Lesson 10 - From the golden age to the crisis of large industrial corporations (2017)

Apunte Inglés
Universidad Universidad Pompeu Fabra (UPF)
Grado International Business Economics - 2º curso
Asignatura International Business & Economic History
Año del apunte 2017
Páginas 12
Fecha de subida 01/03/2017
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Apuntes 16 y 17 de febrero

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a.villagrasa IBE, 2nd Year - 2nd Term Business history Lesson 10: From the golden age to the crisis of large industrial corporations Outline THE THIRD INDUSTRIAL REVOLUTION .............................................................................. 2 Research and development .......................................................................................... 2 Multinationals............................................................................................................... 2 THE US .............................................................................................................................. 4 Increase in competition ................................................................................................ 4 Conglomerates.............................................................................................................. 4 SOVIET UNION .................................................................................................................. 6 Ownership and allocation (Theory) .............................................................................. 6 Russian economic organization .................................................................................... 6 Problems of central planning ....................................................................................... 7 Consequences for the society ...................................................................................... 7 Collapse of the communist bloc ................................................................................... 9 JAPAN.............................................................................................................................. 10 End of the zaibatsu ..................................................................................................... 10 Keiretsu ....................................................................................................................... 10 Performance ............................................................................................................... 10 EUROPE ........................................................................................................................... 11 Differences with US .................................................................................................... 11 PERIPHERAL COUNTRIES................................................................................................. 12 South Korea (ISE) ........................................................................................................ 12 Argentina (ISI) ............................................................................................................. 12 1 IBE, 2nd Year - 2nd Term a.villagrasa Business history THE THIRD INDUSTRIAL REVOLUTION The golden age was a period of mass diffusion of the technologies developed during the second industrial revolution (chemical, electricity, cars…). The Third Industrial Revolution was a period with opportunities to create companies in new industries such as communications and transports.
The telephone and the telegraph were already diffusing, which allowed companies to become global producing abroad. This required reorganizing companies because they needed more coordination (decentralization).
Research and development Research and development (R&D) became very important for companies during this period. Companies created R&D departments to create innovations, which until that moment had been made in an “informal” way. Innovations became a comparative advantage for companies because they allowed them to beat competitors (until they copied them). Because of this, firms became concerned of the importance of keeping developing innovations.
Governments The US government started financing R&D making very large investments. They did so through private contracts, so the R&D was inside the company and the government was paying to develop something new (like a new weapon).
The US was in a technological race with Russia In the case of European countries, the state intervened more creating universities and public research laboratories. This created synergies because not only companies were involved in the R&D process: there was cooperation among institutions.
Japan bought technology to create its innova tions.
Multinationals The US was the country with highest growth during the interwar years and at the beginning of this period it dominated most of the sectors. However, this implied that they were closer to the exhaustion stage, so their growth rates were lower than European growth rates.
First international companies (multinationals) were created in this period.
Multinationals started appearing in the US and soon generalized. The idea was to implement the same business model or production process of a product (or technology) in a country growing faster. This provided the advantage of lower labour cost and high demand (because demand is higher in countries with high growth).
2 a.villagrasa IBE, 2nd Year - 2nd Term Business history Additionally, protectionism was reducing but still present, so it was easier to sell in the country the product was made.
The M-Form, a hierarchical strategy with geographical divisions, gained importance because it allowed area managers to take the best decisions for their market while following the same general strategy (set by the CEO).
3 a.villagrasa IBE, 2nd Year - 2nd Term Business history THE US The US was controlling the majority of the sectors because they were taking advantage of the following: 1. Big companies: They were very big because, after the anti-monopolistic legislation, they had merged.
2. Natural factors: The US is a country very rich in natural resources, so they took advantage of them.
3. Dynamism of demand: It is a very big country, meaning that their market is larger, so despite protectionism they could grow.
After the WW2, American companies were much bigger than European companies.
Increase in competition The US was already in a more advanced stage of technology, so their growth wasn’t as high as the growth of countries that were just entering in the mass diffusion stage. It was a period of economic convergence.
During the 60’s they suffered an increase in competitively (from converging countries) and a slowdown in productivity (exhaustion stage). Hence, they started investing abroad to take advantage of the high growth of those countries, where consumption had increased. Moreover, they intensified research efforts and entered in new sectors adopting diversification strategies.
German and Japanese miracle After the war, Germany and Japan were destroyed, but they recovered very fast thanks to American help. The US was interested in them because of their geographical position, which made easier to control communism. However, this increased competition for American firms.
Conglomerates As we have said, companies started investing more in research, even if they were getting diminishing returns. Moreover, they started a new form of diversification entering in new markets unrelated with their core business.
Until that moment there was only related diversification, which allowed taking advantage from economies of scope.
Conglomerates don’t take advantage neither from economies of scope nor from economies of scale but they take advantage of: 4 a.villagrasa IBE, 2nd Year - 2nd Term Business history 1. Financial advantages: Profits from mature sectors (close to exhaustion) could be used to finance investments in new sectors. Moreover, losses in one sector could be compensated with profits from other sectors.
2. Fiscal advantages: The development of the welfare state implied an increase in taxes, but they were lower for conglomerates.
3. Managerial advantages: They can afford paying high wages, so they can hire very qualified managers.
4. Risk: Their risk was even lower than with related diversification.
However, these advantages couldn’t compensate the high fixed and managerial costs.
In addition, they were less flexible and had a complicated structure that made difficult to take fast decisions. At the end, many firms returned to their core business to regain competitiveness in international markets.
5 a.villagrasa IBE, 2nd Year - 2nd Term Business history SOVIET UNION Ownership and allocation (Theory) We have to distinguish between ownership and allocation of factors.
The difference between capitalist and communist economies is who owns the production factors. In a capitalist economy the owner is private, while in communist economies the ownership is public (the state).
There are two mechanisms of allocation of resources: the market and the central planning. In the market economy decisions are decentralized and based on prices, costs and utilities. On the other hand, in central planned economies the automatic mechanism of the market is replaced by an institution that decides everything: level of investment, wages, quantities, prices...
This difference is important because not all central planned economies are communist.
For example, fascist countries are centrally planned and aren’t communist.
Russian economic organization New Economic Policy (NEP) It was a mixed system introduced by Lenin. It consisted in the public ownership of strategic and heavy industries and the private ownership of consumption goods industries.
However, after Lenin’s death there was a debate about the concept of the Social Revolution because, while Trotsky wanted to spread it internationally, the others wanted to keep communism inside the Soviet Union.
There were also two positions regarding the organization of the economy: A. Maintain equilibrium in the growth: In other words, to give the same importance (resources) to all sectors.
B. Give all the priority to heavy industry Stalin’s system (Central planning) After the Russian revolution there was a civil war between soviets (red army) and the traditional bourgeoisie. After this, a process of nationalization of the majority of activities and the socialization of the means of production started and moved to war production.
The Soviet Union and most of the eastern European countries (except Yugoslavia which was decentralized and allowed factory owners to take decisions) were organized as a central planned economy in which the government elaborated 5 year plans determining what had to be produced and at which prices should be sold.
6 a.villagrasa IBE, 2nd Year - 2nd Term Business history Problems of central planning After Lenin’s death, central planning was imposed by Stalin, substituting the former mixed system. It led to high growth but it had social costs and problems linked to underproduction and inefficiency.
1. Economic growth Stalin changed his mind and adopted the view that all priority should be given to heavy industry. The economy became a central planned one and Stalin was able to mobilize resources massively and to start a process of high growth, which is the reason of their success in WW2. It was an extensive type of growth because it was due an increase in production factors, not in technology. Moreover, they had a tendency to stagnation, with growth rates lower than other countries and even years of negative growth.
2. Underdevelopment of light industry Giving priority to heavy industry caused high social costs because of the political repression and the scarcity of consumption goods like food. As all resources were used in heavy industry, light industries like agriculture weren’t receiving enough investment.
Moreover, to encourage the growth of heavy industries, agrarian prices were very low (even lower than production costs) to allow industrial wages to be low. However, when prices are lower than production costs, there aren’t incentives to increase production, making scarcity problem worst.
The allocation of resources was very inefficient because there were enough inputs for everyone but they were concentrated only in heavy industry.
3. Inefficiency Companies in the Soviet Union were less efficient and productive in comparison to capitalist countries. However, due the lack of competition (there was only one company producing each product) they were bigger.
Decisions were taken by an external agent (central planner), and the role of the managers of the company was limited to producing what the plan stated using unlimited resources. This caused incentive problems for the company1.
Consequences for the society The problems above, related with information and inefficiency, caused the following problems and distortions in the economy: 1 In theory employees would also be less motivated, but this wasn’t a problem because there was a lot of repression and workers that didn’t work were punished (killed).
7 a.villagrasa IBE, 2nd Year - 2nd Term Business history 1. Consumption decisions In a market economy, goods’ prices correspond to the marginal cost and the marginal utility. However, in this system, prices were set according to importance. Hence, luxury goods were more expensive because they “weren’t needed”. This caused people to adapt their preferences with what they had, so they weren’t taking the optimal decision.
As prices weren’t reflecting the costs, people couldn’t take the most efficient decisions.
There was a lot of shortage and distortions because, even if people had enough money to purchase what they wanted, there was nothing to purchase.
The same still happens in Venezuela, where people have the money but supermarkets are empty.
Example: Pet food is not as necessary as human food, so it is more expensive, even if its production cost was the same or lower. Because of this, pet owners are going to fed them with human food, which is not the decision that they would make in a market economy.
2. Process of production In a market economy, firms want to maximize their profits, so they try to be as efficient as possible. However, if their only “task” is to achieve a given production level, using as many resources as they need/want, there aren’t incentives to become more efficient.
In addition, innovation is risky because there might be loses the first year. Therefore, if they innovated they might not meet the plan, so they didn’t have incentives to take that risk.
Moreover, even if they improved the production process, there were incentives to store the production surplus to meet the following year requirements or sell them in the black market.
3. Information The managers of a firm are those having specific information about the particular company, but they weren’t the ones taking decisions. Firms were only production units.
Managers had information that they couldn’t use and planners didn’t have the information they needed.
8 a.villagrasa IBE, 2nd Year - 2nd Term Business history At the beginning, the USSR was an underdeveloped economy with only a few sectors.
However, as the country grew and more sectors appeared, it became much more difficult to plan all products. Furthermore, as opposite to the market economy, there aren’t entrepreneurs because, if you have an idea for a new product, you have to wait for the central authority to approve it.
Collapse of the communist bloc Eastern European countries were internationally specialized. When the communist bloc collapsed, differences between them and countries in the capitalist block in terms of standard of living and performance were evident.
With the end of communism, companies started being privatized, but there was a problem setting prices. All citizens were given vouchers, which made them owners of a part of a company (similar to participations), but they didn’t know the real value of the company. Managers (who were related with the government) had privileged information and knew the real value of the company. Therefore, in a moment of crisis, citizens sold their vouchers to managers, at a low price, making them the owners.
9 a.villagrasa IBE, 2nd Year - 2nd Term Business history JAPAN End of the zaibatsu Before the WW2, during the Meiji Restoration, the first zaibatsu were created as a result of the privatization of industries.
During the war, Japan (which was in the Nazis’ side) was occupied by the Allies. To reduce Japan’s economic and political power, the US decided to dismantle zaibatsu.
However, their strategy changed drastically at the end of the 40’s with the Chinese Revolution, as they wanted to have allies in the Pacific (Taiwan and Japan). America became more permissive, even generous later, and allowed more government intervention.
Keiretsu The Japanese government started supporting strategic sectors through the Ministry of Trade, which subsidized the import of technology and encouraged the growth of these sectors to guarantee the presence of Japanese companies in the international market.
The main objective was to grow enough to take advantage form economies of scale.
Former zaibatsu were reorganized as keiretsu, which consisted in horizontal or vertical integration of firms.
Kynyuu keiretsu (horizontal) They consisted in the reformation of the zaibatsu dismantled during the war. They were companies operating in different sectors connected by the common source of financing, as all of them had shares of the others.
Kigyoo keiretsu (vertical) They were a set of small companies acting as suppliers of a larger company (head group) to which they were united. This was the integration used in the car industry.
Performance Thanks to the support of the Japanese government and the US, they were performing extremely well. Their strategy consisted in purchasing foreign technology, improve it (making it cheaper, better and/or more efficient) and use it in their own production processes.
Instead of innovating, they copied western economy and made it better.
10 a.villagrasa IBE, 2nd Year - 2nd Term Business history EUROPE It was a period of convergence with the United States, so companies started being bigger, more diversified and, as a consequence, many adopted the M-form. It was also a period of liberalization and the first steps toward the creation of the European Union (European integration) were made. As a result of protectionism, market size increased and, together with the aid provided by the Marshall plan, there was fast economic growth in the less developed countries.
Differences with US European companies started copying and implementing the business strategies and structures of American companies, and the generalization of multinationals (American investments in Europe) encouraged diffusion. However, despite the convergence and the reduction in differences between Europe and US, Europe maintained some typical characteristics:     Structure: The M-Form spread in Europe but wasn’t as generalized as in the US.
Holdings and the U-Form were also more popular in Europe.
Size: Small and medium sized companies, as well as family-owned businesses, were more present in Europe than in the USA.
Separation: While it is true that separation of ownership and control increased, Europe never reached the same level as the US, as families were owners and managers.
Government: European governments’ intervention was higher. They regulated strategic sectors, the labour market and owned public transport and communication industries. However, in the 80’s there was a tendency to liberalize the market and a transformation at the political level (M. Thatcher).
In general Europe companies and market became more similar to America, but without reaching the same level.
11 a.villagrasa IBE, 2nd Year - 2nd Term Business history PERIPHERAL COUNTRIES South Korea (ISE) Their strategy consisted in Industry by Substitution of Exports, which consisted in making all countries import Korean products. In that moment, after the Korean War, the US was interested in South Korea as a strategic ally, so they received a lot of American help. Moreover, the US allowed the Korean government to do things that would be usually considered against the standards of competition 2. Their objective was to position South Korean companies really well in the international market (increase their exports).
The state provided a very stable labour force and there were very few labour conflicts because of the high repression (it was a dictatorship). They encouraged technology diffusion by letting multinationals enter in the country only with a partnership contract (being minority shareholder) with local industries to allow them to copy foreign technology.
Subsidizing companies and copying technology using partnership structures has been a common strategy for Asian countries.
Argentina (ISI) Their strategy consisted in Import by Substitution Industries. This strategy was very influenced by the economies of the CEPAL (Comisión Económica para America Latina y el Caribe).
Latin American countries were underdeveloped because of their high dependency to the US, as they were exporting meat and food to the US but importing everything else from there. To correct the lack of economic growth, their idea was to adopt protectionist policies and create industries to replace the previous imports from the US.
However, they weren’t as successful as Asians encouraging local companies using government intervention. They lacked competitively and had problems of inefficiencies, among others. This was, in part, because they weren’t large enough to take advantage of economies of scale.
2 The government can’t help companies to be more competitive, as it is considered to be unfair competition.
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