14.2 The globalisation of industrial activity

The development gap has significant consequences for people in the most disadvantaged countries (Table 14.1). Development may not bring improvements in all four areas at first, but over time they should all show advances. Table 14.1 Consequences of the development gap

Global integration is spatially selective: some countries benefit, others it seems do not. One in five of the world’s population lives on less than a dollar a day, almost half on less than two dollars a day. Poor countries frequently lack the ability to pay for (1) food (2) agricultural innovation and (3) investment in rural development. More than 850 million people in poor countries cannot read or write. Nearly a billion people do not have access to clean water and 2.4 billion to basic sanitation. Eleven million children under 5 die from preventable diseases each year. The inability to combat the effects of HIV/AIDS is of huge concern. Poor countries have increased vulnerability to natural disasters. They lack the capacity to adapt to climate-change-induced droughts. Poor farming practices lead to environmental degradation. Often, raw materials are exploited with very limited economic benefit to poor countries and little concern for the environment. Poor countries that are low on the development scale often have non-democratic governments or they are democracies that function poorly. There is usually a reasonably strong link between development and improvement in the quality of government. In general, the poorer the country the worse the plight of minority groups.

Tested

1 Why does the primary sector dominate employment in the poorest countries of the world? 2 Explain the changes in employment structure that have occurred in NICs. 3 The human development index includes education. Why is the level of education considered to be such an important measure of a country’s development? 4 What were the reasons for the development of the first generation of newly industrialised countries?

Revised

Globalisation is a recent phenomenon (post-1960), which is very different from anything the world has previously experienced. The modern global economy is more extensive and complicated than it has ever been before. There are many aspects of globalisation: l economic l urban l social/cultural l linguistic l political l demographic l environmental

Transnational corporations and nation states are the two major decision-makers in the global economy. Nation states individually and collectively set the rules for the global economy but the bulk of investment is through TNCs, which are the main drivers of global shift. It is this process that has resulted in the emergence of an increasing number of NICs since the 1960s.

Globalisation is the increasing interconnectedness and interdependence of the world – economically, culturally and politically. Global shift refers to the large-scale filter-down of economic activity from MEDCs to NICs and LEDCs.

It is easy to think of globalisation as being only an economic phenomenon, but it has many other aspects, as identified in this section.

Figure 14.5 shows the main influences on the globalisation of economic activity. The factors responsible for economic globalisation are as follows: l Until the post-1950 period the production process itself was mainly organised within national economies. This has changed rapidly in the last 50 years or so with the emergence of a new international division of labour (NIDL). l The increasing complexity of international trade flows as this process has developed. l Major advances in trade liberalisation under the World Trade Organization. l The emergence of fundamentalist free-market governments in the USA and

UK around 1980. The economic policies developed by these governments influenced policy-making in many other countries. l The emergence of an increasing number of NICs. l The integration of the old Soviet Union and its Eastern European communist satellites into the capitalist system. Now, no significant group of countries stands outside the free market global system. l The opening up of other economies, particularly those of China and India. l The deregulation of world financial markets. l The ‘transport and communications revolution’, which has made possible the management of the complicated networks of production and trade that exist today.

Decreasing barriers to world trade Increasing economic power of major trade blocs Increasing influence of large TNCs

Capitalism now virtually unchallenged as the global model for economic development

Increasing cultural diversity in a growing number of countries Highest ever levels of international tourism Growing influence of global brands

Figure 14.5 Globalisation trends

Large companies in particular recognise many advantages in working at the global scale as opposed to the national or continental scale: l Sourcing of raw materials and components on a global basis reduces costs. l TNCs can seek out the lowest-cost locations for labour and other factors. l High-volume production at low cost in countries such as China helps to reduce the rate of inflation in other countries and helps living standards to rise. l Collaborative arrangements with international partners can increase the efficiency of operations considerably. l Selling goods and services to a global market allows TNCs to achieve very significant economies of scale. l Global marketing helps to establish brands with huge appeal all around the world.

The new international division of labour divides production into different skills and tasks that are spread across regions and countries rather than within a single company.

Greatest ever global connectivity in transport and communications

Rising levels of international migration

Increasing levels of outsourcing to lower- wage economies

Emergence of an increasing number of NICs

Investment involves expenditure on a project in the expectation of financial (or social) returns. Transnational corporations (TNCs) are the main source of foreign direct investment (FDI). As the rules regulating the movement of goods and investment have been relaxed in recent decades, TNCs have extended their global reach. FDI is not dominated by flows from core to periphery in the same way that it was even 20 years ago. Investment flows from NICs such as South Korea, Taiwan, China, India and Brazil have increased markedly. TNCs have a substantial influence on the global economy in general and in the countries in which they choose to locate in particular. They play a major role in world trade in terms of what and where they buy and sell. A considerable proportion of world trade is intra-firm, taking place within TNCs. The organisation of the car giants exemplifies intra-firm trade with engines, gearboxes and other key components produced in one country and exported for assembly elsewhere. In 2009 the world’s largest TNCs by revenue were led by Royal Dutch Shell, Exxon Mobil and Wal-Mart Stores. All three companies recorded revenue in excess of $400 billion.

Figure 14.6 illustrates the sequential development of a transnational corporation, which begins with operation in the domestic market only. Large companies often reach the stage when they want to produce outside of their home country and take the decision to become transnational. The benefits of such a move include: l cheaper labour, particularly in developing countries l exploiting new resource locations l circumventing trade barriers l tapping market potential in other world regions l avoidance of strict domestic environmental regulations l exchange rate advantages

Serve domestic market only

A transnational corporation is a firm that operates in more than one country. Foreign direct investment comprises overseas investments in physical capital by transnational corporations.

Export to overseas market(s) through independent channels (e.g. sales agents) License foreign manufacturer to produce for overseas market(s)

Establish sales outlet in overseas market(s) (a) by acquiring local firm (b) by setting up new facility

Establish production facility overseas (a) by acquiring local firm (b) by setting up new facility

Figure 14.6 Sequential development of a transnational corporation

TNCs vary widely in overall size and international scope. Variations include: l the number of countries l the number of subsidiaries l the share of production accounted for by foreign activities

l

the degree to which ownership and management are internationalised the division of research activities and routine tasks by country the balance of advantages and disadvantages to the countries in which they operate

Large TNCs often exhibit three organisational levels – headquarters, research and development and branch plants. Figure 14.7 shows the locational changes that tend to occur as TNCs develop over time.

Number of plants/facilities

1 2

Export-led development Overseas location of branch plants 3 4 Shift of R&D and

HQ functions Rationalisation

Increasing globalisation

Activities concentrated in home country where labour and sourcing are established. However, exports may be subject to tariffs and other restrictions Incentives include cheaper labour, access to markets, and financial assistance from host governments

Figure 14.7 The development of TNCs – locational changes

New locations become semi-autonomous as products are more carefully tailored to new markets Increasing competition or recession necessitates concentrating activities in the best locations Source: Advanced Geography: Concepts & Cases by P. Guinness & G. Nagle (Hodder Education, 1999), p.167

Nike is the world’s leading supplier of sports footwear, apparel and equipment and is one of the best-known global brands. It was founded in 1972. The company is an example of a vertical organisational structure across international boundaries, characterised by a high level of subcontracting activity. Nike does not make any shoes or clothes itself, but contracts out production to South Korean and Taiwanese companies. Nike employs 650,000 contract workers in 700 factories worldwide. The company list includes 124 plants in China, 73 in Thailand, 35 in South Korea and 34 in Vietnam. More than 75% of the workforce are based in Asia. The majority of workers are women under the age of 25. Nike is a clear example of the new international division of labour (NIDL).

In Asia four generations of NIC can be recognised in terms of the timing of industrial development and their current economic characteristics. Nowhere else in the world is the filter-down concept of industrial location better illustrated. When Japanese companies first decided to locate abroad in the quest for cheap labour, they looked to the most developed of their neighbouring counties, particularly South Korea and Taiwan. Most other countries in the region lacked the physical infrastructure and skill levels required by Japanese companies.

Companies from elsewhere in the developed world, especially the USA, also recognised the advantages of locating branch plants in such countries. As the economies of the first generation NICs developed, the level of wages increased, resulting in the following:

l

l

Japanese and Western TNCs sought locations in second-generation NICs where improvements in infrastructure now satisfied their demands but where wages were still low. Indigenous companies from the first generation NICs moved routine tasks to their cheaper-labour neighbours such as Malaysia and Thailand.

With time, the process also included the third generation NICs, a significant factor in the recent very high growth rates in China and India. The least

developed countries in the region, nearly all hindered by conflict of one sort or another at some time in recent decades, are now beginning to be drawn into the system. The recent high level of FDI into Vietnam makes it reasonable to think of the country as an example of a fourth-generation Asian NIC.

The reasons for the phenomenal rates of economic growth recorded in South Korea, Taiwan, Kong Hong and Singapore from the 1960s were: l a good initial level of hard and soft infrastructure l as in Japan previously, the land-poor NICs stressed people as their greatest resource, particularly through the expansion of education and training l cultural traditions that revered education and achievement l the Asian NICs becoming globally integrated at a ‘moment of opportunity’ in the structure of the world system l all four countries having distinct advantages in terms of geographical location l the ready availability of bank loans, often extended at government behest and at attractive interest rates

As their industrialisation processes have matured, the NICs have occupied a more intermediate position in the regional division of labour between Japan and other less-developed Asian countries.

In the USA and Britain the proportion of workers employed in manufacturing has fallen from around 40% at the beginning of the twentieth century to less than half that now. Not a single developed country has bucked this trend, known as deindustrialisation, the causal factors of which are: l technological change enabling manufacturing to become more capital intensive and more mobile l the filter-down of manufacturing industry from developed countries to lower-wage economies l the increasing importance of the service sector in the developed economies

Concerns about deindustrialisation have focused on the following: l The traditional industries of the industrial revolution were highly concentrated, thus the impact of manufacturing decline has had severe implications in terms of unemployment and other social pathologies in a number of regions. l The rapid pace of contraction of manufacturing has often made adjustment difficult. l There are defence concerns if the production of some industries falls below a certain level. l Some economists argue that over-reliance on services makes an economy unnecessarily vulnerable. l Rather than being a smooth transition, manufacturing decline tends to concentrate during periods of economic recession.

It has been the revolution in transport and communications that that made such substantial filter-down of manufacturing to the developing world possible. Containerisation and the general increase in scale of shipping have cut the cost of the overseas distribution of goods substantially, while advances in telecommunications have made global management a reality. In some cases whole industries have virtually migrated, as shipbuilding did from Europe to Asia in the 1970s. In others the most specialised work gets done in

Revised

Deindustrialisation is the long-term absolute decline of employment in manufacturing.