic blocks within four days, as compared to 12-16 weeks with outsourcing to China

· High unemployment, providing a good labour supply

· Second Toyota plant in the EU, Valenciennes in France had an unemployment rate of 20%, hence high government grants of 60 million and other training aid

· Past economic problems so the government is willing to offer financial help

· Nissan received 125 million from UK to encourage them to set up a plant

· Establish operations within trade barriers, thus avoiding quotas and import duties

· Suzlon and Vestas, Indian and Danish wind-turbine makers make investments in U.S. manufacturing not only because it’s expensive to ship turbines, but also for the turbines to be perceived as “American” to officials involved in green purchasing

· Focus on the tastes of local people, known as host market production, and be more visible to the area’s consumers, increasing sales

· To gain a higher share in the US domestic luxury car market, Toyota introduced a separate brand called Lexus in 1989. This has now become the most popular luxury car brand in the US, and Toyota introduced it back to Japan in 2005

· Collaborate with other companies located there

· HP and Canon and their product design

· HP and Chinese government firms

PUSH Factors

High labour costs and unionisation

· For DCs, on top of paying high labour costs, the average employer has to pay another 20-25% of the worker’s wage rate for insurance and medical benefits. In LDCs, only 2-5% at most is required. Also, union strikes were unheard of, and workers even willing to work for overtime pay.

· Manchester, Liverpool and unions in France have lobby power and influence wages.

Saturated markets and product life cycles

· Due to market penetration already maximized and home market already well saturated with products, further expansion opportunities are only available overseas. Hence firms regionalize and globalise. e.g. consumer durables.

Low productivity

· Older manufacturing firms in DCs in Europe operated with outdated machinery and methods of production, like Fordist-style. Inefficient use of labour, with high costs.

Depletion of raw materials

· Heavy industries like iron and steel. Exhaustion of raw materials and cheaper raw materials in LDCs led mining to become unattractive in the UK and Europe, causing many miners to lose their jobs.

· US: Pittsburgh Steel lost 130000 jobs between 1965-1985

Global Shift and NIDL – Some Definitions

Deindustrialisation: contraction of manufacturing activities such as construction, assembly industries, leading to unemployment. Comes about as a result of falling demand, exhaustion of raw materials, high operating costs and stronger competition.

Outsourcing: contracting out a business function, normally previously performed in-house, to an external provider.

Offshoring: relocation by a company of a business process from one country to another—typically an operational process, such as manufacturing, or supporting processes, such as accounting.

Rationalisation: closure of a factory in a multi-plant firm due to cost-cutting measures, mostly.

Reindustrialisation: effort to attract high-tech manufacturing industries (as a result of skilled labour) back to a once reindustrialised area using perks and benefits (tax holidays, ready-made factories)

Tertiarisation: transition (impt: maturing of economy seems to be a requirement for it to be considered tertiarisation. Tonga’s major industry is tourism, but it is a result of colonisation and FDI) of an economy from emphasis on manufacturing industries to service industries e.g. tourism, retail, transport. Normally requires high levels of education and training to be sustainable.

Global Spatial Distribution of NIDL

· Headquarters - Core

· Located in DCs

· Contains higher value operations such as research and development, concentration of talent and power

· Nike employs 23 000 people directly in the core and semi-periphery

· Regional Headquarters – Semi-periphery

· Located in newly industrialized country or BRIC or DC

· Regional administration, marketing and logistics

· Mid-level operations, uses local talent along with foreign professionals

· Nike’s sub HQ’s are in Brazil and in Europe

· Standard Chartered private banking HQ in Singapore

· Manufacturing – Periphery

· Located in LDCs

· Lower-order, less valuable activities

· Branch plants/offices

· Nike employs 660 000 contract workers from outsourcing, mainly in the periphery

· However, rise of TNCs in LDCs like China – Geely/Volvo, Lenovo/IBM

NIDL’s Impacts on LDCs

Positive Effects

· More employment opportunities. From 1953 to the late 1990s, the developing economies’ share of world manufacturing output more than quadrupled from 5% to 23%

· Increase in standard of living

· Technological and skill transfer

Negative Effects

· Limited to selected labour intensive industries

· Tech and skill transfer is limited

· Subject to TNCs restructuring and organising themselves

· Economic and political dependency

NIDL’s Impacts on DCs

Positive Effects

· Tertiarisation and beyond, focusing on higher value industries

· More competitive product pricings (outsourcing, offshoring)

· More profits

Negative Effects

· Loss of lower-level jobs like in manufacturing, deindustrialisation (Detroit’s car manufacturing, Rust Belt). The industrialized economies' share of world manufacturing output declined from 95% to 77%.

· Deskilling of workforce

· Social-political resentment towards LDCs, protectionism (EU)

NIDL and Uneven Industrialisation – Link to the Development Gap

Why have some countries benefitted from globalisation much more than others?

1) Geopolitically stable economies. Globalisation tends to favour countries without civil strife, wars, terrorism, social safety issues. This is because investors are less likely to invest in such problematic countries, thus widening the development gap, as countries with such problems are likely to be LDCs.

2) Competent governments. Business companies shun countries which are rampant with corruption, red tape and bureaucracy. Again, these are likely to be LDCs because of such corrupted / communist countries.

3) Good and reliable infrastructure. Many Sub-Saharan African nations do not have necessary infrastructure like roads, communications etc. to support large scale manufacturing and investments. Landlocked regions with no airport facilities are also hindrances. LDCs do not have the required technology to begin with, but globalisation favours and benefits countries with technology, trapping these LDCs in a vicious cycle.

Relevance of NIDL today

The first wave of NIDL was a shift from the DCs of USA, England and so on to the cheaper locations like China, India and Bangladesh. However, how these previously peripheral countries have industrialised as a result of the 1st wave. They have become the core/developed countries, which are now the leaders of the 2nd wave of NIDL.

Critique of NIDL

The theory of NIDL assumes that countries are passive subjects, but in reality states play a large role in attracting foreign investments.

TYS Questions

2007 H1 Q7 Either: With reference to examples, consider the extent to which the NIDL has been responsible for the global shift of economic activities in the last 15 years. [16m]

2008 H1 Q7 Or: Using examples, distinguish between the processes of de-industrialisation and re-industrialisation. [9m]

2009 H2 Q5 Or: With the help of one or more examples of a TNC, explain how its spatial organisation reflects the NIDL. [16m]

Impact of New Technologies on Work

· Analyse the impact of the new technologies on work.

Economic practices change and morph over time. Globalisation spurs innovative practices, which in turn spur globalisation.

1. Fordism / Just-In-Case (JIC) Production

· Mass production of standardised goods on assembly lines with strong hierarchical systems of reporting, checking and auditing.

· Focuses on minimising uncertainty.

· Strong labour unions.

· Specialised, planned, internal R&D departments.

· Practice of storing a relatively large inventory in case of a sudden increase in demand. Characterised by large assembly lines, large number of workers, large storage spaces and warehouses.

Fordism and Globalisation:

Such low-end, repetitive and labour-intensive jobs are easily replaceable and offshored to LDCs, leading to rationalisation and de-industrialisation in the DCs. Skilled workers become ‘de-skilled’ as a result of rationalisation. ‘Re-skilling’ and a mindset shift is required to adjust to the structural change in the economy.

2. Post-Fordism / Flexible Production Systems

· Highly efficient in material, space and labour usage to maximise value and product differentiation.

· SMEs play a larger role than TNCs in performing flexible, highly specialised activites.

· More networking between firms as it is based on inter-dependency.

· Less structured than Fordism – lesser hierarchy, increased self supervision and responsibility

· Features Just-In-Time (JIT) production. Labour supply closely adjusted to demand through part-time workers, multi-skilled workers or hire-and-firing workers.

· JIT production can occur within the main firm or outsourced to another.

JIT Production

JIT is defined as a form of manufacturing where goods are produced in quantities just enough to meet the demand for it, leaving little in excess supply in terms of inventory.

It is often practiced in highly volatile and ever-changing electronic industries where product life cycles (PLCs) change very quickly.

Example: Zara stock upgraded every other week, time between execution and conception only 5 weeks while GAP takes about nine months for this process.

Advantages of JIT

Disadvantages of JIT

· Delivered quickly, cost savings on storage space

· Quickly manufactured under shortest possible time

· Value-added by giving customers latest product

· Takes advantage of changing PLCs to earn more profits – responsive to market changes

· Adjusts labour based on demand – part-time or multi-skilled workers

· The entire supply chain cannot fail

· May not be able to meet unexpected demand surges

· Requires a waiting period for customers since everything is built ‘last-minute’

Outsourcing

Outsourcing refers to parent firms abandoning a part of its operations and hiring third-party firms to do these jobs for them. Outsourcing can be done locally, regionally or internationally.

Outsourcing allows resources to be better allocated due to better business focus and division of labour. It attempts to save costs without sacrificing on quality as much as possible.

An immediate consequence of outsourcing is the loss of jobs in the parent firm. In Singapore, SATS (Singapore Airport Terminal Service) and SIA (Singapore Airlines) have both outsourced various non-core operations, retrenching a large number of workers.

Advantages:

· Reduces capital inputs of setting up new plants, buying new machinery etc. by hiring existing manufacturers. No need to own the factors of production.

· Able to shift operations quickly to find the most efficient subcontractor. Spatial mobility – footloose.

Disadvantages:

· Quality of products might be compromised since QC may not be strictly enforced.

· Unpredictability of local conditions and factors such as labour.

· Possible leakage of confidential information such as production methods – the fake Nike shoes produced in China and Vietnam are as good as the official ones, just cheaper and not branded with the official logo.

Examples of outsourcing:

Iomega: Iomega Asia- Pacific used to own everything, including manufacturing plants, but now it sells its zip drive manufacturing plant to Venture Cooperations in Malaysia for $18 million.

Flextronics: A Singapore based firm that does sub-contracting jobs. It is the largest provider of contract electronic manufacturing and serves industries such as computer, communications, consumer electronics and healthcare.

Offshoring is different from outsourcing. Offshoring refers to shifting of factories to other countries or areas under the same parent firm. The parent firm still owns the factories, so greater control over quality is present, over managerial decisions. However, costs are involved in taking care of these factories, such as time, energy, manpower and money.

Reverse Outsourcing

Host companies may sometimes reverse their decision to outsource their operations, getting non-core jobs back into the parent company.

Reasons for reversing their decisions:

· Experience with outsourcing has not been beneficial – productivity and quality may have fallen as a result of lack of control of operations.

· Erosion of branding as a result of lower quality.

· Acquisition of greater economies of scale (possibly through mergers) and able to bring non-core jobs back into the parent firm.

Case Study: JPMorgan Chase

JPMorgan Chase used to outsource its IT operations to IBM. However, its merger with ‘Bank One’, a smaller but efficient IT-based firm caused it to terminate its outsourcing IT-related operations with IBM because of its gaining of greater economies of scale. It took back 4000 jobs which it had transferred to IBM.

Small Office Home Office (SOHO)

SOHO allows people to set up their own firms/offices in their own homes with the advancement of communications technology such as the Internet, faxes, scanners, phones etc. It usually involves the tertiary/quaternary sector, favouring service-based industries such as consultation, web-designing and artwork, as well as freelancers.

The advantage of SOHO is that it affords the comfort of working at home, as well as relatively low start-up costs. SOHO also results in the decentralisation of services from the city centre as a result of better transport as well as communications technology.

Cell Worker (Multi-skilled workers)

In the face of outsourcing and greater competition as a result of globalisation, firms have begun training their workers to multi-task. Instead of doing just one job, they are trained to operate in more advanced tasks and functions, usually with technological help. Some countries as a result bring outsourced operations back into the home country.

Although they cost more in wages, they also have increased productivity per worker. E.g. 1 cell worker in Japan equals 6 lower skilled workers in Malaysia. Panasonic has begun to use the concept of cell workers, saving jobs in Japan. Kenwood re-shifted its manufacturing out of Malaysia back to Japan despite higher wages, because of Japanese workers’ productivity, saving costs. Another example is Tribon Bearing Electronics in the US, maker of parts for aircraft engines, which also uses the cell worker concept.

The cell worker concept is relatively new – not every firm will be using it, largely because it involves a large amount of money to retrain workers.

JIC and JIT – Hybridisation of Systems

As an evaluative statement, firms nowadays are not purely Fordist or post-Fordist – rather, they are within a spectrum. In reality, firms fall somewhere in the middle of the two extremes of either hierarchy or flexibility. Firms practice a balanced combination according to what benefits them the most. For example, they may practice JIT, but not assimilate a culture of empowerment among all employees where anyone can freely contribute.

3. Established or Innovative Economic Practices

Strategic Alliances

Two or more businesses join together to offer a broader set of skills and services to clients, to the mutual benefit of the companies involved. An alliance between companies which provide different, but complementary, services or products creates an advantage over competitors by broadening the scope of their operations. Examples include the ‘Star Alliance’ of airline carriers, which include SIA, Thai Airways and Virgin Atlantic. Membership to the Alliance gives passengers access to shared private lounges, frequent flyer points etc.

Joint Ventures

Partnering with other firms to amass the capital required for a project. Common with larger projects such as damn-building or petrochemical plants, which involve huge sums of money as start-up costs.

Many LDCs opt for joint ventures today with TNCs, as these partnerships allow them a fair share of the profits as well as transfer of skills and technology.

Both alliances and joint ventures allow for firms to gain greater economies of scale, internationalise their production and integrate functions for larger profits. Thus, firms become more interconnected as a result.

Examples of joint ventures include Shell and Petronas in Iraqi oilfields, Alibaba and Yahoo in China in 2007, Dow Chemical and Corning for Dow Corning Corporation.

Business Networking

A culturally embedded concept, especially in Asia. It is established and widely practiced in Asian societies like Hong Kong, Japan, Korea and China. Japanese keiretsus and Korean chaebols are examples of such networking.

In this case, it is ‘who you know’ that drives economic decisions. Reliance on local partners and forming close relationships with them help to minimise risks in highly uncertain business environments.

Mergers and Acquisitions

M&A refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business entity.

Such a strategy also helps companies to gain further economies of scale. Examples include MittalArcelor, HP-Compaq, Lenovo-IBM, Geely-Volvo, and ExxonMobil.

TYS Questions

2008 H2 Q5 Either: With the help of examples, describe and explain the impact of new technologies on work in the manufacturing industry. [9m]

2010 H1 Q7 Either: Distinguish between the terms de-skilling, re-skilling and multi-skilling and explain why such changes have become important in the global labour market. [9m]

2010 H2 Q5 Or: Discuss some of the ways in which firms seek to ensure their competitive edge in the global economy. [16m]

Impact of Global Economic Change

· Discuss the impact of global economic change on the service sector.

· Discuss the growth and locational shifts in various economic activities.

The Rise of New Service Sectors – Quaternary and Quinary Sectors

Sectors of industries as classified:

Primary – extractive industries (mining, forestry, agriculture)

Secondary – manufacturing and processing industries (car manufacturing, ship building)

Tertiary – general services (administration, finance, banking, insurance)

Quaternary – a subsection of tertiary: encompasses knowledge-based sections of the economy such as information services and technology, education, consultancy and R&D

Quinary – a subsection of tertiary: includes health, culture, research and other government-led industries

The Reason for the Expansion of Higher Order Industries

Economic development – as countries and industries develop and mature, industries change to look towards higher order sectors. The growth of industries has been greatly accelerated by the process of globalisation, due to rising incomes and expectations, increased standards of living as well as higher levels of education and literacy among the workforce.

The progress of economic development is delineated by Rostow’s model.

The spatial division of industrial sectors can be generally seen to progress from LDCs to DCs, with increasingly higher order industries being of larger focus the more developed the economy is.

As such, industries like R&D are more prominent in the more economically advanced DCs, due to their highly educated workforce, growing middle class and rising incomes. Examples include Silicon Valley in the US. Singapore is also building such hubs, like the Biopolis and Science Parks.

A Look at Higher Order Industries

The quaternary and quinary industries are generally “Inventing and Thinking” in nature, encompassing things like R&D, biomedical and pharmaceutical industries, education sectors and government planning departments. The concept itself may be closely linked to what Richard Florida (2002) terms the “Creative Class”, which is a socioeconomic class consisting of knowledge-based workers whose main job is to think, be creative and innovative. Examples of such people include scientists and university researchers.

Locational Trends in Services

Decentralisation of Service Industries

The recent trend in services is that they have been suburbanising, relocating away from the city centre to the suburbs. This is largely due to improvements in transport and communications technology as a result of globalisation.

The main services which have suburbanised are smaller, more knowledge-based services such as graphic and interior design and architecture. This is linked to the rise of SOHO. These smaller services have no need for the high accessibility city centres afford due to the rise of communication technology.

On the other hand, key services such as banking and headquarters of major firms are still located within the CBD. Central economic and government systems are still located centrally because they require the accessibility, centrality, proximity to other functional links and prestige-of-name which the city centre affords.

Some sectors which have decentralised: The Singapore Science Park, which includes Reuters, Seagate and DSTA. Another example is the Pittsburgh Suburban Business Park in the US, which house R&D facilities, finance and administrative services.

Globalisation of Service Industries

The globalisation of services entails the outsourcing of services as well. While previously, it was largely manufacturing, non-core jobs which were offshored and outsourced, a number of factors have allowed and are the impetus for the globalisation of tertiary service industries as well.

1) The development of information technology. Some service-based processes can be done overseas through NIDL, such as finance, software development, accounting, data entry and call centres. India is a prominent example of business process outsourcing, notably call centres. In 2005, the size of business process outsourcing in India was US$5.7 billion, and had grown 44.4% from the previous year.

2) Growing quality of labour in LDCs. Higher education and literacy rates in what used to be LDCs such as India and China allows for the progress in industries to higher sectors. Thus, service sectors can also be outsourced to firms in these countries.

3) Growing ‘standardisation’ of service products. Due to globalisation, people’s needs have been generally standardising over time. This allows for similar service products to be outsourced overseas, and also allows for greater economies of scale to be gained.

4) Service diversification of manufacturing firms. Diversifying itself is a method of lowering risks for a firm. Manufacturing firms such as Wing Tai Apparels have branched off into property, hospitals and F&B markets. An increase in wealth leads to this diversification, which fuels the globalisation of such services.

5) Rapid growth of international trade of goods. The trade of goods also leads to requirements for supporting service sectors in other countries, such as logistics, administration, transport and regional support centres, which many firms such as HP have.

New Industries as a Result of Global Economic Change

The Rise of SMEs

Small and medium enterprises (SMEs) are classified as businesses with 50 (small) to 200 (medium) employees. They come about as a result of the maturing of the economy and increasing literacy rates, and are normally in the services sector. Due to their small size, they are highly versatile and adaptable to changes in market conditions, and often foster a spirit of innovation and enterprise within the business and between the employees. They also have great potential for growth.

Due to increasing demand for specialised goods in mature economies, SMEs provide specific services and serve specific needs. The small nature of SMEs makes it so that they require a supportive and stable environment to flourish, and this is often provided by the government. Government agencies such as Singapore’s SPRING Singapore provide venture capital for start-ups, provide connections, financing and networking assistance to SMEs, and overall cultivate an entrepreneurial culture in the economy.

As such, SMEs have become an important sector in some economies today. For example, Singapore’s SMEs contribute up to 25% of GDP, as well as provide employment for 62% of the workforce. SMEs are also a key segment of the Mexican economy. As of 2006 there were about 4 million enterprises in Mexico – 99.8% were SMEs. About 52% of the Mexican GDP is generated by SMEs. They contribute 72% of the formal employment in Mexico.

In Mexico, SMEs are termed PyMEs (Spanish: pequeña y mediana empresa). The Mexican government has many programs to assist the growth of PyMEs, including Proyectos Productivos (Productive Projects), which helps to finance investment projects that improve the competitiveness of PyMes. This helps to trigger the creation and maintenance of jobs and regional development. The most important project is the financing. These funds are mostly targeted to production projects. The projects have to help by developing, expansion and consolidation of the enterprises.

Another program, the SPyME (Subsecretaría para la Pequeña y Mediana Empresa) was created to promote, encourage, and design tools and programs with the purpose of creating, consolidating and developing micro, small, and medium enterprises in the international market.

The Creation of Hubs

Hub creation is a marketing strategy – the concentration of similar activities in one area allows for grater information exchange and cooperation, a cluster of industries which generates more economies of scale than a single one. This is often spearheaded by governments, who have the ability to allocate the land required to set up such hubs. It is also a strategy to attract more foreign firms into the country – this is often coupled with incentives to locate in the hub.

For example in Singapore, Jurong Island is touted as a petrochemical hub. The ASTAR is also termed a biomedical research hub. Singapore is also looking to be an education hub with the building of more universities such as the SUTD, and even enticing schools such as the Tisch School of Arts to come to Singapore. Collaborations such as Duke-NUS and Yale-NUS are also occurring.

Another example is the Silicon Valley itself. Its location and growth encouraged by the presence of investors. Local universities like Stanford and Berkeley provide the talent. Its advantages included a high availability of capital, and firms were attracted by its prestige. It had a previously large and pleasant working environment, and there was access to cheap labour for assembly of products. Fast communication networks led to rapid growth of market demand. But now, due to lack of space, rising labour and land costs and a high social stress culture has led to diseconomies. This led to the dispersal of firms: Apple now has branch plants in Ireland and Singapore. Increasing social segregation and inequality between skilled and unskilled workers also occurred.

The Deregulation and Privatisation of Public Services

Increasingly, there is the trend of government firms privatizing to allow for more competition. This is to achieve greater efficiency and productivity of these sectors, and to benefit the consumers and citizens more.

Examples of some sectors are telecoms (Singapore Telecoms becoming Singtel, and Starhub and M1 have entered as competition), environment (SembCorp) and electricity (Singapore Power, Keppel Energy and Senoko Power).

By privatizing, the market is open for more competition, even global competitors. The result is more competitive pricing as well as variety and value-added services for consumers (such as the various plans and packages offered by Singtel and Starhub). The key contention with privatizing such utilities is that people wonder whether basic needs like energy should indeed be served by economic agents with a focus on profit motive instead of working for the benefit of the people.

TYS Questions

2007 H1 Q7 Either: Outline the differences between the terms tertiary, quaternary, and quinary, as they are applied to the service sector of the economy and briefly account for their recent growth. [9m]

2008 H1 Q7 Either: With reference to examples you have studied, examine the impacts of global economic change on the service sector of employment. [16m]

2008 H2 Q5 Or: Explain the meaning of the terms quaternary sector and quinary sector. Using examples, describe recent changes in either one of these sectors. [9m]

2009 H1 Q7 Or: With reference to an area or areas you have studied, distinguish between the terms quaternary and quinary sectors of economic activity and explain their growth. [9m]

2009 H2 Q5 Or: Outline the nature of the research and development industry (R&D) and suggest reasons for the global inequalities in R&D expenditure shown in Fig.5. [9m] (no figure attached here)

2. Transnational Corporations

Characteristics, Spatial Organisation, Linkages with Host Economy

· Discuss the characteristics of TNCs.

· Discuss the spatial organisation and structure of TNCs.

· Discuss the command and control relationship between TNCs and the host economy.

· Analyse the social and economic impact of TNCs on the economies in which they operate.

· Discuss the role of governments in attracting investments.

Characteristics of TNCs

A TNC is a firm with two or more branch plants across international boundaries, usually organised in a spatial hierarchy of control and production, with main HQs in the home country and production plants in host countries. Very large TNCs are powerful economic forces that affect the economic fortunes of many countries by the way they make their locational and investment decisions.

Diverse product range. Many TNCs have a wide range of products and brands, maybe even different sectors of the economy under one name. This diversification assists in gaining economies of scope and scale. Examples include Unilever (which owns Lipton, Lux and Axe), General Motors (Chevrolet, Daewoo, Vauxhall) and Yamaha (musical instruments, motorcycles).

A powerful economic force. Due to large market share and revenue size, where TNCs decide to locate their operations and investments has large impacts on both their home and host economies. For instance, the top four seed TNCs control 53% of the global proprietary seed market: the leader Monsanto – accounts for 23% of this market. They also directly employ around 45 million people and provide jobs indirectly for millions more. In the mid 1990s, employment stood in excess of 73 million people in TNCs. TNCs control 75% of world trade, and their incomes are even greater than the GDP of some countries. Combined annual incomes of Ford and GM in the early 2000s are greater than the GDP of the whole of Sub-Saharan Africa. As a result, major TNCs which contribute large proportions of GDP have gained leverage over the governments in countries, especially those with weak governments prone to corruption, such as Shell in Nigeria.

Controller of foreign direct investment. The spatial distribution of TNC investment is selective and uneven. They are focused on three main regions: Europe, East Asia and America, mainly because these are the locations with stable governments and economies which are either mature or have great potential for growth. The African continent is often neglected due to this and not being in close proximity to most DCs. The decisions of TNCs have thus served to widen the socioeconomic gap in the world. Apart from that, TNCs make FDI decisions which are beneficial to them, like the US investing in countries with which it has free trade agreements, or South Korea investing in the US because of its historical ties as an ally in the Korean War.

Internationalisation of the operating process. For many TNCs, their operations are spread out across the globe, closely related to NIDL. Their operations will be located in the places which have the best comparative advantage, like labour-intensive manufacturing in LDCs with cheaper and more abundant labour and the main HQs and R&D located in home DCs, where more capital, skilled labour and better technology is available. Regional locations and HQs will also be present to cater to regional needs better, and these are often located in NIEs of that region.

Global mindset, not homogeneity. While TNCs and businesses in general are perceived as homogenous profit seekers, TNCs in fact have to adapt their operations to suit the local culture in order to gain more profits. Thus, TNCs differ from location to location, their structures and operations often reflecting the society they operate in. In France, ‘McDonald's added tablecloths and candles to improve the ambience at some eateries and introduced waiter service at certain outlets because they found that most Europeans prefer leisurely rather than fast food dining’. In addition to space, McDonald’s has changed its menus from one country to another, offering food that locals usually eat.

The home culture of TNCs also affects the way they behave. Korean chaebols and Japanese kereitsus place a lot of emphasis on respect and loyalty, and are unified by tradition and custom rather than cross ownership. They provide a great variety of goods and services and are picked by MITI (Japan) or EPB (Korea 5-year plans) and supported by government financing and protective barriers (tax credits, low-interest loans, tariff reduction to encourage investment in the company and export industries in general), yet they are highly competitive as they are forced to immediately export, hence competing with international exporters. US TNCs have a “hire and fire” culture, which is completely opposite to the trust based system of some Asian businesses.

Spatial Organisation of TNCs

As mentioned, TNCs organize their operations spatially according to what benefits them the most and what strategies they are pursuing. However, in general, how they delineate their processes is as follows:

Core Headquarters and Main R&D – Home Countries. Often located in developed, home countries, HQs are the ‘nerve centres’ of TNCs where they are at the top of the command structure. Key decisions and strategies are formed in these HQs, such as investment, production and research decisions. Being the apex of management and financial controller, HQs require strategic locations in major areas such as global cities which provide access to high-quality services, skilled labour and infrastructural and communications support. For example, BMW is headquartered in Munich, the third largest city and a major financial centre in Germany.

R&D encompasses product development, new technologies and operational research. As a result of the importance of earnestly developing new products and services, the most important R&D takes place in home countries as well, due to similarly higher skilled labour, supporting technology and infrastructure. Monsanto’s R&D HQ is located in St Louis, Michigan.

Regional Headquarters and Operations – NIEs. In order to facilitate processes in regional areas away from host countries, regional headquarters are ideal. Due to some managerial decisions also being decided here, as well as regional R&D located here, local DCs or NIEs with the required capital, infrastructure, accessibility and potential for growth are desirable. For example, Singapore alone is a major destination for many regional hubs in SE Asia, including LinkedIn, Rohde and Schwarz, and Rolls-Royce’s Marine headquarters.

Logistics, Branch Plants and Periphery Operations – LDCs. It is the most spatially mobile part of TNCs largely because of its homogenous requirements, and periphery operations not requiring the advanced supportive infrastructure and skilled labour. Instead, comparative advantage is desired with cheaper, lesser skilled labour and lower support services (transport and logistics) required.

Impacts on Host Economies

Positive Effects on Host Economies

Positive Economic

Direct job creation via employment

· Many labour-intensive jobs created, such as in manufacturing.

· Shell has employed 5000 locals directly to work in its oil extracting plants, and employed another 20000 people indirectly, increasing employment in the local delta area, increasing per capita income

· Nike employs 660 000 workers indirectly to do contract manufacturing work

· Coca Cola directly employs 13 800 workers in China

· Sime Darby, a Malaysian agricultural TNC, plans to develop Guthrie Rubber Plantations in Liberia, providing 20 000 jobs

· In 1972, Jurong Industrial estate housed 417 plants employing 48 000 people, all employed by TNCs

Industrial linkages – multiplier effects, collaboration

· Primary industries like rubber production can increase profits by supplying their rubber products to the manufacturing plants for the production of Nike products

· Coca Cola has an estimated multiplier effect in China of 414 000 people

· In 2010, Shell set up a 12 billion US dollar joint venture with Cosan, Brazil’s biggest sugar and ethanol producer, contributing 1.6 billion in cash for uses such as biofuel research. This JV also allows for better economies of scale

Transfer and improvement of technology

· Japan’s MITI taking IBM technology blueprints for Japanese firms

· Farmers in India taking Monsanto’s gene technology via cross-breeding to improve their other crops

· In Nigeria, Olam (Singapore) provides farmers with all inputs, including certified herbicides, crop protection chemicals, fertilizers and sprayers, and its foreign affiliate runs a model farm for capacity-building seed multiplication

Skill transfer

· In Chinese manufacturing in the period 1993-1999, there was a positive effect on domestic industries from TNC activities. Those enterprises with foreign ownership or foreign ownership/capital structures did better

· Intel, IBM, Microsoft and Texas Instruments invested in research centers in India to train and employ thousands of Indian engineers at low costs

Economic improvement

· In Nigeria, oil exports by Shell is a very important part of the country’s economy, accounting for 20% of GDP and 95% of its export earnings

· In 2002, Toyota exports in UK made a 500 million pound net contribution to UK balance of payments

· Coca-Cola spent 8.16 billion RMB in 1998 alone

· With about 1200 million worth of FDI coming into Singapore in 1980, TNCs controlled 74% of manufacturing output, and 58% of workers in manufacturing centre, and even 75% of all capital expenditure in the sector.

Positive Social

TNCs engaging local communities

· Dow Chemical contributed $500000 to Habitat for Humanity China for their Post Flood Rehabilitation program through Save and Build. Homes were rebuilt for 110 families in Guangdong Province in China.

· Citibank pioneer funder of microfinance programs in various ELDCs, give small loans of US$100 to start business

· NIKE loans to women in Thailand to set up businesses

Increasing incomes and social welfare

· People living on less than a dollar a day reduced from 79 to 27 percent in China, 63 to 42 percent in India, and 55 to 11 percent in Indonesia between 1981 to 2000

· Housing area per capita in urban areas has grown from 6.1square meters to 26 square meters from 1980 to 1995

Positive Environmental

Environmental programmes by TNCs

· Reclaim previously degraded land using high technology remediation schemes which host country does not have the resources to do on its own, such as reforestation in the Amazon

· A 1997 study by Eseland and Harrison found that foreign-administered plants in Mexico were statistically correlated to be significantly less pollutive than local plants, possibly as they had the necessary capital

Negative Effects on Host Economies

Negative Economic

Exploitation of cheap labour

· In LDCs, the local labour force is often exploited with long working hours and low rates of pay. Young children are often employed and membership of unions is not allowed. Skilled and managerial positions are often filled by people from the country of origin.

· Some claim human rights violations of such TNCs, such as Namibia’s Ramatex factories, who do not provide workers with protective masks.

· In Indonesia, after the rupiah collapsed in 1998, Nike did not adjust the wages of workers in their offshore factories, essentially underpay