Dynamics of Industrial Location

Assessing Trends in Corporate Concentration

Piore and Sabel's (1984) seminal book, The Great Industrial Divide, has sparked an ongoing debate regarding the nature, importance and potential of flexible specialization as a form of industrial organization. As your text notes in chapter 2 (Figure 2.6), in their view, the past two decades has seen a revitalization of flexibly specialized production, specifically in the form of industrial districts organized around small and medium sized enterprises (SMEs). In essence, Piore and Sable think of industrial districts in terms of populations of interacting small and specialized firms that compete and cooperate with one another in way that is conducive to growth and is highly flexible in meeting differentiated and constantly changing markets (see chapter 13). Critics, however, reject this thesis and argue that giant corporations, especially multinational corporations (MNCs), are becoming more important and their structures and strategies are undermining - fragmenting - flexibly specialized industrial districts. The purpose of this note is to provide some additional information on corporate concentration to provide context for this debate. For the debate itself, read Amin and Robins (1990) and Cook and Morgan (1993), and a subsequent comment at this site ('the flexible specialization debate').

Corporate Concentration

Giant, powerful firms have been a significant feature of modern industrial economies for a some time (see chapters 8 and 11). In the US, for example, by 1904, 40% of all manufacturing assets were controlled by just 318 corporations. Indeed, around this time, massive waves of mergers and acquisitions among already large companies underlay fears about the loss of competition and the ability of companies to exercise 'monopoly' powers, for example in gouging consumers through excessive prices. These fears, and associated public concern, in turn helped stimulate various kinds of various kinds of government policies, pioneered especially in the US, that were designed to maintain competition in the economy and to offset the socially harmful 'monopoly' powers of giant firms, 'trusts', 'combines' and 'cartels'.

Whatever the effects of these polices in the US, and elsewhere, giant corporations have remained important and have continued to grow in absolute size. Well before the 1970s, numerous studies documented the size and power and multinational nature of giant companies, referred to variously as industrial octupii, invisible empires and corporate goliaths (e.g. Averitt 1968; Barber 1968; Behrmann 1969; Berle and Means 1932; Fellner 1944; Galbraith 1952 and 67; Hymer 1960; Robertson 1928; Turner 1970; Veblen 1932 [original 1904]). Two of the best known studies, (Galbraith 1967; Averitt 1968), labeled giant companies that dominated the US economy as core or planning system firms, in contrast to small, weak 'peripheral' or market system firms. Indeed, this distinction, and the importance attached to giant firms, is a vital undercurrent to much of industrial geography over the past 30 years, including The Dynamics of Industrial Location.

These studies remind us that corporate industrial power is a long established characteristic of industrial economies. Simultaneously, they remind us that the social (good and bad) implications of corporate power have long been debated. An interesting question, especially in the context of the current debate over flexible specialization, is whether or not giant corporations are becoming more or less important in national economies, or indeed the global economy as a whole. Individual firms have clearly increased in size. But are they becoming more important in relation to the markets they serve?

In the context of market power, economists distinguish competitive markets from monopolies and oligopolies. In competitive markets, there are typically many sellers (and buyers), the relationships between sellers and buyers are voluntary and independent ('arms length') and no one firm has any (socially harmful) power over another. In contrast, monopolies occur in markets where there is only one seller (and monopsonies where there is only one buyer) while oligopolies occur when there are relatively 'few' sellers in markets. Concentrated or 'strong' (or 'tight') oligopolies occur when there are 'very' few sellers and less concentrated or 'weak' oligopolies occur when there are numerous rivals. Oligopolies are market structures in which firm behaviour is interdependent, not independent, which means that the behaviour of firms affects, in one way or another, its rivals. In works such as Galbraith and Averitt, oligopolies are considered to be the most important market structure in modern economies. In practice, the term 'monopoly' is often used for markets which are oligopolistic. It might also be noted that, strictly speaking, small firms may have significant shares of specific market niches and thus constitute a monopoly or part of an oligopoly. Social concerns, however, primarily focus on monopolists and oligopolists which are also big in an absolute sense.

To measure the 'market power' of corporations, economists frequently refer to various kinds of concentration indexes. The simplest of these indexes measure the amount of a market supplied by a 'few' (usually from 3 to 5) firms, either in the context of a nation or group of nations. Such an index is a 'crude' measure of concentration, that by itself does not provide direct evidence about the behaviour and power of firms or their multinationality. The distinctions between 'strong', 'moderate' and 'weak' oligopolies according to this kind of index is inevitably judgmental while indexes calculated at national scales need to take into account trading relations. Market areas often do not correspond with national boundaries, for example, and national competition is affected by imports. Nevertheless, such an index provides useful comparative insights and suggestions, for example, as how concentration has changed over time.

Concentration indexes can be calculated for individual industries or for entire sectors. Brozen (1982), for example, calculated the 4-firm level of concentration, for all US manufacturing industries and for several individual industries (Table 1). Between 1935 and 1972, Brozen found a small increase in overall concentration levels. Thus, for the manufacturing sector as a whole, the leading four firms accounted for an average of 37% of production in 1935 and for just over 40% in 1972 (Brozen 1982: 23). There were substantial variations among industries. The 4-firm concentration index for the US cigarette manufacturing industry, for example, has been very high since at least 1910 when it was at 80.2% (Table 2). In 1980, the leading four cigarette producers accounted for 88% of production. Between 1910 and 1980, the concentration index varied but had never dropped below 80%.

For the UK, Clark (1993) calculated concentration levels for the manufacturing sector as a whole from 1935 to 1989 (Tables 3 and 4). His results reveal that in 1935 the 3-firm concentration level was 26.3%, and in 1968 the 3-firm concentration level was 41.0%, that is, there was an increase in corporate concentration. He found the rate of increase had been particularly marked between 1958 and 1968. According to Clark, however, during the 1970s concentration levels stabilized in UK manufacturing and in the 1980s they have consistently decreased. Thus, based on employment and the leading five firms, the concentration index declined form 44.0% in 1980 to 39.1% in 1989. Measures based on sales and output are in the same direction and magnitude (Clark 1993: 124).

For the EC as a whole, according to Amin (1993) concentration levels are high and increasing, thus directly reflecting growing corporate power and a heightened tendency of MNCs to undermine local development ('fragment regions'). The data cited by Amin (Table 5) do reflect important levels of corporate concentration. However, these data do not show a tendency for concentration to increase. Thus, for EC industry (manufacturing and energy sectors, the leading 10 firms accounted for 6.3% of either employment (or sales) in 1971 and 6.4% in 1988. In the years in between, there are some fluctuations with perhaps a tendency to decline in the 1980s. Similarly, the top 20 firms accounted for 10.3% of employment (or sales) in 1972 and 9.8% in 1988, with a tendency to decline in the 1980s. Concentration among the top 100 firms show a clear tendency to decline from 25% in 1980 to 20.8% in 1988 (unless 1981, when concentration levels are inexplicably recorded as low, is chosen as the benchmark).

These, and other, data typically reveal that corporate concentration is an important feature of modern industrial economies that has been in evidence for almost 100 years at least. Whether or not corporate concentration has increased over the past two decades or so is more questionable. Even if concentration is not increasing, the large multi-plant, multinational corporation is a powerful institution deeply implicated in 20th century industrialization. As such, the modern corporation, especially the MNC, has exerted strong impacts on the geography of industrialization. For many authors, including Amin (1991, 1993), the tendency of MNCs to think and act globally reduces the potentials for locally agglomerated development.

Additional References (not in text)

A Amin (1991) These are not Marshallian times. In R Camagni (ed) Innovation Networks and Spatial Perespectives London: Bellhaven, pp. 105-117

A Amin (1993) The globalization of the economy: an erosion of regional networks? In B Hogut, W Shan and G Walker (eds) The Embedded Firm: On the Socioeconomics of Industrial Networks, London: Routledge, pp. 278-95

Y Brozen (1982) Concentration, Mergers, and Public Policy, London: MacMIllan

R Clarke (1993) Trends in concentration in UK manufacturing, 1980-9. In M Casson and J Creedy (eds) Industrial Concentration and Economic Inequality, Cambridge: Edward Elgar, pp. 121-42

P Cooke and K Morgan 1993 The network paradigm: new departures in corporate and regional development, Environment and Planning D 8: 7-34

Table 1

US Manufacturing: 4-Firm Concentration Levels (Shipments) 1935 and 1972
1935 1972
Weighted average 37.0 40.2
Brozen 1982: 23

Table 2

Concentration in the US Cigarette Industry: 4-firm Concentration
1910 80.2
1910 80.2
1930 97.5
1950 86.9
1960 80.9
1970 84.4
1980 88.0
Brozen 1982: 20
Data refer to production shares

Table 3

UK Manufacturing: % Trends in Concentration 1935-79

1 2
1935 26.3
1951 29.3
1958 32.4
1963 37.4
1968 41.0
1970 44.8
1975 45.5
1979 45.6
Clarke 1993: 123
1: Average 3-firm employment concentration for 3-digit UK industries (n=42)
2. Average 5-firm employment concentration for 3-digit UK industries (n=93)

Table 4

UK Manufacturing: Trends in Concentration 1980-89

Employment Sales Output
1980 44.0 44.9 45.7
1981 43.6 44.7 45.2
1982 42.9 43.3 43.8
1983 40.4 41.9 42.6
1984 40.4 41.9 42.5
1985 40.1 42.2 42.6
1986 40.1 42.3 43.0
1987 39.5 42.1 43.3
1988 39.1 41.4 42.2
1989 39.1 41.4 42.2
Clarke 1993: 124
Note: These data are for 3-digit industries and for the largest 5 firms.

Table 5

EC Industry: Shares (%) of Largest Firms

1972 1980 1981 1984 1988
Top 10 6.3 8.3 8.7 6.5 6.4
Top 20 10.3 13.1 13.6 9.4 9.8
Top 100 25.0 26.3 18.2 20.0
Amin 1993: 287 (Note: it is unclear whether the data pertain to sales or employment).
Industry refers to manufacturing and energy sectors.