2.3 Telecommunications and the Transnational Corporations
Easily accessible as they might seem, the new telecommunications technologies are still quite expensive to the small firm. According to Dicken (1998, p. 157) it is only the very large organization, whether business or government, that yet has the resources to utilize fully the new communication technologies. The transnational corporations (TNCs) are the major users of international leased telecommunications networks. These immense networks permit the corporations to transmit their internal communications at very great speed. “One reason for the importance of international leased networks for large TNCs is that the unit cost of a leased circuit falls as usage increases; major TNCs thus have a substantial advantage over smaller companies in being able to channel large volumes of information in their leased network” (Langdale, 1989, p. 506). The large nodes in these networks tend to be the major world cities and many newly industrialized economies, such as Singapore, are investing huge sums to position themselves strategically in the global communications network. “It is the possession of such instantaneous global communications systems that enables the TNC to operate globally, whether it is engaged in manufacturing, resource exploitation or business services” (Dicken, 1999, p. 157). From being a helpful tool, telecommunications technology has become a necessity to every firm, whether big or small, and every person who wishes to conduct business.
3 The Financial Sector
3.1 General Comments
Since telecommunications is part of convergent IT and the fundament for long-distance contact, the effects are bound to be most striking in those sectors that have information as a substantial element of their operation. This applies to almost all forms of production, but the financial sector is the best example of an industry that has in some cases broken the chains of matter and deals solely with information.
In the dawn of financial services, monetary transfers were complicated and to some extent limited by the fact that the value had to be guaranteed in some form, often gold or a currency tied to gold, that physically had to be moved between the parties involved. Technological development, especially in telecommunications have enabled and facilitated a financial revolution that has until quite recently been under the strains of government regulations. In spite of the fact that regulations have been under pressure since the emergence of the Eurodollar market in the 1960s and the increasing absurdity of the split gold price, there has only been forms of reregulation and not deregulation. However, there has been a great incongruence between state policy and the realities of finance, which has given TNCs an edge in dealing with states.
Because of its nature the geographical shifts that have occurred, solely or partly by reason of telecommunications, are the most obvious ones. The following part explains some of the trends in the finance sector, in form of geographical shifts, although many of them are applicable on numerous sectors.
3.2 “Back-office” and “Front-office”
It is often and somewhat falsely claimed that telecommunications have erased geography’s importance, e.g. in O’Brien’s ‘The End of Geography” (Berry et al., 1997, p. 476). It is said that through IT, information, which is the core product of finance, has become available anywhere and conclusively the geography of production would be arbitrary. Even though this thinking applies to some parts of the finance sector it is clearly ignoring the complexity and diversity of this idiosyncratic business. Empirical evidence displays major flaws in the so-called end of geography. There are obvious tendencies towards clustering, or agglomeration, in ‘front-office’ functions. These functions demand highly skilled workers, face-to-face contact, personal relations based on trust and so on. Formal information is often available through telecommunications but the often more important informal information such as rumors, insight in the competing firms’ new strategies is not. However the main benefit of clustering is often the difference in speed between remote and clustered business, in acquiring new information. This difference in speed is often what makes a good investment since the market is extremely volatile. For the new financial instruments known as derivatives, this is especially true.
In contrast to the centripetal front-office functions, stand the centrifugal back-office functions. These are often removed from the core financial centers where they needed to be in the pre-IT era. However, since the introduction of telecommunications new centers or regions in less expensive areas have emerged. In these areas the routinized and physically separated parts of finance are performed. The most radical form of centrifugal business is outsourcing.
3.3 Outsourcing
Outsourcing is the most striking centrifugal movement, to some extent in line with NIDL (New International Division of Labor). The principle is quite simple; the company transmits a product to a low-cost region where it is processed and then sent back. The impact of telecommunications on outsourcing is apparent. In order to have a quick and reliable contact between the two parties they are depending on adequate electronic infrastructure. The rational behind this process differs somewhat between sectors, yet the decisive variable tends to be labor costs. Another factor worth mentioning is access to a surplus of skilled workers, allowing a more dynamic and flexible employment that can satisfy an ever-changing market.
3.4 The New Finance and IT
One of the finance epithets is innovation. In the post-Bretton Woods era, completely new forms of financial instruments have been introduced, the so-called derivatives (e.g. swaps, futures and calls). Derivatives have not only provided new forms of spreading risks and borrowing but they have also increased velocity, with higher volatility as a consequence. Telecommunications have had an important role in creating and supporting these instruments with the information flow that they require. IT has furthermore somewhat diminished the intermediary role of traditional financial institutions, and thus allowing borrowers to place capital in a more competitive and therefore higher-yielding milieu. These effects have two sides: Obviously they have led to increased competition and diversity but they have also had a major role in some of the recent financial crises. Financial institutions have installed automatic trade systems in order to hedge against a quick baisse. In the 1986 New York stock exchange crash these systems were more or less protagonists, as soon as the market had fallen to pre-decided levels all automatic sell systems set in, leading to a crash that otherwise could have been avoided. A more perilous case was perhaps the 1994 crisis of Mexico where the velocity of information and therefore capital became painfully evident to the Mexican government. However it would be foolish to blame telecommunications for the effects that it has on the society. It is rather the framework in which this new technology exists that has to be updated and adapted. When the techno-economic paradigm shifts a major shift in state policy, and nowadays perhaps more importantly in the international co-operation, is imperative.
4 Case Study: Ericsson in Sweden
4.1 Introduction
The development of Ericsson from a small engineering workshop into the international corporation of today has been extremely influential on the development of the Swedish telecommunications sector. This short analysis of Ericsson will be mainly based on Michael Porter’s The Competitive Advantages of Nations (1998, p. 71-175.) within the framework of the literature provided.
4.2 Background
When Lars Magnus Ericsson started his workshop in 1876 the American Bell Company was the main actor on the Swedish telecommunications market as well as on the international scene. The Bell Company was principally concentrated on the manufacturing and operation of telephone networks. L M Ericsson decided to mainly venture into the telephone production sector where he saw that he had a possibility to establish a solid market share due to the different attitudes of the Bell Company toward these market segments. The high-cost policy of the Bell Company made it possible for other companies to substantiate their newly found positions as operators in the 1880s. The largest of these companies was Stockholms Allmänna Telefonaktiebolag (SAT). In 1918 SAT merged with LM Ericsson (Alvstam, 1995, p 104).
4.3 Factor conditions
Sweden has during the 1900s had some important features that have made it possible for Ericsson to achieve and sustain its position on the telecommunications market. The technological universities of Sweden have supplied Ericsson with well-educated and comparatively inexpensive labor. The advanced infrastructure of Sweden and early Nordic standards regarding the use of mobile phones has also made it possible to make large ventures in new areas before its competitors. (Alvstam, 1995, p.104-105).
4.4 Demand conditions
The early introduction of telephones and the vigorous competition, especially in the Stockholm area, made it moderately inexpensive to acquire a telephone connection in private households. As a result Sweden had the third highest rate of telephones per hundred citizens in 1900 with three per hundred, only the USA, with eight, and Canada, with four, had a higher rate (Berry et al., 1997, p. 301). The Swedish market is quite small and in the first decades of the twentieth century the competition from the public Telephone Company Televerket increased, as it started producing telephones. The only possible solution for Ericsson was to diversify its markets through an expansion into the international field.
The First World War disturbed the development of Ericsson through the loss of the Russian assets and market. Partly due to the results of the war, Ericsson increased the diversification both in the number of national markets and business sectors e.g. cables and radio communication. (Alvstam, 1995, p.104-105).
The demand for high-tech products has generally developed earlier in Sweden than in the home countries of Ericsson’s competitors.
4.5 Firm strategy structure and rivalry
The lack of competition on Ericsson’s home market is the most remarkable feature of Ericsson’s development during the 1900s. But in comparison with other telecom producers Sweden is not such a noteworthy example of cluster free areas within the telecommunications producing community, Nokia in Finland is another example. The only competitor on the home market has been the government-supported industries, which forced Ericsson to enter the international arena at an early stage of its development. This also created positive effects, e.g. the possibility to establish a position on the market before competitors, the so-called “first mover” effects, aside from the apparent negative effects of competing with government supported enterprises in a small domestic market like Sweden.
The deregulation of the Nordic telecommunications markets has created a Nordic market where the two major actors are Nokia and Ericsson. This development has created a surrogate competition to the lack of domestic competition.
4.6 Related and supporting industries
There is a relative shortage of related and supporting industries in Sweden. Ericsson has its own suppliers, both domestic and international. However the production is highly regionalized in Sweden i.e. the centers of the telecommunications production in Sweden are situated in Stockholm and Östergotland (Linköping-Norrköping). The telecommunications sector is highly historically and geographically correlated to the military industry. This is especially obvious in certain parts of Sweden for example when the airforce shut down F15 in Söderhamn the telecommunications industry moved a majority of its functions to Gävle. A part is relocated to Söderhamn from Stockholm to oppose the unemployment development. In 1989 the only area in northern part of Sweden where there were some telecommunications industry was Östersund and there is an airforce flotilla situated. The Ericsson plants in Linköping and Norrköping are partly situated there due to the technological university in Linköping and the Aircraft production in Linköping by Saab exemplifies how access to aircraft production and education facilities is decisive in the location selection. (Alvstam, 1995, p. 105 and Appendix 1)
The telecommunications industry centers have become more important, but a number of smaller industries have been established between 1989 and 1996 for instance Kalix and Kalmar. (Appendix 1)
5. Telecommunications in the Future.
“…we are not living in a global village, but in customized cottages globally produced and locally distributed.”
(Castells, 1996, p. 341)
5.1 The Growth of the Service Sector
As the importance of trading with refined goods is growing, the significance of fast communication increases. There is a growing importance of services in the global economy, which increases the demand for fast and standardized information. The expansion of the service sector is one explanation to why GATS (General Agreement on Trade in Services) was brought in to GATT during the Uruguay Round 1986-1994. Technological developments are the most significant progressions, which Kondratiev displayed through his long wave theory where every major applied technological innovation is followed by an economic upswing. The evolvement within the telecommunications sector has enabled the emergence of the fifth Kondratiev wave. Since telecommunications connects people it is not surprising to find that the service sector has experienced a skyrocketing expansion during the same time period.
Trade in services is turning more global and complex, thus global communications are becoming more and more intensified. A worldwide communication system is very important, since the need for fast information and communications is growing. Commercial, financial and business services are becoming increasingly internationalized. Many service activities are not tradable because they have to be provided to customers on a face-to-face basis. In the 1970s trade in services grew more slowly than that of manufacturing, but during the 1980s the situation was reversed, especially in telecommunications. Internet has, within just a few years, revolutionized the mass communications media by providing the potential for interactive communications globally. The importance of Internet will most certainly increase in the future.
5.1.1 Capital
According to C.G Alvstam (11-11-1998) the intraregional trade within Western Europe has grown to become the most important trade, and the need for communication in the European Union is immense because of the divided European market. The growth of Foreign Direct Investments is going to positively influence the importance of fast information, cf. Michael Porter’s ”diamond”, and related and supporting industries because of the information flow it creates. The factor proportions theory, which took shape near the end of the nineteenth century, recognized capital as factor-creating. According to Berry et al. (1997, p. 373) capital is of three principal types: Financial capital, physical capital and social capital. Financial capital is the most mobile of factors, and in recent years there has been a growing trend towards substitution of trade flows for capital flows. FDIs have an interdependent relationship with trade. As FDIs and capital movements are growing immensely, so is the need for fast and standardized information. Today, four days of arbitrage are worth more than a whole year of world trade in goods, as mentioned by C.G Alvstam.
5.2 The Consumer Market
Computers, both personal and portable, are today very common. In 1998, 20 percent of the Swedish households had a regular telephone, a mobile phone, and Internet at home (Dagens Eko 12-10-1998). Computers are today able to perform all kinds of telecommunications and e-mail services. Nowadays it is easy to choose among telephone networks, and operators are competing on the open market, a market that is becoming more and more global. Teleshopping and telebanking is also possible, and we can anticipate further revolutionary changes in the way computers are used in connection with telephony, both ordinary telephony and on the mobile market.
5.3 New Conditions for Trade
The Information Technology Agreement, ITA, signed in February 1997, is a supplementary agreement to GATS (C.G Alvstam, 24-11-1998). The agreement includes thirty of the most important countries in the world. Another important feature of the Uruguay Round is E-commerce, which is an agreement dealing with network trade. New information technology, and telecommunications creates new conditions for trade. When, during the transaction, do we cross national boarders?
Trade in services is increasing, and the buyers are becoming more sophisticated and demanding. Today companies are expected to have on-line service 24 hours per day. According to Berry et al. (1997, p. 324) telework is especially attractive for filling off-shift positions, as companies have to turn into 24 hour service. Telework is also attractive for filling off-shifts for ordinary routine and non-routine workers. This pattern of decentralization allows companies to combine the benefits of centralization with the benefits of decentralization, i.e. economies of scale of operations, centralized customer access at the same time as lower space-utilization and lower wages. New, better technology might facilitate a delay of the seventh causal sequence in Mensch’s metamorphosis model (Berry et al. 1997, p. 299) which means that it might facilitate a delay of technological stalemate. It may also reduce the importance of clusters, which has a significant impact on rivalry between firms. The organization of firms, forms of co-operation and competition will probably be more directed towards “just-in-time”, therefore “Keiretsu” might be the most favorable organization form in the future.
5.3.1 Commercials
More advanced communication technologies will be very important to the commercials of tomorrow. The American firm Double Click is one example of a company only working and operating via the Internet. Double Click believes that the Internet market will grow to become the most important market for commercials in the next two decades. In Sweden the Internet trade comprises over 50,000 purchases every year, a market, which will increase in the future (meeting with a representative from Double Click, Gothenburg, 13-11-1998).
6. Conclusions
“…a vertical disintegration of production takes place, accompanied by the dispersal of standardized, capital-intensive functions and the concomitant reorganization of skilled labour-intensive functions around large, densely populated urban areas.”
(Warf, 1989, p. 267)
In line with the law of Engels the income elasticity for high-cost consumption products increases with income. The mobility of educated people industrialized countries has through the fourth wave of Kondratiev created an increased demand for mobile communications products. The fourth wave augmented the possibility for people to reside, work and consume in different places through effective infrastructure and automobile development. Through escalating entropy, when regarding the distribution of a mobile population, a need for a stable point has appeared. This is the great need which was created by the fourth wave, and which the world is striving to satisfy during the fifth wave. Time has come for a new economical paradigm when describing the localization of the modern firm. As we have reached the final phase of the dethünenization process, a shift in importance between the variables has occurred. While the weight of transportation costs have been marginalized in most industries, the importance of agglomeration and access to an adequate electronic infrastructure have elevated.
An important demand condition is that the need for information has grown considerably because of the increased complexity and diversity of modern society. Information has within great many sectors especially the financial sector, become the commodity, not solely being an instrument enabling the production of other merchandize. This development is not only the result of the progress within the telecommunications industry but also a prerequisite for it.
Rivalry within the telecommunications sector in Sweden has been fairly nonexistent. The recent deregulation will and have already to some extent, lead to multipolar and kaleidoscopic market. This will, in line with Michael Porter’s thinking, be a benefit to the consumers, due to increased competition and diversity.
The technological revolution, that telecommunications undoubtedly is, has led to a major shift in government role in many sectors. From having been one of regulation and strains directed at privately owned enterprises, in order to sustain what the state labels as an important part of the defensive infrastructure, the emphasis is nowadays the diametrical opposite, namely attracting private investments in this sector through investment incentives etc. This applies most accurately to second generation NICs. They have realized the importance of low-cost high-quality communications.
The geography of trade has become intricate and hard to regulate. The most obvious change has been the shift in the geography of information. Unlike most popular thinking the geography of production in information business has been strengthened while the consumption has become virtually geographically arbitrary. Governments across the globe have tried to agree on some regulations concerning this complex trade with little but some success e.g. E-commerce.
The effects of telecommunications will due to its fundamental role in Kondratiev’s fifth wave have immense influence on other sectors of the society. It will just as the auto-industry change the way we live, consume and think. The material and intellectual foundations of our post-industrial society are trembling, the techno-economic paradigm is undergoing a turbulent metamorphosis, leaving us abandoned, without the guidance of a shepherd, on terra incognita.
8 Bibliography
Written Sources:
Berry, B., Conkling, C. and Ray, D.M. (1997) The Global Economy in Transititon, 2nd Edition, Prentice-Hall Inc., Upper Saddle River, New Jersey.
Dicken, P. (1998) Global Shift: Transforming the World Economy, 3rd Edition, Paul Chapman Publishing Ltd, London.
Henderson, J. And Castells, M. (eds) (1987) Global Restructuring and Territorial Development, Sage, London.
Langdale, J.V. (1989) The geography of international business telecommunications: the role of leased networks, Annals of the Association of American Geograhers, Vol 79, pp. 501-22.
15
Porter, M.E. (1998) The Competitive Advantage of Nations, Basingstoke Macmillan
Alvstam C.G. (1995) Industri och Service, Sveriges Nationalatlas, Sveriges Nationalatlas Förlag
Other Sources:
Dagens Eko, 12-10-1998, Sveriges Radio
Lectures by C.G. Alvstam, ICU, autumn 1998
“Dethünenization” is here used to describe the diminishing importance of classical localization theories
