The Size Distribution Of Firms: Geographical

Perspectives

Melody ShekariMelody Shekari

Scott SzarkaScott Szarka

IntroductionIntroduction

► Size distribution of firms: Why do small, medium, Size distribution of firms: Why do small, medium, and large firms exist?and large firms exist?

► Geographic scope of large firms Geographic scope of large firms Mainly Mainly employment geographies.employment geographies.

► Spatial Division of Labor (SDL) Spatial Division of Labor (SDL) Implications from Implications from employment distributions of large firms.employment distributions of large firms.

Size Distribution of FirmsSize Distribution of Firms► Capitalist economies have large range in sizes of Capitalist economies have large range in sizes of

firmsfirms► Typically few large firms, many small firmsTypically few large firms, many small firms► Suggested that increase in size of firm, number of Suggested that increase in size of firm, number of

firms declines steadilyfirms declines steadily

Economies of ScaleEconomies of Scale

►Traditional explanation is Economies/ Traditional explanation is Economies/ Diseconomies of ScaleDiseconomies of Scale

►When average cost of production When average cost of production decreases and size of activity increasesdecreases and size of activity increases

►Diseconomies of Scale Diseconomies of Scale Increasing Increasing avg. production costs with increasing avg. production costs with increasing size of activitysize of activity

Economies of ScaleEconomies of Scale► Large, multi-plant firms more efficient than Large, multi-plant firms more efficient than

small ones small ones Implied by possible reductions Implied by possible reductions in avg. costs with increasing firm sizein avg. costs with increasing firm size

►Diseconomies of Scale – Increasing size may Diseconomies of Scale – Increasing size may become inefficientbecome inefficient

► Small firms exist because the economies of Small firms exist because the economies of scale for firms is very limited or market is too scale for firms is very limited or market is too smallsmall

Economies of ScaleEconomies of Scale

►Large, multi-plant firms spread out Large, multi-plant firms spread out fixed costs (ex. Marketing, R&D) fixed costs (ex. Marketing, R&D) exploiting economies of scaleexploiting economies of scale

►Act as ‘barriers to entry’ for medium-Act as ‘barriers to entry’ for medium-sized firms trying to enter same sized firms trying to enter same marketmarket

Dual Economy ArgumentDual Economy Argument

► Economies comprised of:Economies comprised of: Large corporations – ‘Planning System Firms’Large corporations – ‘Planning System Firms’ Small firms – ‘Market System Firms’Small firms – ‘Market System Firms’

► Act as different institutionsAct as different institutions

► Planning system firms growth not just for efficiency, Planning system firms growth not just for efficiency, for access to resources, reduce uncertainty, gain for access to resources, reduce uncertainty, gain bargaining powerbargaining power

Dual Economy ArgumentDual Economy Argument

► ‘‘Satellites’ – have direct business Satellites’ – have direct business contact with large firmscontact with large firms Planning system firms control marketPlanning system firms control market

► ‘‘Loyal Opposition Firms’ – Directly Loyal Opposition Firms’ – Directly compete with core firmscompete with core firms

►Dynamic small firms – manufacture new Dynamic small firms – manufacture new products, potentially acquired by large products, potentially acquired by large firmsfirms

International Size DistributionInternational Size Distribution

► Economies of scale not sole reason for size Economies of scale not sole reason for size distribution.distribution.

► Small firms more important in Japanese and Small firms more important in Japanese and German markets than UK or USGerman markets than UK or US

► Includes national or cultural factors, choiceIncludes national or cultural factors, choice

► Japan and Germany have ‘chosen’ to priority Japan and Germany have ‘chosen’ to priority to SME’s (small and medium-sized firm)to SME’s (small and medium-sized firm)

International Size DistributionInternational Size Distribution

► Japan has favored highly-specialized strategies, Japan has favored highly-specialized strategies, firms rely on other firms’ specialtiesfirms rely on other firms’ specialties

► Evidence that small firms playing a greater roleEvidence that small firms playing a greater role

► In US, largest 500 firms:In US, largest 500 firms: Sales decreased from 55% to 42% of total salesSales decreased from 55% to 42% of total sales Share of national employment down 17% to 11%Share of national employment down 17% to 11% Number of new, smaller firms risingNumber of new, smaller firms rising

Geographic Distribution of Geographic Distribution of EmploymentEmployment

►Size distribution parallel to geographic Size distribution parallel to geographic view of firmsview of firms

►Hakanson’s model attempts to Hakanson’s model attempts to generalize long-term growth paths of generalize long-term growth paths of corporationscorporations

►Firms establish local base, grow Firms establish local base, grow nationally, then internationallynationally, then internationally

Geographic Distribution of Geographic Distribution of EmploymentEmployment

► Sales offices and Sales offices and agents help gain agents help gain knowledge of other knowledge of other sitessites

► Firms become Firms become larger, merger and larger, merger and acquisition become acquisition become importantimportant

Geographical Distribution of Geographical Distribution of EmploymentEmployment

►Since 1970’s employment geographies Since 1970’s employment geographies have been volatilehave been volatile

►Largest job-shedding in iron and steel, Largest job-shedding in iron and steel, autos, and ship-buildingautos, and ship-building

►Volatility high in Europe and North Volatility high in Europe and North America in manufacturing America in manufacturing technologically sophisticated products technologically sophisticated products and products with high consumer and products with high consumer demanddemand

Foreign OwnershipForeign Ownership►Foreign DevelopmentForeign Development

large firms in manufacturing large firms in manufacturing sector invest as they grow by sector invest as they grow by exporting and investing in exporting and investing in foreign-based facilities. foreign-based facilities.

► Extent of Extent of Internationalization Internationalization VariesVaries evident in size of workforce evident in size of workforce

that is international. that is international.

Foreign OwnershipForeign Ownership►Foreign operations integrated with Foreign operations integrated with

domestic operationsdomestic operations this process has been made easier with this process has been made easier with

improvements in communication and technology improvements in communication and technology and declining tariff barriers. and declining tariff barriers.

►Companies originating from “periphery” Companies originating from “periphery” countriescountries Changed operating environment of “periphery” Changed operating environment of “periphery”

country plants of other Multi-National country plants of other Multi-National Corporations. Corporations.

Mergers and AcquisitionsMergers and Acquisitions

►Mergers and Acquisitions are a Mergers and Acquisitions are a significant growth toolsignificant growth tool Is a type of investment that meets long term Is a type of investment that meets long term

strategic motivations and aids in corporate strategic motivations and aids in corporate systems developmentsystems development

►AdvantagesAdvantages Provide faster, larger-scale, and less risk growthProvide faster, larger-scale, and less risk growth Reduce competition and increase economic and Reduce competition and increase economic and

geographic concentration in power geographic concentration in power

Mergers and AcquisitionsMergers and Acquisitions

►ConsiderationsConsiderations Spatial and Aspatial factors are important Spatial and Aspatial factors are important

criteria in the assesment of mergers and criteria in the assesment of mergers and acquisitionsacquisitions

Mergers provide a way to obtain Mergers provide a way to obtain previously owned land, rights, etc. that previously owned land, rights, etc. that may otherwise be unavailablemay otherwise be unavailable

Many companies use Mergers, Many companies use Mergers, Acquisitions, and Joint Ventures to Acquisitions, and Joint Ventures to increase growth in their companyincrease growth in their company

Spatial Distribution of Labor Spatial Distribution of Labor (SDL)(SDL)

Two TypesTwo Types

►Sectoral Division- Sectoral Division- Region specializes Region specializes in particular industries and skillsin particular industries and skills 1919thth century- Cotton, Iron and Steel, etc. century- Cotton, Iron and Steel, etc.

Regions with skills organized by regional Regions with skills organized by regional populations of firms and vertically populations of firms and vertically distributed. distributed.

Spatial Distribution of Labor Spatial Distribution of Labor (SDL)(SDL)

►Intra-sectoral Division- Intra-sectoral Division- Firms in individual Firms in individual industries choose to specialize tasks and industries choose to specialize tasks and occupations by location.occupations by location. 2020thth century- with growth of interregional and century- with growth of interregional and

international corporations, different functions and international corporations, different functions and occupations are horizontally distributed among occupations are horizontally distributed among different regions different regions

Research and Development and Decision-making Research and Development and Decision-making spatially separated from basic work processes. spatially separated from basic work processes.

Few control centers within cities with many Few control centers within cities with many peripheral basic work processes locations. peripheral basic work processes locations.

Spatial Distribution of Labor Spatial Distribution of Labor (SDL)(SDL)

►New International Division of New International Division of Labor (NIDL)Labor (NIDL)- geographical shifts of - geographical shifts of basic work processes from core to basic work processes from core to peripheral and semi-peripheral peripheral and semi-peripheral countriescountries Implies that capital more mobile and not Implies that capital more mobile and not

necessarily tied to location. necessarily tied to location.

Locational HierarchiesLocational Hierarchies►New SDL vs. NIDLNew SDL vs. NIDL

Within company, has different theory on dispersal of Within company, has different theory on dispersal of basic work processes but agrees that control functions basic work processes but agrees that control functions are at the top of the urban hierarchy. are at the top of the urban hierarchy.

►Evidence of Locational HierarchyEvidence of Locational Hierarchy Example- Cadbury SchweppesExample- Cadbury Schweppes

►Main office- LondonMain office- London►Research and Development- ReadingResearch and Development- Reading►Operating locations- around the UKOperating locations- around the UK►Though within the same country, these facilities are not close Though within the same country, these facilities are not close

to one another. to one another.

Locational HierarchiesLocational Hierarchies►Control Center characteristicsControl Center characteristics

Central business districts for person to person contact Central business districts for person to person contact between decision-makers, as well as proximity to between decision-makers, as well as proximity to networks of informationnetworks of information

US has some in peripheral regions, indicating city US has some in peripheral regions, indicating city problemsproblems

►Research and Development Locational Research and Development Locational CharacteristicsCharacteristics Not concentrated in centers; separate from manufacturing Not concentrated in centers; separate from manufacturing

centers and sometimes from head offices. centers and sometimes from head offices.

Locational HierarchiesLocational Hierarchies►CoreCore

area usually with head offices, research and development area usually with head offices, research and development and control functions; decision making done for and control functions; decision making done for periphery, more stable and higher paid jobs as well as periphery, more stable and higher paid jobs as well as spin-off jobs (legal, etc), generates wealth in the areaspin-off jobs (legal, etc), generates wealth in the area

►PeripheralPeripheral Area with branches of the corporation; in rural places Area with branches of the corporation; in rural places

with lower paid jobs and corporate policy establishes with lower paid jobs and corporate policy establishes rules.rules.

►Locational Strategies vary Locational Strategies vary

ConclusionConclusion►Geography of firms and development Geography of firms and development

implications varyimplications vary Hakanson model- geographyHakanson model- geography SDL/NIDL- local development implicationsSDL/NIDL- local development implications

►Explains tendencies and over-simplifies Explains tendencies and over-simplifies realitiesrealities

►There is need to investigate other There is need to investigate other segments of firms segments of firms