Interregional Trade: Adjunct to Innovation12

RICHARD W. JANSON, Department of Geography, Kent State University, Kent, OH 44240

OHIO J. SCI. 94 (5): 124-133, 1994

WEALTH FROM TRADE:HISTORICAL PERSPECTIVE

IntroductionGains from trade are an obvious fact, and the gains in

a free exchange benefit both sides of the agreement.Contemporary accounts by the earliest European ex-plorers in the Far North of this continent tell of annualexchanges between the Innuit (Eskimos) of the Arctic Sealittoral with the Indians of the taiga (North Woods), eventhough Innuit and Indian were mortal enemies andwould kill each other on sight. The products of the Arctic(ivory, furs, fish hooks, fish) were of immense benefit tothe Indians because they were otherwise unavailable.Reciprocally, the furs of the forest, and products of woodwere of immense value to the inhabitants of the tundra, atreeless plain. The exchange would take place without aface to face encounter. One group would leave theirgoods in a traditional sheltered spot and the other groupwould subsequently take the goods and leave in theirplace the bounty of a different region.

In a modern exchange economy with money as amedium of exchange, the gains of trade are equivalent toan increase in real income in both trading regions. Whenproducts or their substitutes become available for a lowercost the situation is equivalent to an increase in income.

Marco Polo's fabulous recitation of his adventures withhis father and his uncle is an account of a commercialventure to bring luxury goods from the Orient to Venicein exchange for Venetian goods. The silks of China, thespices of South Asia, and the damasks of Persia werecarried by camel caravans protected by private armedguards across thousands of miles of desert, steppe, andmountains. The fabled cities of Bokhara and Kashgar, andSamarkand and Khotan, are oases along the route, onalluvial fans watered by mountain rivers descending intoan arid land. The caravans were commercial venturesinvolving substantial capital and entrepreneurial skilldeployed for commercial gain. The flow of luxury goodsand ideas was in both directions. The woolen textiles fromFlanders and the exotic products of Europe found theirway to the great court of the Mongol emperor (KublaiKhan) ruling on the peacock throne (Barraclough 1987a).

'Manuscript received 19 September 1994 (#94-22).PRESIDENTIAL ADDRESS—Presented at the 103rd Annual Meeting

of The Ohio Academy of Science held at Medical College of Ohio,Toledo, OH, on 22-24 April 1994. Dr. Janson is the past president of TheOhio Academy of Science and is Chairman of Ohio's Thomas EdisonProgram. He is currently a councilor of The American GeographicalSociety and an adjunct professor at Kent State University. He and hisbrother Ray have owned and operated The Janson Industries of Canton,OH, a manufacturing company, for 36 years. Dr. Janson received hisundergraduate education at Denison University, followed by graduatework at Duke University, University of Chicago, and Kent State University(Ph.D. in Geography).

Commercial Towns and Market EconomiesThe Middle Ages lasted for 1,000 years, from the fall of

Rome to the Renaissance. About the year 1000 runawayserfs and other itinerant merchants appeared at medievalvillages and at customary fair locations with goods forsale. These merchants, of low esteem, were the harbingersof change. Slowly their customary trading places outsidethe walls of a great baron's fortified town became thefocus of commercial activity. This external trade was theengine that allowed the townspeople to extract from thefeudal baron privileges that ultimately created the middleclass of freemen—the townspeople. The alliances of free-men in the commercial towns of western Europe with aremote king caused the severance of fealty to the locallord, and ultimately the establishment of the nationstates—a new concept.

Prior to the development of the commercial town inEurope, administrative places with aggregations of popu-lation existed. These centers concentrated the officials andfunctionaries required to administer ecclesiastical landscontrolled by abbots and bishops and other ecclesiasticalbarons. Sometimes the towns were the administrativecenters of secular lords, but the commercial towns, usuallyoutside the walled, medieval fortified towns, were newcreations, pregnant with the chrysalis of a new socialeconomic system (Pirenne 1937).

The medieval church and their administrative townswere institutions for stability, for status quo. Itinerantmerchants and the commercial towns worked for profitand required cash money—not barter—for their goods.The transformation process was slow but inevitable. Theultimate result was a new class of town dwellers no longerbound to the land. A market system with exchange inmoney rather than by barter slowly gained ascendancy. Asa result commercial trade rapidly increased and lifted thereal incomes of the emergent nations of the modern world.

Colonial Enclaves and The Plantation SystemPrince Henry the Navigator of Portugal financed the

cartographic research and the expeditions of discoverythat mapped the coast of Africa. By 1498 Vasco de Gamahad rounded the Cape of Good Hope and shortly there-after reached India. The spices of Zanzibar and theMalabar coast of India assured great wealth to the inno-vating sailors who established commercial enclaves onthese far shores. Christopher Columbus was also a productof this graduate education for mariners. The Spanishencounters following Columbus are not in the category offree exchange because the Spanish motive was conquestfor tribute, not free trade with the indigenous people. Theconquest of Mexico by Cortez replaced the tyranny of theAztecs with the tyranny of the Spanish. The conquistadorsystem was exploitative to the extreme. The king of Spain

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confirmed feudal title to the conqueror for land broughtunder subjugation.

The Dutch and English that followed the Spanishconquerors were driven by the same desire for profits butthe exploitation took a different form. After the famousvoyages of discovery some of the emerging great powersof Europe engaged in peripatetic efforts to plant coastalenclaves on newly discovered shores or on nearby islandsoff foreign shores. The effort was global, and discoverersand traders unfolded the new world during the sixteenthand seventeenth centuries. A trading system emergedconsistent with the new world order. This trading system,compatible with international rivalry for foreign colonies,was based on a monopsonistic principle. The mothercountry controlled the supply of goods emanating fromher colony. Great plantations were established in thecolonies to provide efficient production of agriculturalproducts on a large scale for consumption in the mothercountry or for resale by the great colonial stock com-panies. The plantations on foreign shores were oftenmanned by imported labor. For this reason East Africancountries all have large Indian minorities, as do islands ofthe Pacific, and Sri Lanka in the central highland regionwhere tea is produced (Barraclough 1987b).

From a trading perspective the result was an abun-dance of tropical imports (primarily food and fiber) intothe European countries. The tropical products wereexchanged for the handicraft products of Europe beforethe industrial revolution, when the technology advantagesof the mother country versus the colonial nations wereweighted largely toward military pursuits. In many otheraspects of living the foreign regions were hardly inferiorto the European regions in scale of living, cultural ad-vancement, and political organization. The plantationsystem was exploitative in the tropical countries of origin,but the system was also efficient. The price of the com-modity produced was often reduced to a small fraction ofthe pre-plantation price.

The Imperial Trading SystemAlmost two centuries of commercial growth followed

the great discoveries by Vasco de Gama, ChristopherColumbus, and Ferdinand Magellan. The naval powers ofthat time were all engaged in gold and silver trade, slavetrade, sugar trade, and trade in other tropical agriculturalproducts. The activities were performed by companiesthat usually had monopoly charters from the monarchin the European home country. The coastal enclaves andoff-shore island trading stations in foreign countries wereestablished in strategic locations and were defended tokeep out foreign competitors. By the mid 1600s Amster-dam was the richest city on earth, based on wealth createdby trade, especially the spice trade. By the mid 1700scommercial rivalries were a substrate underlying fourworld wars: 1) Wars of the League of Augsburg, 2) Warof the Spanish Succession, 3) War of the Austrian Suc-cession, and 4) Seven Years War. The wars were engagedby the European powers with prizes in far flung regionsand distant oceans. The final result was preeminence ofGreat Britain, the greatest naval power. Although Britanniaruled the waves, other European powers also projected

power to foreign shores. Imperial expansion at the globalscale was political policy.

The Napoleonic Wars defined the European boundariesof the naval power rivals and largely ended the inter-necine wars on the continent of Europe. For most of thenineteenth century the conflicts were within the interiorof foreign regions with the inevitable (with some excep-tions) domination of the European state. The coastalstation or enclave was no longer sufficient. France ac-quired her Indo-Chinese possessions in southeast Asiaand enormous areas in Central Africa. Great Britainacquired the crown jewel, India, South Africa, Rhodesia,Burma, and island chains throughout the Pacific. Underthe colonial system entire nations 'were brought intoconformability with industrial society imperatives. Theinteriors of continents were subjugated in order to extractmass supplies of agricultural and mineral inputs, and toassure mass markets for outputs from the factories at home(Barraclough 1987c). The self-centered interests ofimperialism raised the level of real incomes in the mothercountry but also in the colony. Incomes raised in thecolonies were typically to a non-democratic colonial eliterather than to a widespread middle class.

The imperial trading system prevailed right up to WorldWar II. Then Germany and Japan belligerently embarkedon a militaristic expansionist policy that aroused thecivilized world because of the barbarity of their conduct.With the end of the war the end of the imperial systemwas foreordained. A great wave of colonies becameindependent nations during the 1950s and 1960s. Rollingback mid-twentieth century German and Japanese im-perialism implied the end of the imperial system. Thebreak-up of the USSR leaves China as the last greatimperial power.

WEALTH FROM PRODUCTION:THE ROLE OF INNOVATION

The Industrial RevolutionCoincidentally, the industrial revolution began about

the same time that England was losing its grip on thethirteen North American colonies. The first wave of thenew production system consisted of advances in textilemachinery, including spinning and weaving—fundamentalinnovations that allowed cotton fibers to be twisted to astrength equal to linen. The result was unparalleleddemands for cotton. In addition, the steam engine becamethe focus of an industrial age that utilized available coal topump water out of the mines that furnished fuel to drivethe stationary machinery of the new factory system and topower the locomotives of a new transport system. Thedestiny of mankind was changed forever. The associatedsocial changes were as fundamental as those associatedwith the invention of agriculture some 14,000 years earlier,when hunters became farmers.

The early wave of the industrial revolution wascharacterized by the factory system, with fixed plant sites.Extensive use of fuel for energy to power steam machin-ery, combined with the concept and practice ofinterchangeable parts, made possible mass production.Nearly all of the first wave innovations occurred inEngland and the wealth generated was largely for the

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beneficial interest of English capitalists. The great inno-vations in production that resulted from the systematicapplication of science quickly caused improvements inthe standard of living in the innovating regions.

James Watt patented his improved steam engine in1766. By 1795 a railroad company using a steam enginelocomotive was making regular scheduled stops, and by1825 steamboats were making round trips along theHudson. By 1835 a steamboat was operating on the OhioRiver using Cincinnati docks. Transportation improvementsfollowed quickly, along with communication improve-ments, especially the invention and diffusion of thetelegraph and telephone.

Continuously falling transport costs and communicationcosts allowed competitors separated by great distance tocompete head to head in regions far removed (Barra-clough 1987d). Today fuel and ore are transported for afew pennies per ton-mile. The result has been a bonanzafor the consumer: For the consumer a drop in transportcost is equivalent to an increase in real income, providingthat the commodity market is a competitive market.

A second burst of science-based innovations werecombined with organizational changes, including assem-bly line techniques and large scale financing arrangementsthat characterized the late decades of the 1800s and theearly decades of the 1900s. In 1905 the 50 year reign ofQueen Victoria was celebrated and the British poetlaureate could appropriately boast that the sun neversets on the British empire. Nevertheless, the technologicaladvances of the late 1800s and the early 1900s no longergreatly favored Great Britain as compared with the UnitedStates and European rivals. Development of dynamos,motors, transformers, electrical power grids, the chemicalindustry, the pharmaceutical industry, the steel industry,and the internal combustion engine using petroleumbased liquid fuel was more even handed than the originalwave of the industrial revolution. The original inventionsthat were the basis of the industrial revolution wereEnglish creations, both steam engine development andtextile manufacturing machines. The second wave ofscience-based innovation was far more cosmopolitan.

Hearth Regions of InnovationThe traditional tripartite division of economic activities

fits all economic enterprise into the categories of produc-tion, distribution, and consumption. The activity ofproduction occurs at a specific place, and productionmeans adding value by combining or assembling resources(customarily denoted factors of production, such as land,labor, capital, and management or organization). In anonexhaustive explanation both extractive industries(mining, agriculture, fishing, and forestry) and manu-facturing (changing the form, both mechanically andchemically speaking, including blending of materials) areincluded in goods production. The salient point for thisdiscussion is that the value is added within a region. Thatis, production is region-specific. The prosperity of theregion largely depends on the terms of trade when thecommodities produced (both goods and non-goodsservices) are entered into interregional trade. In a globalcompetitive market surplus supplies from all regions help

to determine the price along with the demands for thecommodity from all regions.

Hearth regions of innovation are observable phenomena.Silicon Valley is a hearth region for innovative electronicproducts. New York City, Miami, and Los Angeles are in-novative regions in ready-to-wear clothing. The Pittsburgh-Youngstown-Cleveland corridor was an innovating regionin the steel industry for most of the twentieth century.Improved coking furnaces, blast furnaces, open hearthfurnaces, rolling mills, strip mills, electric furnaces, basicoxygen process equipment, stainless steel, were all de-veloped within the region. The innovations were bothstep jumps and incremental improvements and earlyadoption allowed margins that exceeded long runcompetitive returns.

The ability to innovate is the basis of regionaldevelopment policy for Ohio (Boskin 1986, Janson 1993).Without innovations a region is destined to be a commodityproducer competing almost solely on the basis of pricewith producers from all over the world—producers that,in general, have substantially lower labor costs.

There have been many great bursts of creativity inproduction that assured preeminence to hearth regionsof innovation. Part of the Neolithic agricultural revolu-tion originated in the Middle East. Grasses weredomesticated into cereal grains, and that allowed most ofmankind to change from hunter-gatherer to farmer-herdsman. Other bursts of agricultural innovations, in-cluding the domestication of potatoes, corn, and tobacco,occurred in Middle America and highland areas of north-ern South America. Of course the transformations occurredin many regions involving diverse species of flora.

Fourteen millennia later, production of manufacturedgoods soared in England when steam was used to drivemachinery in the first wave of the industrial revolution.Two and a half centuries after the first wave, about 1880,the second great wave of innovations transformedsociety. The second wave of invention and innovationwas based on electrical energy (motors and generators)and the internal combustion engine. The complex ofproducts and processes related to these fundamental setsof innovations suburbanized both industrial and resi-dential sectors. Detroit became the hearth region ofinnovation for gasoline powered vehicles. Enormouswealth accrued within the innovating regions of pro-duction. A recitation of innovations and the innovatinghearth regions is not appropriate for this discussion, butseveral examples are warranted (Utterback 1987).

Organic chemistry was brought to great commercialsuccess in Germany near the end of the last century(synthetic dyes and aspirin, for example), and Germany isstill a hearth region for advances in chemistry. Seattle,WA, because of the presence of the Boeing Corporation,and Dayton, OH, because of the presence of WrightPatterson Air Force Base, are both contemporary hearthregions for aerospace innovations. Silicon Valley, Boston,the Research Triangle, and Austin are contemporaryhearth regions for innovations in electronics. Akron wasan innovating region in the rubber industry early in thetwentieth century and remains an innovating region inpolymer research and polymer production, lineal

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descendants of synthetic rubber. Columbus is a hearthregion for large, complex on-line data base services.Cleveland by the 1920s was a preeminent manufacturingcity, and is still an innovating region for advancedmanufacturing technologies. Of course, to realize theextraordinary gains of innovation, it is necessary to marketthe products beyond the regional boundaries.

GLOBALIZATION PROCESSES:THE NEW REALITY

World Trading SystemThe contemporary pattern of world manufacturing is

extremely uneven and so is the pattern of world trade,whether expressed as export flows or import flows. Thegreat economic dominance of the United States followingWorld War II declined relatively as Europe and Japanrebuilt after the devastation of the war, and as SouthKorea modernized after the Korean War. The oil shockscaused by quadrupling oil prices in 1973 by the Organiza-tion of Petroleum Exporting Countries cartel (OPEC)triggered a severe global recession that persisted foralmost a decade. Unemployment in the early 1980s roseto post-war highs; factories closed in many old-lineindustries and communities tightly linked to the collaps-ing industries were devastated. Many of these agonieshad other causes than the price of oil, including laborcosts that were too high, work rules that were toorestricting, and inflation in commodity markets. The oilprice shocks initiated the restructuring of manufacturingprocesses. In 1989 the Soviet empire and the hegemonythat accompanied the system broke into fragments alongwith the associated trading system of the communiststates, which had been subsidized by the Soviet Union.

A macro trend of global significance was the emer-gence of multinational trading blocs; first, the agreementby the European Community (EC) in 1992 that eliminatedtariffs among the European Community members; andsecond, ratification in 1993 of the North American FreeTrade Agreement (NAFTA) that will gradually eliminatealmost all tariffs between the three trading partners—theUnited States, Canada, and Mexico.

In 1994 the World Trade Organization (WTO) wascreated as a permanent international bureaucracy tomonitor and supervise the negotiations made under theGeneral Agreement on Tariff and Trade (GATT). The WTOtreaty has not yet been ratified by the United States Con-gress. The debate in Congress is likely to be acrimonious,but eventual ratification is almost certain because, other-wise, the United States 'will be opting out of a world tradingsystem (Financial Times 1993a).

Transnational Corporations (TNC)The primary agent internationalizing production is the

transnational corporation (TNC). Dicken (1992a), anauthority on this subject, partially defines the TNC as acompany that makes production location decisions thatcross international boundaries. TNCs, so defined, nowaccount for approximately one fourth of total worldmanufacturing production, and approximately 40% oftotal world trade (exports and imports). Most of this tradeis between divisions or associated companies of the same

TNC. For this reason it is fair to say that foreign directinvestment drives international trade.

TNCs are represented in a complete spectrum fromcompanies with operations in two countries to globalgiants represented in over 20 countries. Manufacturingoutput is heavily weighted toward the global giants, suchas Ford, Phillips, DuPont, Royal Dutch Shell, Exxon,Chrysler, General Electric, Mitsubishi, Hitachi, GeneralMotors, Timken, Siemens, Hyundai, IBM, Toyota, Procter& Gamble, TRW, Samsung, Goldstar, and others.

The growth of TNCs was rapid in the 1960s, more thantwice the rate of growth in world output during the dec-ade; but in the 1970s the rate accelerated and was fourtimes the rate of growth of world output. The relativeshare of the United States dropped as Japan, England,and West Germany increased their share. One otheraspect of TNC global trade is the overwhelming per-centage of world trade that transfers among the four greatnation participants. TNCs from the United States, England,and West Germany made many investments in plant andequipment in each other's country, but did not invest inJapan with proportionate frequency. Japanese TNCsmade direct private investments (FDI) in all three of theother important TNC nations. In addition to the threedeveloped nations, two developing nations (Brazil andMexico) heavily skew the location of FDI. The globalizationof production is continuing among the major players, andis being expanded at an accelerating rate in the rim na-tions of east Asian and south Asian nations. The currentrate (1992) of FDI in the developing regions of the worldis between $40 billion and $80 billion.

Foreign Direct Investment (FDI)Three nations alone—the United States, Japan, and

united Germany—account for almost half of total outputby market economies. Nearly all foreign direct investmentis put in place by firms headquartered in advanced marketeconomies (90%). Most direct foreign investment isplaced in a plant in some other advanced market economy(over 60%). The remainder goes to developing regions.The Asian rim countries and Latin America get virtually allof the direct private investment that goes to developingnations. Africa receives a negligible amount (See Dicken1992, Howes and Markusen 1993, United Nations 1993).

The value of direct investment in foreign regions bytransnational corporations is now on the order of $200billion per year. The annual growth rate has been about13% over a 20 year period. This is startling evidence of thenew regime in nation state relations. National boundariesare of diminishing importance in decisions relating toproduction locations. A hostile attitude toward multinationalcompanies that prevailed in many nations during the1960s has almost disappeared. Even idiosyncratic Indianow welcomes foreign investment along with the jobsand incomes that accompany foreign direct investment.The results are highly uneven, and the reasons for theunevenness will be plumbed.

United Nations data (United Nations 1993) indicate thatapproximately 37,000 corporations (TNCs) have morethan 170,000 foreign affiliated operations (60%manufacturing, 37% services, and 3% in primary activities

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such as agriculture and mining activities). Tony Jackson ofFinancial Times summarized the UN data. The worldwidetotal foreign direct investment (FDD is now $2 trilliondollars. The United States share is about $1/2 trillion; theUnited Kingdom share is about $1/4 trillion; and theJapanese share is also about $1/4 trillion. TNC salesoutside their home countries are now $5.5 trillion, and thetotal value of world exports is about $4 trillion.

Location based on comparative advantage is still rele-vant. A single plant establishment may ship product tocompany-owned and other customer plants worldwide.According to Dicken (1992), the decision to locate in aparticular place requires as necessary conditions: 1) askilled or educated workforce; 2) an existing infrastruc-ture of communications and transportation, includingroads and airports; and 3) a welcoming attitude by officialsand people of the host region. If these necessary (but notsufficient) conditions are fulfilled the global site decisioncan be largely based on lowest direct cost analysis.

A clear distinction between foreign direct investment(FDI) and portfolio investment (PI) is important. FDImeans real investment in plant and equipment withsome powers of corporate control. This is the investmentthat corresponds to globalization of production. Portfolioinvestment is simply purchase of securities for the pur-pose of earning dividends or capital gains and is notrelevant in the context of this discussion.

The three conditions for site location indicated earlierare met in the developing rim nations of East, Southeast,and South Asia, as well as Latin America and the Caribbean.

Adaptations by Transnational CorporationsThe response to globalization processes by transnational

companies is both industry specific, country specific, andfirm specific. The industry constraints reflect the reality ofthe global markets and the firm constraints reflect theorganization of the firms operating within the legal, social,cultural milieu of the host nation. Several examples ofcorporate adaptation will illuminate the matter (BusinessWeek 1994).

ABB (Asea-Brown Bovari Ltd.), the major producer ofelectric generating equipment in Europe (annual salesover $30 billion) faces emerging markets in easternEurope and even greater opportunities in eastern andsoutheastern Asia, and a potentially enormous market inChina. The realities of the close communication withgovernments necessary for the sale of major electricgenerating equipment requires resident national com-panies, which may be wholly or partially owned by ABB(headquartered in Switzerland). The result is a devolvementof responsibility to the subsidiaries and a headquartersstaff that is less than 200. ABB headquarters manages thesubsidiaries as both a TNC and as a portfolio investor. Ofcourse, there are great advantages of mutual benefitamong the national companies. About half of all inter-national trade is between intrafirm companies. Subsidiariesof ABB specialize in heat exchangers, dynamos, boilers,tubing, motors, transformers, transmission equipment,and other related equipment. The global organization ofthe firm facilitates intra-company sales among theinternational units. Nevertheless, the relationship with

government itself is often the key to unlocking theemerging markets, because policy, planning, andgovernment involvement are prerequisites to expansionof the electricity grid. Credits from the Export-ImportBank, arrangements with the World Bank, and agree-ments with the International Monetary Fund all havebearing on multibillion dollar investment strategies bythe developing nation states (Barnevik 1994).

Ford's globalization reorganization is designed to achieveinternational economies by specialization. For example,all small car design and development will soon be per-formed by European engineering groups, which are mostexpert in this specialty. Truck and van design anddevelopment will occur in the United States, wherepersonnel are most expert in this other specialty. Productdevelopment, sales, and manufacturing of operationscurrently organized separately in North America, Europe,Latin America, and Asia will ultimately be merged intoone organization. Savings could be on the order of $3billion annually. The Ford TNC response to globalizationrealities cuts out layers of management and illustrates aflattened horizontal organization that is possible, provid-ing the product is actually a global product.

Sony has worldwide brand name product groups butstill maintains four geographic zones for management ofglobal operations. Bristol-Myers Squibb has also created asingle worldwide unit responsible for Clairol and hair-care products, because Clairol is a global consumerproduct with brand name asset value. IBM is reorganizinginto 14 worldwide industry groups in order to interfacewith customers in a more responsive way and to eliminatethe geographically based turf wars in their own organiza-tion (Business Week 1994).

General Motors Packard Electric Division (Warren, OH)manufactures wiring harnesses for GM cars. Many of theterminal components are manufactured in Warren, OH,and in other plants in the United States. Frequently, thesesubassemblies are complex and require sophistication inmanufacture and assembly. These components are collectedinto kits and shipped to GM plants in Mexico where thefinal assembly is made manually and the finished wiringharnesses are then shipped to GM assembly plants and toother customers anywhere in the world. This is the realityof the new regime in international trade.

New Division of LaborGeographers and economists have designated the

realignment of producing regions as the new division oflabor. One of many observations is that some massproduced products, especially those requiring low skills,are now being produced off-shore, often from satellites ofTNCs. Asian rim countries and Mexico are favored regionsby United States based TNCs for production using low costlabor. This connects the Asian producer nations to thegreat United States consumer market. In Europe most ofthe production remains within the European Community(EC). Italy and Spain are the most important regions forsimilar production utilizing low cost labor.

The processes of the division of labor are continuous.Japanese manufacturers moved production to Taiwan yearsago, and Taiwan manufacturers are moving production

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to Thailand and other Asian nations in the continuingeffort to lower production costs. This cascading effectreflects rising wage levels as economies advance and theconsequent shift of production to off-shore regions withlower labor costs.

A note of caution is appropriate. About 25% of theworld's population lives in advanced market economies(money exchange economies). The remainder of theworld is still rural. Many rural regions have economiesdependent on barter to a large degree and based onsubsistence farming, sometimes feudal, and sometimestribal. The comments and observations in this paperrefer primarily to the rich one-fourth of world popula-tions. Even within this one-fourth the levels of activityare greatly unequal.

The gross domestic product of one nation in Africa,South Africa, exceeds the combined gross domestic productof all other nations in Africa. The poor nations of theworld aspire to be included in the new regime and thecircle of participation is widening, even as income dis-parities widen.

Container ShippingDistribution, like production, has had historical periods

with great innovative bursts that yielded large returns tothe innovating regions. Interregional trade, both domesticand international, is the essential purpose of distributionin order to realize gains from efficient production.Transportation and communication are aspects ofdistribution that facilitate interregional trade. Innovationsthat reduce costs of transport, communication, andwarehousing, and innovations that widen markets alsocontribute. Innovations in transport technologies oftendrive interregional trade in the quest for wider markets.

With the introduction of modern container ports atremendous shift in the hierarchy of U.S. ports was in-evitable. The finger docks of San Francisco and New YorkCity were inadequate to the imperatives of the new para-digm. Twenty or thirty acres of land are now required fora container ship berthing area, and 100 or 200 acres areneeded for railroad sidings and semi-trailer parking. Tensof thousands of longshoremen are gone from the docks ofSan Francisco and New York. Container facilities shiftedport activities across San Francisco Bay to Oakland, andacross the Hudson River to Elizabeth, NJ. Only a smallfraction of the personnel required in the old days, whenships were hand loaded, are now needed. Tremendouscapital investment has caused redundancy in the workforce. Multimillion dollar cranes controlled by skilledoperators have replaced whole gangs of hard workinglongshoremen.

Container ships are as long as aircraft carriers and atechnical principle of naval architecture implies thatthese very large ships will also be very fast ships. Lessenergy is dissipated in nonfunctional pitching in therestless sea. The great, fast container fleet has replacedsquadrons of general cargo ships. The world's goodsmove increasingly in containers, and the great ships of theglobal container fleet can be unloaded and reloaded in aday or two instead of six days characteristic of the oldermode dependent on human labor. The breakdown of the

shipment occurs at the customer's plant instead of on thedock, and the plant may be located thousands of milesfrom the waterfront. Transport costs have dropped;productivity by ocean transport has sky rocketed; andtheft is negligible. In the old days it was not uncommonfor one-fourth of the merchandise (by value) to be stolenbetween the exporter's loading dock and the importer'sreceiving dock.

Investment in container ports coincides with a shift inworld trading patterns. More imports now enter the UnitedStates from the Pacific Ocean than from the Atlantic.Seattle and Tacoma (combined) and Los Angeles aregateways to United States markets from Asian points oforigin. Together these two gateways receive about 45%of all United States imports. Moreover, 70% of the con-tainers coming into Seattle are immediately put on unittrains of flat cars and the containers are taken to someother domestic destination, sometimes to an east coast orGulf coast port for transhipment by container ship toEurope. The reason for the change in modes of transportis based on simple direct costs. It is now cheaper to usea rail link across the United States, even when containersfrom Asia are destined for Europe.

INTELLECTUAL PROPERTY RIGHTS:MUTUAL BENEFITS

The gains of international trade are not simply the gainsthat result from comparative advantage based on re-source endowments. Of course Ohio and Florida canmutually gain by respective specialization in stainless steeland oranges. There is a profound implication that goes farbeyond this obvious example.

The stock of many listed firms trades at 2- or 3-timesbook value. The difference may be called goodwill on afinancial statement, but it is a measure of intellectualproperty—the value of patents, brand names, research inprogress, and the skills and talents of its people (FinancialTimes 1993b).

For over two decades manufacturing jobs have beenfalling in a secular trend in all of the major industrialnations of the world. This reflects automation in thefactory and also the shift of employment from manufac-turing to services. In the United States the proportion ofthe work force in manufacturing is about 15% even thoughit is still about 32% in Germany. The competitive drive forlow cost production will push these percentages lower,perhaps as low as 10% within 30 years (Financial Times1993c). These job losses imply improvements in productivitycaused largely by technology changes in process (know-how), which is another form of intellectual property.Frequently process changes are incremental and areprotected only as trade secrets. Nevertheless, continuingincremental improvement in process can result inmultimillion dollar savings in mass production industries.

Pharmaceuticals provide many examples of intellectualproperty with high values. One example from thepharmaceutical industry will suggest the significance ofintellectual property rights to TNCs. Glaxo, based in theUnited Kingdom, is the patent holder of Zantac, the largestselling drug in the world. Glaxo sells about $3-5 billionworth of Zantac per year for ulcer treatments. A recent

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article in Financial Times indicates that a $700,000,000loss of sales per year would result if claims to a genericversion by a competitor (Novopharm of Canada) wererecognized by the courts as not infringing the Glaxopatent.

Software PatentsBefore 1986 software patents were not granted in the

United States. Since then about 10,000 software patentshave been granted and 15,000 applications, more or less,are waiting for patent determination. This area of intellec-tual property is likely to become a mine field of litigation.Compton's New Media has produced a multimedia ency-clopedia, and has obtained a basic patent on retrievingtext, images, audio, and video from a database. A groupof intellectual firms—Apple, IBM, Digital Equipment,Lotus, and Microsoft—have formed the Software PatentInstitute to build a database of patents for the PatentOffice in order to reduce patent litigation (Financial Times1993d).

At present in the United States patents are kept secretuntil issued. Many firms in the electronic industries wantthe law changed to allow competitors the opportunity tochallenge patents before they are issued. The liabilityincurred by infringing a patent is triple damages, andordinary business decisions quickly become a high stakesgame.

Trade AgreementsThe General Agreement on Tariffs and Trade (GATT)

establishes rules for fair and free managed trade amongthe nations of the world. The most significant newarrangements include a lessening of tariffs on manu-factured goods (about 40%) and on agricultural products,and extends rule based trade to the service sectors byproviding strong protection for intellectual propertyrights. The protection of intellectual rights insisted uponby the United States was largely accepted by developingnations. At the same time, the United States insisted on thereduction of agricultural tariffs, which will allow greateropportunity for less developed nations to earn hardcurrencies by pursuing comparative advantage inagriculture. Most large corporations are not willing to putplants in foreign countries unless intellectual propertyrights are protected. There is now a mechanism to providethis protection (Financial Times 1993e).

Corporate StrategyCorporate strategy can take diametrically opposite

positions with respect to intellectual property. For example,IBM personal computers were designed with open archi-tecture using an Intel chip processor and a MicrosoftDOS operating system. The objective was to widen the useof IBM equipment by making it easier for peripheralmanufacturers and software companies to produce com-patible equipment. The strategy also spawned cloned PCsfrom competitors such as Compaq and Dell. On the otherhand, Apple has consistently used proprietary circuitsmanufactured by Motorola with a proprietary operatingsystem. This closed architecture has been combined withaggressive patent enforcement of their intellectual property.

The acrimonious litigation over intellectual propertybetween Intel and AMD (Advanced Micro Devices) iscontinuing and goes back to an agreement in the 70sstill under dispute. AMD claims that the right to clonethe Intel 386 and 486 chips was conveyed in an earlylicensing agreement, whereas Intel claims the opposite.Meanwhile both companies have prospered, with Intelnow the largest chip maker in the world. AMD's stockwas adversely effected when a court awarded morethan a billion dollars to Intel, ruling that patent infringe-ment had occurred. This ruling is devastating, because theenormous award represents triple damages. Of courseappeals are still going on and both firms are producingchips at flat-out rates.

To avoid the development of intellectual property thatis of little value there is a necessity for specification ofindustry standards (protocols) and manufacturing standards:Protocols are of vital significance to those industries whereequipment produced by sets of manufacturers must allinterface. The European Union has established the DigitalVideo Broadcasting Group (DVBG) that unites about 120manufacturers, satellite operators, governments,broadcasters, and others to establish common Europeanstandards that allow for transmission and pay-TV decod-ing. Clearly a single decoder in a household is preferableto many decoders, especially if programs from manysuppliers can be actuated with a debit (smart) card.Without common standards, much intellectual propertyunder development will not have wide markets. Exam-ples of protocols that accelerated network expansion areToken Ring for IBM equipment interfaces and Ethernetfor ATT telephone switching equipment interfaces.

Even middle-size electronic corporations (500-3,000employees) in the Silicon Valley environment are likely tohave several lawyers on staff to protect the intellectualproperty of the corporation on a timely, day-to-day basis.

Global Trends in Intellectual PropertyThe general concept of encouraging foreign invest-

ment is now widely accepted by developing countries astheir road to national wealth. The trading nations havelinked foreign investment to intellectual rights in theGATT agreements. All types of intellectual property havenow come under an international treaty and this allowsconsistency and enforcement. Enforcement will be madethrough the World Trade Organization (WTO) a newinternational bureaucracy established by the treaty. Asummary of the major agreements effecting intellectualproperty is the following:

1. Patents are protected for 20 years withinthe national boundaries of all signatory na-tions. Patents on life forms were excluded.

2. Copyrights are valid for 50 years and soft-ware programs and data compilations maybe copyrighted. The owners of the copy-right have almost exclusive rights to rent orlease the product. Sound recordings andbroadcast recordings share the sameprotection with performers and producersand have similar rental rights.

OHIO JOURNAL OF SCIENCE R. W. JANSON 131

3- Trademarks and geographic indicators,important in such industries as wineproduction, are now protected.

4. Layouts of circuit design for micro-devicesare protected for 10 years.

5. Trade secrets are protected from disclosure.

These agreements are of vital and far-reaching effect.According to Frances Williams of The Financial Timesthe principle involved is equal treatment for foreignrights holders and domestic rights holders in all regions.The idea is to eliminate discrimination between tradingcompetitors regardless of the manufacturing region andregardless of the market region.

New patents being filed in the United States in 1992underline the emergence of Japan as a leader in this aspectof intellectual property. In a recent year Japan madeapproximately 200,000 filings versus 60,000 for the UnitedStates and less than that by other leading indutrial nations.Research centers, such as Fraunhofer institutes in Ger-many and Edison Centers in Ohio, develop subsidizedresearch that can be purchased by private firms. Oftenthe firm has participated in a jointly funded researchproject culminating in patent applications. From a re-gional development perspective the question is whethermore money is paid out to foreign owners of intellectualproperty than is earned from foreigners for intellectualproperty.

Globalization Effects on Small FirmsAs the barriers to entry into foreign markets come

down, as intellectual property is more securely protected,as tariffs are lowered, as distribution technologies be-come more efficient, as consumer tastes around the worldconverge, as money capital markets become moretransparent, as expert computer programs proliferate—inshort, as the processes of globalism proceed—smallerfirms, not larger ones, are enabled to compete in inter-national markets, even more effectively than their giantcompetitors with their contingent overheads. This is truefor most manufacturing industries, a statement thatappears to contradict the American experience in anhistorical framework (Felix 1977, Economist 1993).

Institutions such as the Technology Centers of TheThomas Edison Program of the State of Ohio now offerguidance in technology development and technologydeployment that facilitates the transfer of technology tosmall firms in order to change their current productionpractices to state-of-art production. Small firms now haveaccess to software production programs and financialprograms that are equal to the learned behavior of thegiants over many decades. These programs are a dis-tillation of learned behavior. This is of significantconsequence. Approximately 1,000 firms are members orusers of Edison technology centers and these 1,000 firmsaccount for approximately half of the value added bymanufacturing in Ohio. All of the member firms, as wellas participating non-member firms, have been impacted atleast marginally by Edison initiatives using sharedintellectual property to increase innovation by Ohiomanufacturing firms.

CONCLUSION: TRADE, THE ADJUNCTTO INNOVATION

Emerging Global Patterns of Production and TradeGlobalization processes now underway, spear-headed

by transnational corporations, are as radical and challeng-ing as the establishment of protocols for trade amongaboriginal mortal enemies, the rise of commercial townsin medieval times, the settlement of trading enclaves onremote foreign coasts during the Age of Discovery, thelinking of colonial plantation regimes to the mothercountry during the Age of Imperialism, and the emergenceof trading blocs of continental proportion since WorldWar II. All of the stages in the historical development ofgeographic patterns of production and trade wereinteractive with the political structure and the techno-logical development of the corresponding era.Contemporary globalization processes have similar far-reaching and profound effects.

The new world order that is emerging will bind theworld's regions into patterns of production and trade thatwill transcend previous patterns based on military con-quests and political hegemony. The changes arefundamental and irreversible. The newly formed WorldTrade Organization (WTO) will have more than 150signatory nations. Regions all over the world will be ableto compete on an equal basis. Foreign firms resident inany region will have nearly the same corporate andcommercial rights within the region as a local firm. Gainsto people everywhere in the global system will resultfrom more efficient production, because the gains diffusethrough interregional trade in a competitive environ-ment. At the global scale welfare of people will clearly beenhanced through the quasi-income effect of lowerprices. At the regional level welfare depends on theefficiency and effectiveness of the region's establish-ments. Those manufacturing and service firms that areinnovative, aggressive, and capable, measured by worldstandards, will prosper. The remainder will face bank-ruptcies and involuntary down-sizing, with associated joblosses, assaults to personal dignity and status, anddevastation of entire communities.

The function of government is to manage change—thebusiness of politics. Interregional trade is the adjunct ofinnovation, the bedrock of Ohio development policy.Trade policy initiatives of the Ohio Department ofDevelopment are now proactively addressing the glo-balization processes of tidal proportions. Regions that can-not match the courage displayed by Ohio's bipartisanpolitical leadership will be overwhelmed.

Innovation, by its nature, is creative destruction. Pro-ductivity of the individual worker increases as a result ofinvestment in plant and equipment that provides morecost effective methods of manufacture. Automation usu-ally maintains the values added by manufacture as theworkforce downsizes. Expanding the workforce underthe new conditions requires expanding the markets. Thecorollary to regional development policy squarely basedon innovation is sustained marketing policies to expandexports out of the region. For this reason the Departmentof Development of Ohio has a continuing presence inforeign cities. At the same time other export enhancing

132 INTERREGIONAL TRADE VOL. 94

initiatives are pursued by the Department, including taxcredits for job creation, export tax credits, access to infor-mation services, trade show exhibitions, incentives forresearch and development, and a set of financial incen-tives, including a direct loan program (enterprise bondfund financing), and enterprise zone incentives, as well astechnical assistance through the Thomas Edison Program.

Implications for Ohio Development PolicyThe most vital contemporary agency of change in the

emerging global economy is the transnational corpora-tion. The manufacturing and market decisions of thesefirms profoundly effect the destiny of regions around theworld. The intricate articulation of production amongdivisions of a TNC assures that in nearly all cases the plantproduction is for a wider market than the host region. Inmany cases production is for a global market. More than50% of foreign trade (the sum of exports and imports) forboth the United States and Japan now consists of ship-ments between plants of transnational corporations.

The total number of worldwide manufacturing firmsthat have sales over one billion dollars annually andhave production facilities in two or more nations is about1,000. Less than 100 manufacturing firms meeting thisdefinition of a TNC currently have at least one productionfacility in Ohio. This Ohio base for manufacturing pro-duction is sound and growing, but is much too small toassure high levels of opportunity and prosperity for ourwork force in the early decades of the next century.

Value added by manufacturing for the United Stateseconomy is about 24% of the world total, which includesall advanced market economies, all developing marketeconomies, and all command economies (particularlyChina). Ohio value added by manufacturing is about 6 or7% of the United States total, and Ohio value added bymanufacturing is thus about 1.5% of the world total. It ismanifestly urgent for Ohio to maintain and increase itsshare of value added by manufacturing.

Ohio development policy already reaches out aroundthe world to attract foreign TNC investment for produc-tion facilities in Ohio. Initiatives to make Ohio attractive toforeign investment are necessary conditions in a com-petitive environment. Policies friendly to foreign directinvestment are required in all aspects of regulation andgovernance including environmental mandates, worker'scompensation insurance, access to public procurement,protection of intellectual rights, full involvement inThomas Edison Technology Center activities, voice inlegislative hearings, access to elected officials, and allother privileges that appertain to resident Ohio basedcorporations. Recruitment of foreign manufacturers shouldhave a global perspective with emphasis on Canadian,Japanese, German, British, French, and other Europeancorporations along with Mexican, Brazilian, andArgentinean corporations.

The reorientation of global manufacturing is a con-tinuous evolutionary process. Proximity to raw materialsis of lesser importance than in the past because of gigan-tic increases in productivity in transport and distributionactivities. Manufacturing plants in the future will be moredirectly oriented on the basis of information, especially

information on markets, and whenever the product gainsbulk in assembly. This reorientation has already occurredin automobile and truck assembly plant locations. Theconcentration has been along a band of states fromMichigan, Ohio, and Indiana to Texas. The expansions ofthe European automotive firms in South Carolina alsomoved production facilities toward markets. These are re-orientations based on contemporary technologies. FromOhio's perspective the nationality of ownership shouldbe almost an irrelevancy. We should expect good cor-porate citizenship, welcome and inform foreign owners,and treat branch plants of foreign companies with im-partial equality with indigenous manufacturers.

Increased job opportunities for Ohio citizens is themost important benefit of a global manufacturing policyfor Ohio. The benefits to Ohio government are as obviousas the benefits to the labor force. Ohio income taxes, bothcorporate and individual, will be enhanced at all levels ofgovernment. Revenue sources will increase from realestate taxes, both from plant and equipment investmentby the corporations and from housing investment by theworkforce. Shopping centers and retail investment bybuilders and developers will follow promptly and some-times will lead the growth curve. Sales tax revenues willcorrespond. The horizon of job opportunities for Ohioworkers will expand along with the globalization processesnow underway. There is no longer any viable option foran iconoclastic policy that attempts to shield Ohio manu-facturers from the winds of change in global trade—windsof historic proportion.

Exports already account for more than 12% of U.S. out-puts; and imports account for more than 15% of inputs.

The Challenge for OhioReal income is created in the region where value is

added in the production process. This fact is a substratumthat underlies the logic of regional science. A simpletheorem proves the equality of the aggregate value addedin the region and gross regional product of the region.Net real regional income and net regional product arealso equivalent and are values obtained after subtractingfor depreciation. One obvious measure of the prosperityof citizens of the region is the measure of net real incomeper capita. Other rough measures of prosperity are alsoappropriate in the context of development policy forOhio.

About 1.5% (0.015) of world economic output isproduced in Ohio, but Ohio has only one five-hundredth(0.002) of the world's population. Per capita output fromOhio's factories, farms, and mines, and from our serviceorganizations is about 7 1/2 times the per capita value forthe world. This is a metric for measuring the currentprosperity of Ohio by world standards and a metric tomeasure the challenge to maintain Ohio real income percapita (standard of living).

In the world of competitive reality technologies arenot constant nor are the other conditions of production.Plants will move and firms will invest in foreign regionsto enter markets that are closed, or to gain access to bet-ter technology, or to be closer to their markets, or toprovide a link in their worldwide production network.

OHIO JOURNAL OF SCIENCE R. W. JANSON 133

Reconfigurations of plants, products, and markets arecontinuous processes. The internal structure of the TNCreduces costs (Financial Times 1993c). Branch factories ofthe TNCs are the plants Ohio needs regardless of thecountry of ownership. Output from these plants willvastly exceed Ohio needs and shipments will be made tothe rest of the United States and to the world beyond,frequently to other plants owned or controlled by thesame TNC. This is an advantage to Ohio because onaverage approximately 50% of TNC manufacturing out-put is sold to sister companies. The stability created bysemi-assured sales is highly desirable.

Most off-shore investment by firms headquartered inadvanced market economies is in other advanced marketeconomies. The remarkably rapid growth of direct foreigninvestment (FDD in the Pacific Rim countries is dwarfedin absolute terms by investments in advanced marketeconomies. The most likely firms to invest in green fieldplants in Ohio are firms from Canada, Japan, Germany,the United Kingdom, France, and several other Europeannations. TNCs already have global production networksthat depend on international sales. Innovation is theprime mover of efficient production (both goods andservices) in a dynamic, expanding economy that offersjobs to citizens and competitive products to customers.Trade is the adjunct to innovation. Output has to be soldfor incomes to be realized. The transnational corporationalready has a global network in existence for the purposeof increasing worldwide sales.

Transnational manufacturing corporations are thecontemporary equivalent of the great trading companiesin earlier times. Remember the Portuguese mariners sail-ing to the Spice Islands (Moluccans, southeast of thePhilippines), south India, Ceylon, and the Malaysianarchipelago in the 1500s; or the traders from Amsterdamworking for the Dutch East India Company in Batavia(Java 1619 to 1811). Recall the French fur traders from theCompany of One Hundred Associates (1627-1663) glid-ing by canoe through the North Woods 1,000 miles fromMontreal, bartering with the Indians for beaver pelts.Picture the Scotch factors, the buffalo hunters, and thevoyageurs at Selkirk on the Red River or at Fort Edmon-ton on the Saskatchewan River at Hudson's Bay Companyforts (1670-1869); and the young English clerks toilingfor the East India Company during the century after 1641,at their major trading station on the Coromandel coast(Madras, India). The technical person sitting beside youon an international flight, the seasoned engineer in therow behind, and the female industrial engineer travelingto implement a manufacturing software program in aforeign plant are contemporary counterparts.

In a long term analysis that assumes, artificially, that nonew technologies will be developed, a gradual shift tolow cost production will reconfigure the economic-geographic landscape. For some products this will entailoff-shore plants in low wage regions. For other products

lowest cost production will imply massive investmentand automated factories in high wage regions.

The concept (definition) of value added stripped to thebarest essential is the difference between sales and thecost of goods and services required for production. Thisdifference (value added in the region) includes bothpayroll and profit. Payroll is the reason for the focus onjobs by the Ohio Department of Development. Profit isthe focus of firms employing Ohio citizens. Both jobs andprofits are simultaneously determined. In an ideal world,taxes should come out of earnings. Incentives to trans-national corporations to invest in plant expansions and tolocate greenfield factories in Ohio must be realistic andsincere. Prosperity for Ohio will follow.

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