Human Geography – The Globalisation of Economic Activity Uneven Development in the Global Economy

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  Headquarters - Core
  
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    Located in DCs
    
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    Contains higher value operations such as research and development, concentration of talent and power
    
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      Nike employs 23 000 people directly in the core and semi-periphery
      
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  Regional Headquarters – Semi-periphery
  
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    Located in newly industrialized country or BRIC or DC
    
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    Regional administration, marketing and logistics
    
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    Mid-level operations, uses local talent along with foreign professionals
    
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      Nike’s sub HQ’s are in Brazil and in Europe
      
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      Standard Chartered private banking HQ in Singapore
      
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  Manufacturing – Periphery
  
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    Located in LDCs
    
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    Lower-order, less valuable activities
    
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    Branch plants/offices
    
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      Nike employs 660 000 contract workers from outsourcing, mainly in the periphery
      
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    However, rise of TNCs in LDCs like China – Geely/Volvo, Lenovo/IBM
    

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  More employment opportunities. From 1953 to the late 1990s, the developing economies’ share of world manufacturing output more than quadrupled from 5% to 23%
  
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  Increase in standard of living
  
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  Technological and skill transfer
  

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  Limited to selected labour intensive industries
  
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  Tech and skill transfer is limited
  
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  Subject to TNCs restructuring and organising themselves
  
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  Economic and political dependency
  

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  Tertiarisation and beyond, focusing on higher value industries
  
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  More competitive product pricings (outsourcing, offshoring)
  
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  More profits
  

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  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%.
  
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  Deskilling of workforce
  
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  Social-political resentment towards LDCs, protectionism (EU)
  

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

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   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.
   
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   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.
   
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   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.
   

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 1^st wave. They have become the core/developed countries, which are now the leaders of the 2^nd wave of NIDL.

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

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  Mass production of standardised goods on assembly lines with strong hierarchical systems of reporting, checking and auditing.
  
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  Focuses on minimising uncertainty.
  
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  Strong labour unions.
  
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  Specialised, planned, internal R&D departments.
  
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  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.
  

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.

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  Highly efficient in material, space and labour usage to maximise value and product differentiation.
  
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  SMEs play a larger role than TNCs in performing flexible, highly specialised activites.
  
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  More networking between firms as it is based on inter-dependency.
  
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  Less structured than Fordism – lesser hierarchy, increased self supervision and responsibility
  
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  Features Just-In-Time (JIT) production. Labour supply closely adjusted to demand through part-time workers, multi-skilled workers or hire-and-firing workers.
  
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  JIT production can occur within the main firm or outsourced to another.
  

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.

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:

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  Reduces capital inputs of setting up new plants, buying new machinery etc. by hiring existing manufacturers. No need to own the factors of production.
  
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  Able to shift operations quickly to find the most efficient subcontractor. Spatial mobility – footloose.
  

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  Quality of products might be compromised since QC may not be strictly enforced.
  
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  Unpredictability of local conditions and factors such as labour.
  
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  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.
  

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:

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  Experience with outsourcing has not been beneficial – productivity and quality may have fallen as a result of lack of control of operations.
  
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  Erosion of branding as a result of lower quality.
  
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  Acquisition of greater economies of scale (possibly through mergers) and able to bring non-core jobs back into the parent firm.
  

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.

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.

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.

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.

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:

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.

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.

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   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.
   
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   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.
   
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   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.
   
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   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.
   
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   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.
   

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.

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.

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.

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.

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.

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:

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.