The Size Distribution Of Firms: Geographical Perspectives

1. The Size Distribution Of Firms: Geographical Perspectives Melody Shekari Scott Szarka

2. Introduction • Size distribution of firms: Why do small, medium, and large firms exist? • Geographic scope of large firms  Mainly employment geographies. • Spatial Division of Labor (SDL)  Implications from employment distributions of large firms.

3. Size Distribution of Firms • Capitalist economies have large range in sizes of firms • Typically few large firms, many small firms • Suggested that increase in size of firm, number of firms declines steadily

4. Economies of Scale • Traditional explanation is Economies/ Diseconomies of Scale • When average cost of production decreases and size of activity increases • Diseconomies of Scale  Increasing avg. production costs with increasing size of activity

5. Economies of Scale • Large, multi-plant firms more efficient than small ones  Implied by possible reductions in avg. costs with increasing firm size • Diseconomies of Scale – Increasing size may become inefficient • Small firms exist because the economies of scale for firms is very limited or market is too small

6. Economies of Scale • Large, multi-plant firms spread out fixed costs (ex. Marketing, R&D) exploiting economies of scale • Act as ‘barriers to entry’ for medium-sized firms trying to enter same market

7. Dual Economy Argument • Economies comprised of: • Large corporations – ‘Planning System Firms’ • Small firms – ‘Market System Firms’ • Act as different institutions • Planning system firms growth not just for efficiency, for access to resources, reduce uncertainty, gain bargaining power

8. Dual Economy Argument • ‘Satellites’ – have direct business contact with large firms • Planning system firms control market • ‘Loyal Opposition Firms’ – Directly compete with core firms • Dynamic small firms – manufacture new products, potentially acquired by large firms

9. International Size Distribution • Economies of scale not sole reason for size distribution. • Small firms more important in Japanese and German markets than UK or US • Includes national or cultural factors, choice • Japan and Germany have ‘chosen’ to priority to SME’s (small and medium-sized firm)

10. International Size Distribution • Japan has favored highly-specialized strategies, firms rely on other firms’ specialties • Evidence that small firms playing a greater role • In US, largest 500 firms: • Sales decreased from 55% to 42% of total sales • Share of national employment down 17% to 11% • Number of new, smaller firms rising

11. Geographic Distribution of Employment • Size distribution parallel to geographic view of firms • Hakanson’s model attempts to generalize long-term growth paths of corporations • Firms establish local base, grow nationally, then internationally

12. Sales offices and agents help gain knowledge of other sites Firms become larger, merger and acquisition become important Geographic Distribution of Employment

13. Geographical Distribution of Employment • Since 1970’s employment geographies have been volatile • Largest job-shedding in iron and steel, autos, and ship-building • Volatility high in Europe and North America in manufacturing technologically sophisticated products and products with high consumer demand

14. Foreign Ownership • Foreign Development • large firms in manufacturing sector invest as they grow by exporting and investing in foreign-based facilities. • Extent of Internationalization Varies • evident in size of workforce that is international.

15. Foreign Ownership • Foreign operations integrated with domestic operations • this process has been made easier with improvements in communication and technology and declining tariff barriers. • Companies originating from “periphery” countries • Changed operating environment of “periphery” country plants of other Multi-National Corporations.

16. Mergers and Acquisitions • Mergers and Acquisitions are a significant growth tool • Is a type of investment that meets long term strategic motivations and aids in corporate systems development • Advantages • Provide faster, larger-scale, and less risk growth • Reduce competition and increase economic and geographic concentration in power

17. Mergers and Acquisitions • Considerations • Spatial and Aspatial factors are important criteria in the assesment of mergers and acquisitions • Mergers provide a way to obtain previously owned land, rights, etc. that may otherwise be unavailable • Many companies use Mergers, Acquisitions, and Joint Ventures to increase growth in their company

18. Spatial Distribution of Labor (SDL) Two Types • Sectoral Division- Region specializes in particular industries and skills • 19th century- Cotton, Iron and Steel, etc. Regions with skills organized by regional populations of firms and vertically distributed.

19. Spatial Distribution of Labor (SDL) • Intra-sectoral Division- Firms in individual industries choose to specialize tasks and occupations by location. • 20th century- with growth of interregional and international corporations, different functions and occupations are horizontally distributed among different regions • Research and Development and Decision-making spatially separated from basic work processes. • Few control centers within cities with many peripheral basic work processes locations.

20. Spatial Distribution of Labor (SDL) • New International Division of Labor (NIDL)- geographical shifts of basic work processes from core to peripheral and semi-peripheral countries • Implies that capital more mobile and not necessarily tied to location.

21. Locational Hierarchies • New SDL vs. NIDL • Within company, has different theory on dispersal of basic work processes but agrees that control functions are at the top of the urban hierarchy. • Evidence of Locational Hierarchy • Example- Cadbury Schweppes • Main office- London • Research and Development- Reading • Operating locations- around the UK • Though within the same country, these facilities are not close to one another.

22. Locational Hierarchies • Control Center characteristics • Central business districts for person to person contact between decision-makers, as well as proximity to networks of information • US has some in peripheral regions, indicating city problems • Research and Development Locational Characteristics • Not concentrated in centers; separate from manufacturing centers and sometimes from head offices.

23. Locational Hierarchies • Core • area usually with head offices, research and development and control functions; decision making done for periphery, more stable and higher paid jobs as well as spin-off jobs (legal, etc), generates wealth in the area • Peripheral • Area with branches of the corporation; in rural places with lower paid jobs and corporate policy establishes rules. • Locational Strategies vary

24. Conclusion • Geography of firms and development implications vary • Hakanson model- geography • SDL/NIDL- local development implications • Explains tendencies and over-simplifies realities • There is need to investigate other segments of firms