Flexible Capitalism

Many projections about the benefits of free trade are based on assumptions such as: Capital is immobile, unit labor costs are the same in all nations, people have preferences for the products of their own nations, and existence of full employment. All of these assumptions are questionable. Today we will look at the consequences of capital that is highly mobile, something that has become increasingly true over the course of the twentieth century.

The large factories that dominated capitalist production over the 20th century have sometimes been called the Fordist (after Henry Ford) or Taylorist (after a famed efficiency expert) means of production. It entails the concentration of large amounts of capital, machinery and labor in a single location.

Recently, capitalist production has become more dispersed among subsidiaries, affiliates, subcontractors and partners around the world. Large factories are still important, but the bulk of recent growth has resulted from the increase of mid-sized production facilities for light industry. This is sometimes called flexible capitalism because no one company is deeply invested in the success or failure of a single product. Rather, the risk is broken down and distributed among smaller units, and deals, production targets and designs can change much more rapidly. Recent transformations in multi-national corporations, and the emergence of East Asian business networks are different means through which to understand flexible capitalism.

Multi-National Corporations
Many statistics can be found arguing that as man as half of 100 wealthiest economic units in world are multi-national companies.

• In 1991, the sales of the ten largest corporations exceeded the aggregate GNP of the 100 smallest countries.
• General Motors sales of 133 billion dollars equaled the combined GNPs of Tanzania, Ethiopia, Nepal, Bangladesh, Zaire, Uganda, Nigeria, Kenya, and Pakistan--countries that make up one tenth of the world.
• The 200 largest corporations employ 0.3% of population and control 28.3% of output.
• Very few of these companies directly support militaries or social service projects (except through taxes), yet often reap the benefits of social services like public housing and welfare support (keeps wages down), and the military (help keep friendly elite in power and suppress labor movements--maintain "public order").

Most of these companies are no longer based in a single countries, but have branches, affiliates, and offices around the world. Some of the benefits of spreading around the world include:

• Can set up productive facilities where the most appropriate mix of skilled labor, cheap labor and weak labor unions can be found.
• Can set up offices, productive facilities and banking operations in locations where taxes are most lenient.
• Can circumvent tariffs and sanctions. For example, Cars produced in Honda's Ohio factory can be freely imported into countries like Taiwan which have barriers against auto imports from Japan. The U.S. engineering firm of Brown and Root transferred the management of its multi-million dollar projects in Libya to its British subsidies when Reagan imposed sanctions on Libya.

With the dispersion of production and finances comes the dispersion of assets and subcontracting. The only asset of many well-known companies is their trademark. Many well-known technology companies are little more than coordinating stations, managing the flow between designers, producers, shippers, marketers and distributors. Speeding up turnover, perfecting order quantities and distribution, coordinating production processes and facilitating the rapid flow of goods is the new frontier in cost-efficiency. Some consequences of this:

• It is impossible to say where any particular item was manufactured. Material, labor and assembly probably took place in many locations. Some computer parts may have crossed the Pacific Ocean four times in the process of manufacturing.
• Royalties, licensing rights, intellectual property rights are becoming an increasingly important source of profit for large companies that monopolize these rights. They are thus guaranteed a portion of all profit created anywhere and reduce significant competition.
• Much work is subcontracted to smaller companies. The advantage is that these companies invest in the labor and machinery, and large companies can choose to order or not order from them without bearing much of the risk or maintenance costs. Thus, it is true that a significant portion of all businesses are small businesses, but they are heavily dependent on the activities of large multinationals.
• The multinationals enforce competition between smaller subcontractors by giving orders to the cheapest and most efficient producer. Yet among themselves they cooperate to an enormous extent, dividing world markets between them. The inside mechanisms of many electronic items come from exactly the same factory, even though the plastic casing and brands are different.

Chinese Business Networks
It is not all exploitation. Chinese business networks link up myriad small and mid-size family companies, and dominate much of the Pacific Rim economy. Chinese businessmen say their greatest assets are not machinery or money, but reputation and connections. When an opportunity presents itself, a well-connected businessmen can instantly find appropriate money, producers and distributors. The firms are small, but highly adaptable. A small factory may change from producing tennis rackets to producing plastic thermoses within a month. Wealthy and middle class Chinese families are famous for dispersing family members to get educations, set up residences and open branches around the world--much like multinational corporations.

It is difficult to estimate the strength of Chinese business networks. Western economic indicators are based on measuring the production of large, stable companies. Chinese companies tend to be ephemeral, existing from deal to deal, and hide their accounts from tax men and other strangers. The man is the measure of success, not the company. Business empires tend to die with their founder, because no institutional structure exists to continue his legacy.

Many people now argue that Chinese culture and Confucian virtues of frugality, hard work, etc. are at the root of this success (even though a century ago, Confucianism was blamed for the backwardness of China). It is true that speaking, eating, and behaving Chinese can help to build business relationships--many Southeast Asians now make their kids study Chinese and learn Chinese culture. But it is unrealistic to explain success in terms of cultural values--these are the values of small entrepreneurs across the world. We are better off in following Hamilton to look at how Chinese business historically had to develop institutions and procedures for trust and self-regulation within a hostile atmosphere. This has proven extremely successful for establishing networks that cross national boundaries and do not depend on the legal protection of any single nation.

This form of organization was unsuitable for creating the enormous industrial operations of Fordist capitalism, but is extremely successful in an already industrialized world. Much of their business is subcontracted to multinational corporations, but a good portion of East Asian trade takes place through Chinese networks that are independent of multinational corporations. There is still space for the success of an independent entrepreneur.

Back to Schedule