Theories Flashcards
Transaction costs
All costs incurred in trading a product or service
Contact costs
Costs associated with buyer and seller getting into contact with each other (time, effort)
Contract costs
Costs associated with terms of delivery, a contract between buyer and seller (coordination)
Control costs
Costs associated with evaluating if and how well the terms of delivery are met (evaluation)
Two opposing views on globalization
Friedman: pro -> everyone can access global economy and benefit
Stiglitz: anti -> globalization leads to more inequality
Upstream transaction costs
Pre-production process transaction costs
Downstream transaction costs
Post-production process transaction costs
Isolation
Both up- and downstream transaction costs are low. Production can take place anywhere
Concentration
Both up- and downstream transaction costs are high. Production clusters on strategic locations
Innovation
An invention that is also introduced to the market.
Also: the creation and automatically diffusion of new ways of doing things
Two parts of innovation
Product and Process innovation
4 degrees of technological change
Incremental innovation: relatively small modifications to existing products/processes (smartphones)
Radical innovations: discontinuous events that drastically change existing products/processes (dishwasher)
Change of technology system: extensive changes in technology affecting several parts of economy and creating new sectors
Change in techno-economic paradigm: new product/process that completely changes or affects routines in all sectors
Creative destruction
New ideas come at the expensive of existing status quo (existing products, ideas, processes)
“Destruction” because the occupied resources are then made free for the new technology/innovation
Product Life Cycle
Introduction Growth Maturity Decline Obsolescence Initially fight for dominant design (product innovation) eventually fight for efficiency (process innovation)
Triple Convergence
By Friedman (2005)
- Technological progress -> lower transportation costs
- Tradability of products -> should be enough products that are affected by this
- Organization of the system -> system should be organized accordingly
Absolute advantage
By Adam Smith: describes a situation that assumes it is profitable for countries/regions to specialize. Only possible if they can trade among each other, so transaction costs must be low enough
Comparative advantage
By David Ricardo: more realistic description of absolute advantage theory. Recognizes that even when countries are overall better in production of goods, it is still profitable to specialize
World Trade Organization theory
Specialization improves global output -> barrier: transaction costs
- WTO change non-tariff barriers into tariff barriers
- Lower tariff barriers
TNCs
Transnational corporations. Two main definitions:
- firms that trade across country borders (exports/imports) and/or
- companies that have ownership across country borders (FDI)
Action space of a company
Hakanson: describes the phases a company goes through in becoming TNC:
- location (production plant + head office)
- penetration of local market (+ sales offices)
- export through trade agents (+ trade agents abroad)
- establishment of trading sites (+ trade offices abroad)
- multinational (industrial) company (+ production sites abroad -> FDI)
TNCs and Product Life Cycle
Introduced by Raymond Vernon:
Introduction: all production domestic, exports to many countries
Growth: production starts abroad, exports to LDCs
Maturity: abroad exports to LDCs, domestic exports to LDCs stops
Decline: abroad exports to domestic market
Obsolescence: LDCs export to domestic market
Investment cycles
Gao and Tisdell expanded on Vernon’s TNCs and PLC:
- emergence of MNCs in top-tier NICs (newly industrialized countries). Initially they depend on FDI from developed countries, but eventually develop own MNCs who perform FDI
- low-income countries (esp. large LDCs) avoid passive product transfer from developing countries and state proactively invests in domestic industries through selective approach
OLI paradigm
By Dunning:
Ownership specific advantages: valuable intangible assets like intellectual property, knowhow, technology, etc. (company)
Location specific advantages: advantages a firm has based on its (geographical) location
Internalisation (of ownership specific) advantages: ability to develop/produce ownership specific advantages self or outsources/partner (license)? (strategy)
OLI towards FDI
Ownership advantage over foreign rivals? No? -> Stay domestic
Yes?
Locational advantage in foreign country? No? -> Export
Yes?
Advantage from internalizing production? No? -> License
Yes?
FDI
Dunning on intangible capital
During 1980-2000 the world was characterized by 3 features:
- intellectual capital as key wealth creating asset: patents
- globalization (exports faster than production): economies of scale
- alliance/stakeholder capitalism: many more stakeholders a company should take into account, each contributing and receiving something
Factors determining governance in global value chain
Gereffi:
- Complexity of product and information that flow through value chain
- How well can information be codified and transmitted?
- Capabilities of suppliers to process/understand information as well as technical capabilities
Gereffi’s global value chains:
Market: transaction complexity (low), codification (high), capabilities (high), power asymmetry (lowest) Modular: high, high, high, lower Relational: high, low, high, medium Captive: high, high, low, higher Hierarchical: high, low, low, highest
Market value chain:
Simple transactions, simple information transmitting. Minimal input and almost no formal cooperation. Low switching costs. (Ex. traders buying from wholesaler)
Modular value chain:
Suppliers tailor products/services to customer’s needs. Low switching costs. High codification. Transactions can be complex. (Ex. Apple and Foxcon)
Relational value chain:
Interactions characterized by information transfer based on reputation, proximity, family/ethnic ties, etc. Mutual dependency, but lead firm in charge. Differentiated products. Complexity and therefore no codification. High switching costs. (Ex. Asian migrants in US)
Captive value chain:
Small suppliers vs. few buyers with great power/control. Much monitoring. Thick linkages, high switching costs. Lead firms may invest in upgrading suppliers to improve efficiency of chain. (Ex. Nike)
Hierarchical value chain:
Vertical integration, managerial control at lead firm. Development/production in-house. Possible reasons: info cannot be codified, complex products, lack of capable suppliers
Types of regional economic integration:
Free trade area: removal of trade restrictions between member states
Customs union: above + common external trade policy towards non-members
Common market: above + free movement of factors of production between member states
Economic union: above + harmonization of economic poilcies under supra-national control
Agglomeration benefits
Internal returns to scale: at the firm level -> firm becomes more productive (reduced production costs) through scale-increase
Urbanization economies: all actors/firms -> benefits from clustering together such as business services nearby, public transport (subway)
Localization economies: for specific firms -> specialized businesses (perhaps related industries) benefit from nearby skilled labour and specialized services
Localization economies:
- Skilled labour market (matching): attracting more and diverse workers -> easier to match
- Input-output relations (sharing): companies with input-output relations have easier access to each other -> lower transaction costs
- Knowledge spillovers (learning)/externalities: exchange of ideas between employees of clustered companies/externalities: side-effects of economic activities not factored into price
Two types of knowledge
Tacit: more elusive. Information that typically needs to be discovered by oneself or told by others. (implicit)
Codified: more concrete. Can be written down and then easily understood/transferred
Ex. Philips machine from Drachten to Thailand and back again.
Globalization and tacit/codified knowledge
Through globalization transaction costs for sharing codified knowledge decreased, but for tacit knowledge not that much. So:
tacit knowledge is still difficult to transfer, codified knowledge (much) easier.
Neue kombinationen
Schumpeter:
innovation is about new combinations of thins (production, resources, people, knowledge)
Globalization + innovation + tacit knowledge + transaction costs =
Tacit knowledge is key in innovation but difficult to transport/transfer, so transaction costs are high. When innovation is an important part of production, transaction costs will be high in this activity, leading to an increased chance of clustering
Central Place Theory
By Christaller:
Range: distance a consumer is willing to travel to obtain a product
Threshold: number of people a firm needs to be able to access for it to earn a profit or at least break even.
Hexagonal shape
Range and transaction costs
When transaction costs decrease, the range increases. Increased range leads to increased competition, potentially ultimately leading to one big market area
Traditional economics:
Produce a good, sell it locally. Receive feedback on (dis)advantages allowing you to tweak it. Step-by-step you start selling it to an increasingly large market, eventually internationally and worldwide, all the time improving your product and upscaling and using your maximum production capacity with each bigger step.
Economics following globalization:
Product immediately available for the global market. No opportunity for feedback and tweaking the product, needs to be ready at once. Production capacity should be enough for the whole market immediately. Market is saturated fast(er) since you’re serving the whole market at once. Entire market has access to your product, meaning it gets reverse-engineered/copied faster, diminishing your competitive edge.
All of the above pushes for more/faster innovation -> emphasis is now more in fixed costs of production instead of variable costs.
Consequences of globalization / increased emphasis on Fixed Costs:
- Increased standardization/routinization
- Increased flexibility
- Increased modularity (Ricardo)
Technological progress had two consequences
- Changed the way firms interact with each other -> impact on production
- Also directly changed the way we produce
Globalization through technological change
Technological change reduced transaction costs, spurring globalization. Globalization led to shorter product life cycles, putting more emphasis on the Fixed Costs and innovation. Innovation relies heavily on tacit knowledge, but transaction costs for tacit knowledge are high. When transaction costs are high -> clustering happens (concentration). Ex. Apple Park.
Premium on being smart
Effect of globalization: (spatial) transaction costs for routine, standardized, non-knowledge intensive activities have fallen, while for the opposite activities they have risen. Jobs associated with these activities are also higher valued.
Also innovation is more important, which requires tacit knowledge, which needs higher education?
McCann’s bid rent curve expansion
Following globalization, high value activities in clusters have further increased in value (increased valuation fixed costs, premium on being smart).
Transnationality index
Measures how international a company is through 3 percentages:
- Revenue abroad/total revenue
- Foreign assets/total assets
- Amount of employees abroad/total employees
Von Thunen’s isolated state
- Dairy and intensive farming: lasts short
- Timber and firewood: heavy to transport
- Extensive fields crops: lasts longer than dairy and is lighter than wood
- Ranching animals: self-transporting
Bid Rent formula
L (land rent) = Y(p-c) - YDF Y = yield p-c = price - costs D = distance from market F = transport costs per distance per ton
Concentric circles
Burgess: same as the bid rent curve but applied to urban areas
Sectoral model
Hoyt: bid rent model corrected more elaborately for disruptive factors: roads, channels, etc. City divided into sectors
Polycentrical model
Harris & Ulman:
added endogenous and exogenous factors to bid rent model
Location and land use
William Alonso:
expanded on bid rent model. Different land users: firms and households, all wanting to locate in the center. Firms decide on maximum profit. Households on maximum utility.
Inception of amenities
Brueckner, Thisse, Zenou:
Why certain cities have rich in the center and others don’t? Because of the amenities:
- Exogenous amenities: natural (rivers, hills, coastline, etc.) historical (monuments, buildings, parks, etc.)
- Endogenous amenities: modern (restaurants, theaters, other public features)
Marshalls’ Principles of Economics
Humans naturally want to optimize. Optimization leads to specialization. This led to more free time -> people found new activities to do.
Weber’s location theory
Focuses on transport costs of resources and finished products.
Resources:
- ubiquities (available everywhere): production typically happens near market
- localized (available at certain locations): production typically happens near resources
Material index = weight of used, localized resources / weight of the finished products
Extension on Weber’s theory:
Isard and Moses:
- factor substitution in the production process. Ex. changing share of raw materials or labour.
- internal economies of scale: if scale increases enough, this will lead to lower production costs which may affect location choice
Weber’s material index:
M > 1 resource orientation
M = 1 location indifferent
M < 1 market orientation
Central Place Theory K-levels:
K=3 : each higher level of range is 3x larger (market: optimized for product sales)
K=4 : each higher level of range is 4x larger (transport: optimized for efficient transport)
K=7 : each higher level of range is 7x larger (administrative: optimized for administrative organizations)
Central Place Theory hierarchy:
Central places: everything available, both low and high order goods
Less central places: less products/services, both low and high order goods
Least central places: few products/services, only low order goods
High order: large threshold, large range
Low order: low threshold, low range
Spatial competition
Hotelling:
- Competition can also lead to spatial clustering
- Free market may not be automatically spatially optimal:
> some customers have to travel further
> first-mover advantage
Hotelling vs. Christaller/Losch:
Hotelling more on small scale. C/L larger scale (multiscalar). They complement each other
New Economic Geography background
Important contributer: Krugman. Formalizes effect of agglomeration on location of production. Increasing returns to scale boos clustering of activities (regional inequalities): - love of variety - decreased transaction costs Three underlying principles: - iceberg transportation costs - love of variety - home market effect
Home market effect
If home market is relatively strong, companies are generally more competitive. When borders open, advantage will go to the stronger area with larger home market (remember Australia/New Zealand)
Centripetal and centrifugal forcse
Centripetal: encourage firms to cluster: - input-output relations - skilled labor market - knowledge spill-over Centrifugal: encourage firms to spread: - immobile factors - land rents - pure external diseconomies
What’s in it for the rural?
Bosworth and Venhorst: builds on Overman, Rice, Venables.
Focusing on urban and rural regions and looking at tension between house work and residential locations, and the effect of commuting.
Porter’s Diamond
Adds Rivalry to the three other agglomerated economies (internal returns to scale, urbanization economies, localization economies):
Rivalry/competition enables you to analyze what your competitors are up to and utilize that to increase productivity
Cumulative causation
Myrdal:
Describes how self-reinforcing growth may happen.
Spread effects: growth in one region may spread (trickle down) to other nearby regions
Backwash effects: growth in one region may pull capital/resources from nearby regions
Growth pole theory
Perroux:
Proposes way in which cumulative causation may happen. Key company sets off the process of cumulative causation
Four mechanisms:
- technical polarization (investing in technology of or for key company)
- income polarization (higher income -> more consumption -> boost production)
- psychological polarization (image effect when key company does well)
- geographical polarization (consequence of the above)
Paradox of opening borders and regional growth theories
Opening borders is claimed to leverage comparative advantage (specialization), but regional growth theories suggest to close yourself from other regions (at least a bit) to spur economic growth
Multiplier effect:
Direct: affects actors directly involved
Indirect: affects suppliers and those indirectly involved
Induced: affects wider economy
Models of Man
Herbert Simon:
People don’t have all information and if they do, they can’t process all information.
Bounded Rationality
Satisficers and optimizers
People are satisficers instead of optimizers: work with the information they have (which is [geographically] limited) and at some point settle with what we find.
Spatial scales:
- Activity space: all information available
- Behavioural space: some information (unprecise, incomplete)
- Objective space: no information about
Debunking the Homo Economicus
- People don’t have all information or otherwise cannot process it.
- Same factual information has different perceptions/interpretations.
- Non-economic considerations may also be important.
They introduce uncertainty in economic decision-making
Two applications of the Alternative Man
- Behavioural matrix (Allan Pred)
- Mental maps: based on
- Operational knowledge: information from those thins you use.
- Responsive knowledge: still based on contet, known landmarks used to connect points.
- Inferential knowledge: generalized locational knowledge that can be used in other contexts.
Institutions:
Formal: official, written down somewhere (also external institutions)
Informal: unwritten rules we all known (also internal institutions)
Direct and indirect impacts of better institutions in Europe:
Direct
- Better returns on public policy
- Higher empoyment rate
Indirect
- More innovation
- Infrastructure policies
Evolutionary economic geography
Recognizes how history is importan for decision-making. Tries to understand the drivers and direction of regional economic change. Follows Charles Darwin: - random adaptation of species - survival of the fittest - selection environment
Routines
Better routines, built by experience or innovation, can create a competitive edge and help outperform other firms/regions. However, identifying routines is difficult.
Two important contributions to evolutionary economic geography
Agglomeration benefits from related diversity
Dynamic concentration models without the need of agglomeration benefits
Related Diversity
Ron Boschma:
it’s not about being (too) diversified or specialized, but about being able to develop into diverse but related activities (based on the routines that you have).
Spin-off model of clustering
Steven Keppler:
clustering without agglomeration benefits happens through increase spinoff companies from a company that has better routines. The region of this company will experience more clustering than regions of companies with lesser routines.
Implications of evolutionary economic geography
- Slow development
- Difficult to influence
- Uncertain outcome
- Policy goal is to optimize process
