Corporate Power in an Age of Global Value Chains

By David Levy.

Gerald Davis and Israel Drori make the provocative argument in their thoughtful piece, After the Collapse of the Large Corporation – Progressivism 2.0?, that the era of powerful, large corporations able to provide long-term economic security for employees is over. If the corporate giants of the last century required a strong, centralized government to provide adequate regulation and countervailing power, Davis and Drori contend that we need new models of governance for an era of fragmented, networked economic forms. While it’s undoubtedly true that economic activity has become more disaggregated in the internet age, the demise of the large corporation, and more importantly, of corporate power, has been greatly exaggerated.

First, large corporations have not exactly disappeared. The number of publicly listed companies in the US has declined, but that is in part due to the rise of private equity – just this week, a bidding war broke out to take Dell private. Some firms have shifted their listings to overseas locations for regulatory or other reasons. But the decline in the number of listed firms could also be a result of increasing economic concentration, due to mergers, acquisitions, and bankruptcies.  Data from Europe suggest that from 1991 to 2005, the largest firms in each sector have increased their share of revenues, while the 4-firm concentration ratio has been more or less stable. The recent wave of mergers in the US airline industry exemplifies the continued growth of the sector’s largest firms even as the number of major carriers falls. With American’s purchase of US Airways, 4 firms will control 70% of the industry. Walmart, the $400 billion retailer, has grown from 9% of US consumer sales in 2000 to 14% in 2009. The financial crisis led to significantly more concentration in the financial sector. Growing concentration is even evident among the internet-based firms that Davis and Drori hold up as a portent of the future. Google, Facebook, Amazon, and EBay enjoy market shares that industrial firms can only dream of, protected as they are by network economies, branding, and other barriers to entry. It’s true that Facebook can service more than 1 billion visitors a day with only 5,000 employees, but these companies wield enormous market power and have been gobbling up lots of smaller companies.

The disaggregation and dispersion of production through subcontracting and offshoring has transformed rather than terminated the forms of corporate power and control. The literature on Global Value Chains and Global Production Networks suggests that the traditional model of large vertically integrated multinational corporations has begun to give way to a more networked form of economic activity. Nevertheless, dominant firms have developed mechanisms to exert effective control over these chains without direct ownership, and are thus able to wield market power and extract disproportionate profits from the value chain. Walmart, for example, achieves this through its buying power and strength in logistics, while Apple does it through control over branding and technology. The result is a new separation of ownership and control – where Berle and Means saw this separation between managers and owners as an internal issue of corporate governance, the new separation relates to governance across the value chain. Just as senior managers in the early 20th century developed mechanisms to exert control without ownership over increasingly large and complex firms, 21st century firms are developing ways to coordinate and control complex globally networked operations without the capital commitments and risks of ownership.

Has corporate power really declined in recent decades? Davis and Drori argue that the fear with new-era technology companies “is not that they are too powerful but that they are too weak, that is, that they are too ephemeral to carry out the policies that we expect of corporations”. It’s true that increasingly intense global competition has created pressures in many sectors to increase flexibility and reduce labor costs. This is particularly the case for the large numbers of workers in second tier suppliers and service providers that have a weaker position in global value chains.  Yet the decline of full-time jobs with security and benefits has occurred across the board, and is just as severe in old school manufacturing as well as the new internet giants. Indeed, this shift in working conditions can be viewed as signaling the increasing power of firms relative to labor, in an age of declining unions, offshoring and automation. US corporations are sitting on a $3 trillion cash hoard, but they just don’t feel a need to spend on improving working conditions.  Corporate power is stronger than ever when measured in political terms, whether it’s the financial sector blocking post-crisis regulatory efforts or contributions to political campaigns, which rocketed after the Citizens United decision to end limits on corporate political spending. The Global Value Chain perspective helps us understand how firms maintain their market power as value chains fragment – and my own research has examined the links between market and political power in these chains.

Davis and Drori propose new forms of local governance to match the new modes of production. This might be effective if firms operating in the new paradigm were atomized locally-embedded entities. In reality, they are highly mobile components of global value chains and subject to intense competition. Local efforts alone are likely to prove ineffective in attempting to rein in their operations. Indeed, an effective governance response to the new forms of production would need to be more international in scope. Some initiatives emanating from civil society, such as Fairtrade and the Global Reporting Initiative, have tried to come to grips with the challenges of confronting corporate practices in global value chains by developing strategies that link activists, consumers, labor and businesses across geographic divides. New forms of governance and countervailing power are urgently needed to meet the shifting forms of corporate power, but this requires a clearer view of the changing nature of corporate power.

Further readings:

Nelson Lichtenstein’s excellent book: Walmart: The Face of Twenty-First-Century Capitalism (2006: The New Press).

Adolph Berle and Gardiner Means, The Modern Corporation and Private Property (Transaction: 1932)

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5 thoughts on “Corporate Power in an Age of Global Value Chains

  1. Pingback: After the Decline of Large U.S. Corporations: Where Do the New Giants Come from? | Organizations and Social Change

  2. The number of large corporations, and the amount of power they are able to wield in the social and political spheres has changed, if not simply diminished as Davis and Drori suggests. Certainly gone are the days of United Fruit Company’s “Banana Republics”, and the empires of the robber barons have become mere memories of a century gone bye. But I would still argue that large corporations wield a great deal of power and influence today. It does not take much of an argument to make the case for companies that sell physical, manufactured goods and their impact and power in the countries and regions they outsource their manufacturing to. But even companies that sell what can be considered “ephemeral” things, like Facebook and Google, still wield the power to move around impressive amounts of resources, and as a result have a larger influence than any smaller entity operating within the same sphere. While the internet, new biotech advances and emerging “green” technologies have led to a proliferation of start-ups, these continue to consolidate in to larger corporations through mergers and acquisitions, and more traditional industries like airlines, automotive or financial services have not shown a definitive trend of fragmentation in to smaller companies. Therefore I must agree with Professor Levy’s assessment of the Davis and Drori’s theory.

  3. Thanks to both Davids for the thoughtful responses. I have a longer reply on the original post, but I want to pick up a couple of threads here. On the question of whether large corporations are disappearing, I think the numbers are pretty stark. The US had 8851 listed domestic companies in 1997; in 2011 it was down to 4171, having dropped 20% in 2008-9 alone. The companies that are being de-listed (Eastman Kodak, Circuit City, Borders) employed tens of thousands of people and lasted for decades; the ones that are being added (Groupon, Zynga, Facebook) employ hundreds, and many are unlikely to survive to their 5th birthday. Circuit City’s demise may have increased Best Buy’s market share, but this is hardly a positive sign for Best Buy’s long-term prospects. Best Buy, like Dell, has been contemplating a private equity buyout precisely because of the weakness of its model.

    By one measure – employment – it is clear that large corporations are in long-term decline in the US, with the notable (and almost utterly idiosyncratic) exception of Walmart. In 1973, the largest 25 US corporations employed nearly 10% of the private labor force. Now it is much less than half that fraction. GM today has about as many employees as it did in 1928, a 75% drop since 1980. Today nine of the 12 largest US employers are in retail, where wages are typically low and turnover high. And it is hard to argue that, say, Sears has durable economic or political power, in spite of its (still large) size.

    Before attributing too much potency to Facebook and Ebay (whose market share strikes me as a bit mysterious), it is worth recalling that back in 2000, when network analysts mapped out alliances to discern the power structure of the Internet economy, the four clearly dominant nodes were AOL, Yahoo, Microsoft, and AT&T (the old one that was merged into oblivion by SBC). Amazon has built hard-to-replicate physical facilities and distribution infrastructure (which is why all other retailers are nervous), but any business based on a dormroom insight strikes me as potentially vulnerable.

    The point about global supply chains is really important. My argument would be that corporations adopted this model for the reasons David L says: vendors tie up their capital and take the risk. The flip side of this is that once the capacity is built outside the firm, others can avail themselves. Vizio can “make” millions of LCD televisions without owning any factories because Sony blazed the trail. Dropbox can attract 100 million users with a few dozen employees because it can rent the capacity that already exists. So, what is the source of power here?

    David J is right about the fact that congeries of independent firms could always in principle replace the one big firm – that’s the theme of Piore and Sabel’s book from 30 years ago. What is different now is that capital equipment (particularly Braverman’s dreaded CNC tools, which now encompass much of the shop floor) is super-cheap, and digital designs are easy to replicate, share, improve, and adapt to local conditions. When economies of scale become less decisive and the costs of one-offs decline enough, then the historical advantages of giant firms wither, and the prospects for local economies increase. (This theme is developed here: http://webuser.bus.umich.edu/gfdavis/Papers/Davis_P&S_2013.pdf)

    It is still worth formulating in a systematic way the sources and uses of corporate power in global value chains. It is not obvious that Walmart’s power over the supply chain (e.g., suppliers like Procter & Gamble, Kraft, and other consumer packaged goods producers) is of the same sort as, say, Apple’s power with respect to Foxconn. David, some enlightenment here?

  4. The social character of intelligence as John Dewey understood it ensures that the non-hierarchical collaboration of small groups may enhance innovation, invention, and quality production. Modern digital technologies facilitate this process but did not introduce the possibility.
    Networks of small enterprise have always been an alternative to gargantuan corporations. Large financial institutions and powerful enterprises of other kinds continue to marginalize the possibilities for
    relatively democratic networks as the railroads and banks did in the 1800s.

    Like David Levy, I do not see the big corporation giving ground.

  5. Pingback: After the Collapse of the Large Corporation – Progressivism 2.0? | Organizations and Social Change

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