Dynamics of Industrial Location

The Flexible Specialization Debate

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 chapters 8, 9 and 13). Critics, however, reject this thesis and argue that giant multinational corporations (MNCs), are becoming more important and their structures and strategies are undermining - fragmenting - flexibly specialized industrial districts (see chapters 8, 12 and 15). The purpose of this note is to briefly introduce and assess the criticisms that have been directed towards the emergence of flexibly specialized industrial districts from this point of view. By way of background, note that a previous comment on this site discussed the concept of corporate concentration.

MNCs and the Regional Fragmentation Thesis

As the 19th century and first half of the 20th centuries progressed, industrialization and urbanization went hand in hand. As a key part of this relationship, giant firms anchored major industrial agglomerations. During the 1950s, however, MNCs expanded rapidly across many industrial sectors and in terms of decision making structure, the leading US-based MNCs favoured strongly hierarchical, divisionalized and tightly integrated organizations. With particular reference to 'fordist' US-based MNCs, beginning with Hymer (1960), an increasing number of studies argued that MNCs had become an important force in the geographic dispersal of industry and in the undermining of regional development. In recent years, Amin (1993) has been one of the most insistent observers emphasizing the regional fragmentation thesis.

The basis of the regional fragmentation thesis rests on the domination of the economy by MNCs and three main, closely related tendencies in the way MNCs organize space:

1. Location dispersal tendency: MNC, it is argued, seek to geographically disperse activities for a variety of reasons, for example, to gain access to markets, lower costs of production, reduce the risks of excessive concentration in one or a few jurisdictions and/or to gain bargaining advantages with labour (see Figure 8.7; 12.3). Since MNCs typically control a wide range of manufacturing and service activities, MNCs enjoy many opportunities to implement such dispersals. Moreover, MNCs have the capabilities to organize activities around the globe because they provide many services, such as accounting, computing, research, purchasing, marketing, planning, and these services are highly mobile within the firm. Transportation and communication technologies facilitate easy movement of goods, information and services while person to person contact is rarely more than one day away, if necessary. Indeed, branch plants typically buy and/or sell goods to other affiliated plants, at least to some degree, in many cases to a considerable degree. Thus, from this perspective, all branch plants need from a location is basic infrastructure and an appropriate labour supply. Many market and supply links are within the firm but these links can be organized internationally.

2. Core-periphery (or location hierarchy) tendency. In dispersing activities, MNCs tend to behave in collectively similar ways to create distinct (internal) spatial divisions of labour. On the one hand, MNCs allocate the highly demanding managerial, science and engineering jobs to core regions where highly qualified (and highly paid) professionals can be found and like to live (see Figure 8.6). On the other hand, the most basic work processes are allocated to peripheries with plentiful supplies of cheap, compliant labour. In this sense the internal divisions of labour are both cause and effect of core-periphery contrasts, as reflected in occupational type, wage differentials and employment stability. Similarly, the cores become entrenched as control centres for head-offices and R&D activities. Peripheries, on the other hand, are dominated by branch plants and so exhibit high levels of external control, including foreign control. While cores control their own destiny, the future of peripheries is decided by distant decision makers. Externally controlled peripheries have lost the capacity to decide their own future.

3. Internalization of trade tendency (with respect to both visible and invisible trade). MNCs evolve in a coordinated, integrated way - they can be legitimately described as open systems which means that while MNCs trade with companies outside of their control they are nevertheless highly internally articulated organizations. Control centres such as head-offices and R&D centres provide various service inputs to branch plants around the globe while branch plants themselves supply each with components, raw materials and parts. As a result, a considerable amount of trade, visible and invisible, occurs within corporations. This type of transaction is known as internal trade or administered trade and is distinct from normal market transactions (see Figure 7.4). Estimates vary but there are suggestions that over half of the world's visible trade occurs within firms. The implications of this trade is enormous. First, because it is institutionalized, such trade links are 'sticky' and not easily affected by government policy. For example, governments that want to promote R&D may find little interest among the branch plants in their jurisdictions who are already supplied with R&D from a distant parent. Second, companies have much more control over internal prices than they do market transactions. Thus, parents can charge subsidiaries high prices for head-office services thus reducing profits, and therefore taxable income, at the subsidiary. Also, subsidiaries can quote low prices on resources they wish to export thereby reducing ad valorem taxes.

These three tendencies are powerful ones. Indeed, according to Amin they are overwhelming any opposite tendency towards flexible specialization. From this perspective, flexible specialization is a romantic ideal and flexibly specialized regions are exceptional, and in any case constantly threatened by corporate take over.

The counter arguments are also impressive.

Limits to the Regional Fragmentation Thesis

The proponents of flexible specialization emphasize the continuing importance of SMEs in even the most industrialized of economies. Since Marx, many economists of varying ideological persuasions have predicted the death of SMEs. The evidence indicates that SMEs will not go away (chapter 9). There are also many firms, that have not been been widely researched, that are neither huge nor fall within what is conventionally understood to be a SME; they are what your text calls 'large medium sized firms' (chapter 10). To turn corporate concentration data the other way around, if a relatively few giant firms account for 25-50% of manufacturing production in advanced industrial economies then firms that are not the biggest giants account for a much large share of wealth. Many of these firms are undoubtedly big, but the great majority are small. Moreover, flexible specialization proponents argue that SMEs cannot be collectively dismissed as some exploited appendages of the giants that exist only at their whim (see chapters 13). SMEs are not simply under 'the long shadow of MNCs'. Rather, they have a much more independent role. For SMEs, spatial proximity remains vital to understanding their behaviour (see chapter 9). SMEs can maintain global linkages but the majority are deeply embedded in local communities. For SMEs, constant re-location is not considered an option.

Indeed, there is growing recognition that even among MNCs, the forces of inertia are extremely powerful. Corporate spatial systems, especially in core regions, are extremely stable over long periods of time (chapter 8). Giants such as GM and Phillips, for example, still favour the same core locations as 50 years ago. In part these inertias refer to the sunk costs of physical capital. New capital has a supply price, old capital does not. It is extremely expensive to build new factories and related infrastructure so, especially in relation to small increments of capital that may be required to keep old facilities operational. In addition, there are tremendous human inertias. Factories are not simply buildings to house machinery; they are also accumulations of human knowledge and experience which cannot be readily accessed elsewhere by individual firms (see in situ change comment on this site). In other words, if globalization represents powerful pressures on MNCs to pursue locational flexibility, capital and human inertias represent powerful pressures on MNCs to retain locational stability.

In fact, a number of observers point out that during the 1980s aggregate flows of DFI have remained largely concentrated among industrialized countries (see chapter 11). Certainly, until the 1990s at least, the aggregate data do not support the idea of MNCs solely looking for cheap labour sources in poor parts of the world. Such behaviour happens and is important. However, so far it has not dominated DFI motivations. There also many examples of giant firms that have favoured concentrated development based on close access to SMEs. Toyota is a particularly good example (see chapter 14). Several researchers in geography have given strong support to Piore and Sabel's argument that flexible specialization is the key trend in industrial organization (for example, Cooke and Morgan 1993). In this view, increasingly rapid technological change and more refined patterns of market differentiation favour disintegrated or flexibly specialized forms of industrial organization. In this view collectivities of interacting entrepreneurs are able to develop substantial external economies of scope to respond to wide ranging and changing consumer demands (see chapter 13). Cooke and Morgan (1993), for example, point to several trends encouraging trends towards flexible specialization, notably:

1. shorter product life cycles, the need for faster rates of innovation, loopy R&D, and the growing importance of lateral information flows as key reasons.
2, The need to produce of goods of higher quality at reasonable cost by a) minimizing defects b) close attention to detail and c) and total quality control extending through supplier chain.
3. the flattening out of decision making by removing managerial layers and involving workers more in decision making.
4. increasingly close ties between users and producers to allow for 'learning by using' economies. These ties are more critical with faster product life cycles since suppliers must know precisely what customers are thinking and experiencing.

The proponents of flexible specialization also emphasize a growing interest in developing close, stable ties among core firms and subcontractors, along the lines of Japanese practice (see chapter 14).

In many respects, the issue of whether it is the fragmented region or the flexibly specialized region that is the blueprint for the future is unresolved. The idea of flexible mass production, which seeks to combine standardization with customization, appears to be a powerful trend that lies between the fordist and flexible specialization trajectories (Figure 2.6). In practice, forms of industrial organization varies considerably within and among regions. What is happening in your region?

Additional References

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

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