Economic Geography

Mr. Keller

APHG– 2007

Types of Economic Activity• Primary = products of extraction or harvest• Secondary = transformation of raw materials into a

more usable form– Fell from 31% of U.S. labor force in 1960 to 16% in 2000.

• Tertiary = provision of services to primary and secondary sectors and directly to customers

• Quaternary = information-based services– Corporate headquarters– Business services such as accounting, marketing, and HRQuinary = education, research, product or process development

Locational tendencies

• Primary – oriented toward raw material source• Services – market oriented• Secondary – complicated spatial expression,

depending upon a set of factors– Raw material location

– Markets

– Agglomeration economies

– Labor costs

Raw material location

• Weight-losing operations are drawn to the raw material source.– Ex. copper smelter, iron and steel, fruit and vegetable

packing, meat packing, orange juice, wine.

• A break-of-bulk point is where a good is moved from one mode of transportation to another – often an attractive location for production – At Great Lakes ports of Chicago, Gary, Detroit,

Cleveland, and Toledo coal was brought by rail from Appalachia and iron was shipped by boat from N. Mich. and Minn. For steel production.

Port of Elizabeth, New Jersey

The amount of cargo handled at the Shanghai ports has increased at a phenomenal rate.

As of Dec. 31 2006, Shanghai Port had handled 537 million tons of cargo in 2006, hanging on to its world number one spot, Shanghai Port handles 90 million tons more of cargo than Singapore port, which ranked second. According to the Shanghai Port Administration, the port's annual handling capacity topped 100 million tons in 1984 and the figure rose to 200 million tons in 2000 and 300 million tons in 2003. 2006’s figure was 21.2 percent more than that for last year and accounted for 12 percent of China's total for 2006. Shanghai Port handled 21.71 million twenty-foot-equivalent unit (TEU) containers this year, up 20.1 percent from last year and accounted for 24 percent of the country's total for this year. A record 55,000 ships, including 23,000 container ships, berthed at the port this year. The port handles shipping routes reaching more than 300 ports worldwide.

Port of Shanghai

Shenzhen

• Twenty years after Shenzhen was designated China’s first Special Economic Zone (SEZ), the city has made unprecedented progress in several areas of economic development. Shenzhen has emerged from a small frontier town into a glamorous modern coastal city. Shenzhen continues to improve its status as a high-tech area, modern logistics hub, regional financial center, and beautiful seashore tourist destination.

The Shenzhen port ranks as the world’s fourth largest container port, having an annual throughput of 13.6 billion containers. The city’s subway system was put into operation in 2004 and a direct subway line to Hong Kong is under construction. Shenzhen is viewed by many as China’s gateway to Hong Kong and the global marketplace. In 2004, Shenzhen’s GDP reached USD 42 billion. Total import and export trade reached USD 147 billion, USD 78 billion exports, and USD 69 billion in imports. By the end of 2004, the accumulated value of foreign direct investment reached USD 28 billion.

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Outsourcingto India & Beyond

• A new way to leverage skills and markets

• Win-win situation: for DCs ?: productivity, competitiveness, higher employment, faster economic growth– every dollar of outsourcing creates $1-45-1-47 of value of

which the US captures $1.12-1.15 while India gets only 33 cents

• Outsourcing ‘industry’: to exceed $1 trillion by 2006

• Total savings from global outsourcing:– to grow from $6.7 bn (2003) to $20.9 bn (2008)

• Developing countries’ gains: $60 billion in ITES by 2008

• Outsourcing: North-South issue? – More North-North trade-68% of trade

• North America, largest market: 60% of total • Canada, largest exporter of private services to US

• Job displacement, unfounded?– Net creation of 22 million new jobs in the US (from 2000-2010);

shortage of 10 million in 2010

– Estimates for outsourcing: job creation: 317,000 net new jobs by 2008 in the US

– 2003: 98% of total contract value for outsourced business process service delivery in the US is done domestically (only 2% off-shored)

– India accounted for only 1% of total US imports of private services (of which, 2% - business services)

The Benefits• Contributes to the Developing Countries:

– gender empowerment, poverty reduction, access to technology

• Has positive spill-over effects: – gains from additional consumption, skills and technology

transfer, secondary employment

• Strengthens local capacity: – through technological developments – could assist Developing Cs in building their own

industries– Indian example: TCS, Infosys, Wipro Technologies

Gains for Outsourcing Companies

• Strategic decision / competitive necessity • Lower labor costs • Economies of scale • Round the clock operations / time zone• Access to skills (including language skills)• Legal and regulatory framework• Quality • Structure of existing corporate network• Global R&D teams working in tandem

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The Activities

• Lower end: customer contact centres, data entry operations, telemarketing, basic technical support

• Middle: processing of financial transactions (credit-card billing, insurance claims)

• Higher end: professional services such as research and development, accounting, engineering and architechtural design services, investment analysis, medical diagnostics

Developing Country Beneficiaries• India: a wide known success story

– 18 percent share of the global market– Growth rate: 54% in 2003-04– Total export revenues to touch US$ 57 bn by 2008; US$ 148

bn by 2012– Employment to rise from 110,000 (2003) to 2.7 mn by 2012

• Philippines, China, Malaysia, Vietnam, Bangladesh, S.Africa, Ghana, Senegal, Kenya, Jamaica, Mauritius, Nicaragua, Barbados, Mexico, Brazil.

• Others:– Hungary, Czech Rep.

Programmers’ WagesYE2006 (Average Wage/year (US$000)

2.45.88 6.4 6.5 7.2 7.2 8 8.9

2528

6

0

5

10

15

20

25

30

Source: United Nations conference on trade and development

Vietnam Experience• Nortel, Cisco, IBM, Hewlett-Packard, British Petroleum, Sony,

Fuji, TCS, now in Vietnam

• IT training specialists (NIIT, Aptech, Oracle) and Royal Melbourne Institute of Technology, providing training

• Attractions: – cost advantage– strong mathematical skills ( focus of educational system)– knowledge of French and English

• Government: providing incentives to IT sector (tax holidays, infrastructure development, education)

• Vietnamese diaspora: key driver of IT industry

Ghana Experience

• Government: pro-active role: campaign, promotion for major US BPO players to set-up presence

• Attractions:– stable political environment– english-speaking workforce; high literacy

• Role of diaspora population:– setting-up their own companies in Ghana; some in partnership

with foreign investors– knowledge of foreign culture and their networks

Success Stories: Summary

• Competitive cost• Language, education, skills

– also enables moving up the value chain• Ability to develop global networks• Adequate and reliable infrastructure

• Government role: infrastructure, education, various incentives, marketing, political stability, regulatory framework (e.g., security and protection of data)– relates to long-term prospects of doing business

• Role of Diaspora population• Cultural and relational proximity and trust

The Challenges to Overcome• Lack: infrastructure, trained HR, local market base

• Difficulty in gaining confidence of outsourcing companies: – regulatory framework still under development – political instability and governance issues

• Lack of coverage for liability and risk– putting in place a strong risk-control framework

• Potential erosion of competitive advantage– through new laws and regulations (e.g., restrictions on transfer

of personal data)

• Growing protectionism in outsourcing countries

To Sum Up….

• In my opinion, Outsourcing is an inevitable trend in the global economy…

• with potentially huge gains (for both developed and developing countries).

• Benefits are not automatic…• but require targeted action…

– at national level (policies to support outsourcing, e.g. create infrastructure and educational base);

– at international level (targeted action for national policies and negotiating outcomes to curb protectionism).

Markets

• Attractive sites for weight-gaining operations– Ex. Soft drinks and beer

• Ubiquitous industries– Newspapers, bakeries, dairies produce a

perishable product for immediate consumption

Agglomeration Economies• Definition: cost savings from joint location• Inter-industry linkages

– Backward – firm uses the output of another firm, ex. Automobile industry uses tires, paint, radios, seat covers, etc.

• Just-in-time delivery

– Forward – firm’s output is the input to another firm• Steel is used in automobiles• Boxes are used by food processing• Chemicals• Garment

• Urbanization economies – cost savings from an increase in total economic size– Share labor, financial institutions, information – Ex. Semiconductor

industry in Silicon Valley– Share large market

Labor

• Important when labor is a high % of total costs, ex. Textiles, garments, furniture, shoes

• Maquiladoras – duty-free assembly of products in Mexico for re-export to the U.S. Takes advantage of cheap labor in Mexico for electronic products, textiles, furniture, leather goods, toys, automotive parts.– Outsourcing – producing at foreign sites for domestic

production– 3,600 plants and 960,000 workers in 2002. Began at

border, but more are now moving to Mexican heartland– Growth limited by low-cost production in China

American Manufacturing Belt

Key Trends

• Globalization – In 1960, 20% of world production crossed national boundaries. Today, that is 50%.

Organization of production – vertical disintegration

• Vertical integration vs. disintegration– Integration = assembly line production, Fordism - Fordism refers

to the system of mass production and consumption characteristic of highly developed economies during the 1940s-1960s. Under Fordism, mass consumption combined with mass production to produce sustained economic growth and widespread material advancement. During the 70’s, 80’s & 90’s, the system of organization of production and consumption has, perhaps, undergone a second transformation, which when mature promises a second burst of economic growth. This new system is often referred to as the "flexible system of production" (FSP) or the "Japanese management system."

– Disintegration = externalizing production, subcontracting, Post-Fordism

Why disintegration?Uncertain markets, can respond faster to changes in marketplaceTakes advantage of specialized laborWeakens union by breaking up production – lowers wages

Post-Fordism, on the other hand, involves the application of a variety of different production techniques to produce, in basic terms, the same sort of result (the most efficient method of producing a commodity such as a car or television). These techniques include things like co-operative working - Under this system, workers are organized into flexible teams, each with complimentary, related, skills. Each person within the team is capable of doing all other jobs within the team and each worker is not subject to the mind-bending monotony of the "single repeated task" Fordist production line.

The objective here, as far as the management of production goes, is to provide each worker with a sense of involvement (and hence ownership) of the tasks) they perform. By creating a sense of responsibility, the production process is improved by reducing the sense of alienation inherent in Fordist forms of production (the idea that the worker is separated from the things they produce and, thereby, has little sense of pride, achievement and responsibility for the things they produce). In addition, by giving individual workers some form of responsibility they are encouraged to think about - and possibly suggest improvements to - working practices… and Just-in-Time ("JiT") techniques - This technique involves the idea that a product is not built or assembled until an order for it is received - which means that large stocks of components do not have to be kept in warehouses. This saves a company money because capital is not tied-up in materials that may not be used for months, years or, indeed, ever...

In addition, once a commodity is assembled it doesn't have to be stored prior to it being bought (since it is already sold before its built). Thus, quite literally, the components used to build a commodity (such as a car, a television, a fridge and so forth) are delivered "just in time" to be assembled.This form of production is hugely efficient in economic terms, but it clearly requires a high degree of co-ordination if it is to work (since the whole production process depends on every component being available "as and when it's needed". If one vital component is not available the whole process judders to a halt...).

Examples

• Movie Industry has moved from the era of big studies to flexible production of movies

• Ladies dress industry - subcontract 48% of cutting; 89% of sewing.– Highly agglomerated to take advantage of

external economies

Economies of Scale:The savings that accrue from large-scale production whereby the unit cost of manufacturing decreases as the level of operation enlarges. Supermarkets operate on this principle and are able to charge lower prices than small grocery stores.