presented by ralph fasano & andrew josuweit. chapter 8: size distribution of firms- geographical...

Presented by Ralph Fasano & Andrew Josuweit

Chapter 8:

Size Distribution of Firms- Geographical Perspectives

Chapter Outline

1. Why small and large firms exist?

2. Outline geographic scope of large firms

3. Spatial Division of Labor

PART 1 Why Small and large firms exist?

•In capitalist economies, firms tremendously range in size….

•Great majority of firms have sales less than > US $10Million

•Emergence of oligopolistic and monopolistic firms led many, including Marx and others to anticipate the demise of the small firm

•A few MNC’s even have sales larger than some countries gross GNP

•Ex. General Motors (GM) made profit of $168 billion (U.S.) 1995

This was twice the GNP as Greece or Portugal!

• As firms increase in size , the number of firms declines in a steady way

Largest firms are typically very few, while the smallest firms are typically very many

*The relationship between the number and size of firms can be summarily represented by a positively skewed

distribution or as a population pyramid

‘POPULATION PYRAMID’Size of firm

Number of firms

•GIBRAT’S LAW - among a population of firms, the rate of change of (average) firm size (in any particular size class) is independent of size

*This means that while firms experience different growth and decline, the net affects of these variations offset each other to produce stable size distribution over time

Economies of Scale

-The traditional explanation for the size distributions of firms emphasizes the effects of internal economies of scale and to what extent each firm takes advantage of economies of scale…

- Economies of Scale occurs when the average cost of production declines with increasing size of activity

e.g. Mass production, large factories often realize plant- factory economies of scale

- ‘dual economy’ model – recognizes segmentation between large and small firms in terms of motivation, structure, and behavior

-also the opposite of this is diseconomies of scale, when average costs increase as activity increases…. this signifies “inefficiency of a firm”

-from this perspective, the size distribution of firms reflects the differential effects of (dis)economies of scale on factories and firms

Why small and large firms exist?Small-either factory and firm level economies of scale are

extremely limited or market is too small

Medium- exist because there are possibilities between the polar opposites of large and small firms,

*medium firms are set apart from large firms usually because the suffer from ‘Barriers to entry’ into new markets

Large- economies of scale can be realized and a

market demand is available, big firms enjoy bargaining advantages which can translate into lower costs. Big firms can also specialize their workforces according to specific tasks to increase productivity.

Economies of Scale cont.- Large firms can also allocate more money to large

fixed costs to be spread over a larger output than smaller firms

-Factories may also be able to further exploit ‘technological’ economies of scale

E.g. – integrating processes permit savings in energy

- large multi-plant firms exploit economies of scale by spreading the fixed costs of expensive managerial functions, which brings down the average costs

E.g spreading out marketing, R & D, distribution, etc. over several locations

- As operations increase in size, possibilities of economies of scale can be exhausted and average costs level off or even increase to create diseconomies of scale

(dis)economies of scale

- In factories, diseconomies of scale usually include:

- technological limits on machine size- problems of supervision and communication- labor alienation over excessive specialization- transportation costs

- In firms, diseconomies of scale usually include:

- costs of ‘administration’- ‘governance’ costs- issue of ‘bureaucratization’ , personal

differences can undermine trust and effective communication, resulting in negative productivity

Dual Economy Argument

Size distribution of firms is not simply a sliding scale of technological opportunity, constrained only by market size, over which firms increase in size by progressively moving down an average cost curve… many other factors take place!

Economies compromise:

1. Giant corporations represent ‘planning system firms’

2. Small firms represent ‘market system firms’

These two types of firms are qualitatively different and have different strategies and structures!

Dual Economy ArgumentPlanning System Firms- exercise greater control

over their own destiny, requires highly uncertain and conscious long term planning by groups of highly skilled specialists in large-scale organizations

not all of the largest firms are the most efficient firms!

some firms grow to sizes that are far in excess of their ‘minimum efficient size’

-E.g. – GM debated breaking up the company in order to increase profitability and efficiency

planning system firms not only seek to grow, but for other reasons including access to resources, reduce uncertainty, gain bargaining power, etc.

* From this perspective, efficiency and size are not related in a simple linear fashion!

Dual Economy Argument

Market System Firms- some types of small firms are ‘laggard’ and ‘craft’, which provide traditional products in small markets and essentially exist outside the ambit and concern of planning systems or core firms

shadows can be cast on small firms by large firms depending on whether or not the small firms are ‘Satellites’ which have direct business links with core firms

dynamic small firms which manufacture new products can also be potential acquisition targets for core firms and may need to follow a planning system

BUSINESSORGANIZATIONS

Market System Firms(small firms)

Planning System Firms(large firms)

Leaders

Intermediates

Traditonal(laggards)

CraftsmanSatisfiedSatellites

SubcontractorsFranchises

LoyalOpposition

Functional Divisions

GeographicDivisions

Taylor and Thrift’s Dual model of Organization Figure 8.3 pg. 195

Product Divisions

Finance, R&D, Marketing,Production

Product A,B,C

Region A,B,C

Size Distribution of FirmsPart 2: Geographical scope of Firms

The Geographic Distribution of Employment with Big FirmsThe size distribution of firms is mirrored by

variations in the geographic scope of firms

As firms become larger, growth by acquisition and merger typically becomes more important so that the geographic scope of operations can occur in big leaps

Locational adjustments at existing sites continually occurs as firms expand, modernize and change some sites while closing others

Size Distribution of FirmsNational Employment Maps of Corporations

Up until the 1970s many corporations enjoyed continuous growth and expansion

Since the 1970s, the employment geographies of large corporations have been extremely volatile with significant employment changes throughout the corporate systems

Ex. These corporations who have been reducing employment involve both blue and white collar workers

This has been combined with a general shift towards the hiring of more highly qualified employees

Size Distribution of FirmsThe significance of foreign operations to

giant firms

Rapid improvements in communications and production technology and declining tariff barriers, have constantly changed the operation environments of MNC’s

This in turn has encouraged rethinking about integration and has created much more varied and complex systems

Size Distribution of FirmsThe significance of acquisitions and mergers

Acquisitions and mergers help companies to meet long term goals and develop and evolve

Acquisitions and mergers can provide faster, larger scale and less riskier growth

Also helps to reduces competition

Increases economic and geographic concentration of power

Leads to an expansion to more valuable and profitable land or

facilities and into new, potentially foreign , lucrative markets to increase profit

Size Distribution of FirmsPart 3: Spatial division of labor

The Spatial Division of Labor

Two Basic Types

First, the sectoral division of labor occurs when regions specialize in particular industries and all the related skills

Second, the intra-sectoral division of labor occurs when within individual industries firms choose to specialize tasks and occupations by location

Size Distribution of Firms

Location Hierarchies

Ex. Cadbury Schweppes

Head office in central London and its main R&D laboratory in nearby Reading and its operation locations are dispersed throughout the UK and elsewhere



The strategies and structures of Cadbury Schweppes and firms like it have contributed towards broader spatial divisions of labor within their respective countries



Some countries such as the UK, Japan and Canada, the geographic concentration of head-offices is unusually marked

For example in the UK 74% of the head offices of the 100 largest manufacturing firms are in south east England, principally London



The US is more dispersed than such countries as the UK and Japan

For example New York accounts for about 30% of the head offices of the 500 largest manufacturing corporations in the US

See Figure 8.11 on pg 211 See Figure 8.12 on pg 212

Size Distribution of FirmsCore-periphery effects

The tendency of international firms to locate head offices, R&D and related control functions in selected centers and regions simultaneously defines these places as ‘cores’ or ‘metropoles’

Works CitedHayter, Roger. The Dynamics of Industrial

Location. 1st ed. Vol. 1. Toronto: John Wiley & Sons. 187-213.