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
HR
Quinary = 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.
http://members.virtualtourist.com/m/2aa8f/f4d15/
Outsourcing
to 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 (creditcard 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’ Wages
YE2006 (Average Wage/year (US$000)
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10
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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 marketplace
Takes advantage of
specialized labor
Weakens 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 cooperative 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 largescale 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.