Chapter 5 The Political Economy of Global Production and Exchange
TABLE V.9 World’s Largest Transnational Corporations (Financial and Non-Financial)
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TABLE V.9 World’s Largest Transnational Corporations (Financial and Non-Financial) Listed by Assets or Revenues Financial TNCs Assets Non-Financial TNCs Revenues (2008) ($ trillion) ($ billion) BNP Paribas 2.949 Exxon 477.4 Royal Bank Scotland 2.682 Royal Dutch Shell 458.4 HSBC 2.364 Wal-Mart 404.3 Bank of America 2.339 BP 365.7 Japan Post Bank 2.320 Chevron 273.0 Deutsche Bank 2.261 Conoco-Phillips 240.8 Barclays 2.237 Total 234.6 Credit Agricole 2.232 PetroChina 221.6 Mitsubishi 2.184 China Petroleum 220.4 JP Morgan 2.135 Toyota 204.0 ICBC 2.044 General Electric 182.5 Citigroup 2.002 Volkswagen 166.5 Bank of Tokyo 1.841 Eni Group 158.2 ING 1.673 General Motors 149.0 Mizuho 1.672 Ford Motor 146.3 China Construction 1.642 Daimler 140.3 Sumitomo Mitsui 1.600 E.On 126.9 Bank of China 1.588 ArcelorMittal 124.9 Lloyds 1.575 Hewlett-Packard 118.4 Agr. Bank of China 1.570 Fiat 116.0 Banco Santander 1.546 Siemens 116.0 Societe Generale 1.467 Thyssenkrupp 114.3 Unicredito Italiano Spa 1.331 Samsung 110.3 UBS 1.290 IBM 103.6 UniCredit 1.245 Honda 99.5 Wells Fargo 1.244 GDF 99.4 Commerzbank 1.145 Metro AG 99.4 Credit Suisse 1.022 Hitachi 99.4 Source: UNCTAD Annex Tables, Nos, 26 and 28, http://www.unctad.org/Templates/Page.asp?intItemID=5545&lang=1 Author’s calculations from various annual reports. Comparing the size and influence of TNCs and nation-states is a very tricky venture, as these are quite different entities. Nonetheless, no matter which metric we use, TNCs represent large and important actors in international political economy. Clearly, the total resources of some nations, based on the entire economic output of a nation, dwarf that of TNCs. However, note this is true for only four or five nations; BNP Paribas, a global financial institution originating in Europe but with operations in 80 nations and with 200,000 employees, is one of the five or six largest economic entities in the world. Firms similar to BNP Paribas – global financial firms – control enormous resources as assets and have very large effects on nations and firms through their investment and lending behavior. Notice there are ten financial firms with economic resources that approximate those of Germany, Russia, Brazil, U.K. and France. And there are 26 financial TNCs with economic resources greater than Indonesia (population 245 million) or Turkey or Australia. Though these firms have little military force and do not control territory, they are able to augment their resources with the ability to operate throughout much of the world. Transnational firms are more diverse than might be expected. Though most TNCs are private firms, meaning the ownership of the shares is in the hands of private individuals and institutional investors, an increasingly important set of TNCs are owned, in part or whole, by governments. An especially important group of state-owned enterprises (SOEs), that operate globally as TNCs, are in the energy business. Indeed, the very largest global energy firms are state-owned.32 These include firms such as Saudi Aramco, Petrobras (Brazil), and China National Petroleum Company, which dominate much of the production of oil around the world.33 Many of these firms, especially those from China, operate across the world looking for, producing and distributing energy products. Another important category of state-owned TNCs is financial firms. From China, where state-owned covers a multiplicity of forms, to a variety of nations benefitting from global trade, many nations have created investment firms to leverage their large holdings of foreign reserves. These are referred to as sovereign wealth funds (SWFs). Many nations have built up a very large financial surplus from trade relations and have chosen to establish a unit of the government to invest these funds. From China, with its gargantuan four trillion dollar holdings of foreign reserves, to a collection of several energy surplus nations (Saudi Arabia, UAE, Abu Dabi, Kuwait), to nations with large trade surpluses (Taiwan, Korea, Japan), there are many very large and important sovereign wealth funds.34 Perhaps the most successful example is in Singapore, where the government owns two large SWFs with assets totaling about $400 billion. The goals of the Singapore SWFs are related to enhancing the economic capabilities of the government and the economy, with an exemplary record of accomplishment. Though there is increased concern about the potential impacts of SWFs, the real and unanswered question is whether state investments will operate any differently from private funds.35 A broader conception permits us to see beyond the categories of private and public to understand the deeper partnership between governments and firms in the management and governance of the global economy.36 Why do firms engage in FDI? The commonly understood answer – to gain access to lower wages and easier sets of business rules – is correct but misleadingly narrow and incomplete. Because labor is a declining proportion of production costs, there are increasingly more complex reasons for operating abroad and especially for operating a globally dispersed business. There are now a vast array of global resources located in a wide variety of nations and TNCs typically seek to gain competitive advantage from a unique organization of those resources. Perhaps one of the most surprising reasons for global TNC investment is that emerging economies contain not only many workers but many consumers as well. Economic growth brings higher wages and incomes and an expanding middle class. TNCs want to sell their products where markets are growing rapidly. Increasingly, this means production, distribution and marketing capabilities to serve these emerging markets. An example is the auto market in China – now the largest in the world – and in which the German firm Volkswagen and the U.S. firm General Motors produce and sell more cars than in any other market. Though these markets usually require new kinds of products specialized for different tastes, the ability to spread costs, risks and demand fluctuations over a new set of consumers provides a compelling incentive for FDI. But surely the most important purpose for TNC investment in recent years is to gain access to specialized capabilities in a particular environment. Global production is increasingly knowledge-intensive and specialized knowledge is now widely distributed across the world. The competitive advantage of a firm now often rests on the ability to assemble a unique set of global resources. This means developing a sophisticated global scanning and knowledge-gathering capability. Then, it must act organizationally to develop a product mix and innovation capacity and distribute its production facilities – inside and outside the firm – to those locations with the kinds of specialized resources to enhance the efficiency and effectiveness of the system. For example, in 2006 one of the world’s great firms – IBM – relocated a critically important part of its entire business operation from the United States to China. The process of procurement – the purchasing of all the resources IBM uses to operate its business - was moved to the southern Chinese city of Shenzhen. This was not much related to the costs of labor in China but rather to the tremendous concentration of knowledge workers in procurement in the Shenzhen area. It was not the low wages of these workers but the cluster of knowledge capabilities they collectively create that drew IBM half way across the world.37 Another example comes from India, which has provided IBM and other software services firms with low cost but highly skilled software engineers. But, as with procurement in China, IBM has various operations that allow it to gain access to complementary skills in numerous locations around the globe and much of its global competitive advantage comes from the ability to organize and combine these knowledge resources.38 Put simply, low wages is of declining importance for the operation of global firms and specialized knowledge resources of rising importance in explaining global FDI patterns.39 Global/Regional Production Networks The extraordinary expansion of emerging market economies, described at the beginning of this chapter, is linked in part to new forms of relationship among transnational firms, national and local governments, and local firms in these nations. Moreover, this set of relationships reflects the creation of various forms of local but globally specialized assets sought out by TNCs in their FDI activities. The global and regional production network (GPN) is a new system of production and involves the partnership of TNCs, states and local firms to reorganize the scale and geography of production based on the capabilities of information technology. Understanding the global production network requires that we consider how the production of goods takes place. An important concept is the value chain, which refers to the various elements and activities that are involved in production. Consider the value chain of a computer. It must be designed so all the components - the solid state drive, memory, the microprocessor, the different kinds of software, the LCD screen, and other related components - work effectively together. The various components must be manufactured, and sometimes rapidly improved, so they work together and with a high level of reliability; the parts must be assembled in one place; the computer must be sold, perhaps online and in a retail store; it must be marketed, with ads in various kinds of media; it must be delivered; it must be serviced if something goes wrong; and the entire process must be organized and managed. Collectively, these make up the value chain. Though an automobile is much more complex in the number of parts and the design, it too has a comparable value chain. In the 1960s and earlier, a very large part of the value chain of a computer (then a mainframe, as there were no PCs) was organized within the direct control of a single firm, largely because of the information and communication difficulties and costs of controlling production. It was usually better to make it yourself than to find some other firm. For example, IBM integrated production of most of the parts and the software within IBM and most of this took place within the United States. This was common for most large companies. Even when subcontractors were used for production of certain components, almost always these firms were located within the home country of the buyer of these parts. Interestingly, it was computers – personal computers – and the ability to link these computers together inexpensively – that changed this process and gave us the global production network. The rapid improvement in the processing power of personal computers, at a falling price, coupled with the ability to network computers and communicate directly with each other has had a vast impact on the globalization of production.40 Quite simply, the globalization of production (and finance) has been made possible by the long-term and exponential declines in the cost of creating, manipulating and distributing information, even on a global scale. The changes wrought by this are truly stupendous. Consider the comparison of an advanced desktop personal computer from 1982 with an iPhone 6 of 2014. The iPhone 6 has a processing power that is 350 times that (1.4Ghz versus 4Mhz) of a $2500 1982 desktop and costs one-fifth that of the same desktop (even less in real dollars). When you add in the fact the iPhone 6 weighs about 1/100 of the desktop, is a global phone, connected to a global internet, takes high quality photos and HD video, and you can talk to it and it answers back and the differences are nothing less than miraculous. When connected to the system of production, these information and communication technologies have altered dramatically the location and the process of the production of goods and services. One of the first changes relating to computers was the containerization of global shipping, with vast ships loaded with large container modules full of a diversity of products. The containers were quickly loaded and unloaded and switched to a truck or train for delivery. Keeping track cheaply of the goods and their destinations was through computers and linked to a specialized and sophisticated port infrastructure usually built by the government.41 In addition, rapidly falling costs of information and communication removed many of the managerial barriers to operating production around the world. Firms are constantly looking to achieve competitive advantages by lowering costs and therefore the prices of their products. There are large gaps in wage levels between rich and poor nations that offered significant potential for lowering costs, but achieving these gains was very difficult because of several problems that were solved in the years after 1965. One was the continuing decline in tariffs, not only in the markets of rich nations but also in poor nations. A second was the weak infrastructure and business systems in many poor nations. Several nations in Asia began upgrading these capabilities, sometimes in a focused area known as a “special economic zone,” and making commitments to continuous upgrading for the future. The third was the large difficulties in managing firms at long distances. Computers and networks changed that by continuously lowering the costs of creating, applying and distributing information. The result was to shift much of the production and assembly part of the value chain from the rich home country of a firm to nations where costs were lower and then to independent firms operating in those nations that specialized in those parts of the value chain. Sometimes referred to as the “fragmentation” of the value chain, this meant breaking up various elements of the value chain and offshore outsourcing them to an independent firm usually operating in another nation. Major sources for this offshore outsourcing from the 1970s on were Singapore, Taiwan, Hong Kong, Korea, Malaysia, Thailand, Vietnam and especially China. New specialized firms emerged, operating in these nations to provide the production processes and services outsourced by global firms who would retain control over the design, branding and marketing of the products. For example, throughout the period after 1984 Apple has designed and created many new computer products, music players, phones and tablets. Apple has many suppliers who operate factories around the world, none of which is owned by Apple. One of the most important is Foxconn, a company from Taiwan that operates numerous very large production and assembly facilities in southern China and elsewhere.42 Apple is an example of a “global network flagship” firm, a TNC organizing and coordinating production of their products through a variety of suppliers that often are themselves global firms.43 Many other firms, such as Cisco, Nike, GAP and even Disney for its toys, operate the same way. The rise of global production networks fueled much of the spectacular economic growth of nations able to attract and/or create firms related to this process. And, GPNs served to affect dramatically the overall structure of global trade and the global economy. A large part of what we call globalization – especially the globalization of trade - is really the global diffusion of production. The process of shifting production abroad to take advantage of cost advantages requires TNCs either to set up a production facility abroad or to engage in offshore outsourcing to an independent firm. This can mean a western firm – such as Flextronics – establishes production facilities abroad and engages in production for a flagship firm. Or a local firm – such as Taiwan Semiconductor Manufacturing or Samsung (Korean) – establishes these facilities and obtains contracts for production. Such a system often means different parts of a product are manufactured in different countries and then brought together for assembly in yet another nation (often China). The result is a set of global or regional trade networks that follow the geography of global production. One outgrowth of this process is the emergence of regional trade agreements, which are specialized trade arrangements among nations to reduce tariffs and other trade barriers and thereby facilitate this kind of trade. The production capabilities of nations, combined with the benefits of a regional trade arrangement, represent a competitive advantage for attracting and locating additional production.44 At the same time GPNs enhanced the economic capabilities of some nations, this new system also had measurable effects on the global economic system as a whole. Perhaps most important, GPNs were central in creating new global economic structures. The most important processes of economic relationships in the global economy have shifted from trade among nations to the interactions among firms and between firms and states. Global production is now far more important than exchange that simply crosses borders and both global production and trade depend on the partnerships between TNCs and states for developing the industrial ecology that supports both processes.45 These partnerships, especially in more knowledge-intensive industries, are built around continuing flows of FDI and of technology and knowledge leading to long-term changes in the diffusion of knowledge and to the potential for continuing economic upgrading. 46 The very capacity for building manufacturing systems, and for innovating those systems, has been shifted in great measure from rich nations to emerging economies. Increasingly, firms from emerging markets have leveraged their knowledge and technology resources into the much more lucrative design and product development part of the value chain, especially as this relates to production processes. Even the most advanced parts of innovation are now being done in the same emerging nations.47 IV: Regions of Production, Trade and Investment The European Union An important question for thinking about the trends in global political economy is whether we should examine globalization as a process sweeping across much of the world and providing for unifying and integrating processes, or whether we should see the world fragmenting into separate and distinct regions.48 Do special trade agreements framed around geographic regions – some call these preferential trade agreements - have the effect of enhancing trade among nations or simply diverting trade from one place to another?49 The viability and effectiveness of systems of regional trade can be examined as a first step by considering the most important, the European Union, now more than fifty years old. Though certainly not the first preferential trade agreement, the European Union (EU) is surely the most important as it encompasses twenty seven countries with a total population of 500 million and a combined GDP equal to that of the United States. Europe dominates global trade as a result mostly of very high levels of exchange within this region. Moreover, the EU has become much more than a PTA with a complex system of political processes and its own currency, the Euro. As such, the EU is the most far-reaching effort at international cooperation, consistently seeking to expand its membership as well as the issues under its jurisdiction. The European Economic Community or Common Market, as today’s EU was once called, was established in 1958. The original six members50 sought to use the creation of a common tariff area as a means to resolving some of the lingering political conflicts that had troubled Europe for the preceding 75 years. This common market would provide important new markets for the products of individual nations and the increased level of interdependence was expected to promote enhanced levels of political cooperation. In addition, the economic and political successes of the original six served to draw other European nations into the system as well.51 The expansion of membership in the EC was accompanied by an enlargement of political capabilities and a deepening of economic interdependence within the European Community. In 1985 agreement was reached on moving beyond the removal of tariff barriers to the elimination of non-tariff barriers as well. In addition, the community sought to establish common standards across the members on a wide range of trade-related matters in order to facilitate the free movement of goods, money and people. The process of political decision making on EEC issues was shifted much more to a majority vote, with much less of a possibility for any one member to veto a decision. In 1991, at Maastricht, the Netherlands, the members of the European Community reached agreement on the goal of much greater integration through n economic and monetary union. Adopting the name, European Union, was linked to a series of arrangements to deepen multilateral decision-making, a common foreign and security policy, and establish a common currency. Creating the common currency – the Euro – between 1999 and 2002 was certainly the most significant form of economic and political integration, one that forced the greatest sacrifice of sovereignty.52 Though the decision for a common currency permitted some nations in the EU to opt out, there were compelling reasons to move in this direction. Most important was that closer integration in trade made for closer integration in money. This was first recognized in the 1970s when the community adopted mechanisms to link exchange rates, supported by procedures to coordinate monetary and fiscal policies. The success of this effort helped prompt decisions to permit the unhindered movement of money, community-wide branch banking and an integrated market for financial services. Once money began to move freely, large benefits and costs were associated with developing a single monetary unit that would operate across this geographic area. FIGURE V.4 The European Union 
Source: Nations Online Project, http://www.nationsonline.org/oneworld/europe_map.htm FIGURE V.5 The Eurozone 
Eurozone participation European Union member states (eurozone) – 19 European Union member states not in ERM II but obliged to join – 7 European Union member state in ERM II, with an opt-out – Denmark European Union member state not in ERM II, with an opt-out – United Kingdom non-European Union member states using the euro with a monetary agreement – 4 non-European Union member states using the euro unilaterally – 2 Source: Wikipedia http://en.wikipedia.org/wiki/Eurozone Notwithstanding the powerful reasons for a single currency, there are also strong countervailing arguments. Creating the money for a nation and managing the money supply is a core feature of modern national sovereignty. A single currency for the EU negates many of the prerogatives of the nation state, not the least of which was the ability to influence economic growth through monetary policy. Nations often differ substantially in their domestic commitment to a loose or tight monetary policy, that is, whether or not the nation will expand its money supply to boost growth. Within Europe, one nation had historically provided a strong anchor for a tight money policy, working to restrain the inflationary effects of too rapid a growth in the money supply: Germany. Differences among Eurozone nations about monetary policy have been greatly exacerbated by the global financial crisis. Operating a single currency successfully would mean a real sacrifice of fiscal policy as well, with all nations conforming to a unitary standard based on Germany. What’s more, a single currency obscures the reality that different countries in the EU have very different levels of competitiveness and operate with wide variations in their balance of trade, some with significant deficits and some with large surpluses. Adjusting these imbalances now are somewhat disconnected from the value of the Euro and must rest primarily on wage levels. Notwithstanding the monetary difficulties of the Euro, trade relationships of the European Union have been spectacularly successful. However, the economic growth in Europe associated with the creation of the Euro contained numerous structural problems that ultimately threatened the EU once the global financial crisis struck in 2008. In the years preceding the crisis, the economy of production and trade and the economy of finance failed to produce balanced growth. Much like the U.S., financial speculation combined with a rapid expansion of debt (government and private) to create widespread vulnerabilities across much of Europe. Between 2000 and 2010, EU external exports rose by 58.7% to €1.349 trillion; in the same time, external imports to the EU rose by 52% to €1.509 trillion. The composition of this trade changed substantially in terms of the weights of various trading partners over time. These changes can be seen in Table V.10 Directory: tlairson -> ipe tlairson -> Nyt amid Tension, China Blocks Crucial Exports to Japan By keith bradsher published: September 22, 2010 tlairson -> China Alters Its Strategy in Diplomatic Crisis With Japan By jane perlez tlairson -> The Asia-Pacific Journal, Vol 11, Issue 21, No. 3, May 27, 2013. Much Ado over Small Islands: The Sino-Japanese Confrontation over Senkaku/Diaoyu ipe -> Chapter IX power, Wealth and Interdependence in an Era of Advanced Globalization tlairson -> Nyt india's Future Rests With the Markets By manu joseph published: March 27, 2013 tlairson -> Developmental State tlairson -> The Economist Singapore The Singapore exception To continue to flourish in its second half-century, South-East Asia’s miracle city-state will need to change its ways, argues Simon Long tlairson -> History of the Microprocessor and the Personal Computer, Part 2 ipe -> For richer, for poorer Growing inequality is one of the biggest social, economic and political challenges of our time. But it is not inevitable, says Zanny Minton Beddoes Download 225.82 Kb. Share with your friends:
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