The Global Corporation: The Move to International Specialization – Greater Efficiency and Greater Risk
October 19, 2005

As part of its continuing series on key developments in the American and global economies, the Wilson Center's Program on Science, Technology, America, and the Global Economy featured a discussion with Barry Lynn,, Senior, Fellow at the New America Foundation and author of the recently released book, End of the Line: The Rise and Coming Fall of the Global Corporation. Paul Magnusson, a Washington-based correspondent for BusinessWeek, provided the commentary.

In sum, Lynn points to complex global systems, the increased reliance on single sources, and the vulnerability of the U.S. economy to the disruption of global supply chains through natural or man made disasters. In effect, he is reminding American policy makers that the ankle bone is indeed linked to the neck bone, that putting all one's eggs in a single basket is risky, and that it is often wise to have something extra in the pantry.

Lynn noted that the United States and most other advanced industrial economies had built buffers into complex systems. As examples, he pointed to the U.S. banking system which is limited by the need to hold some capital reserves, the provision of depositor insurance, and regular oversight by a number of regulatory bodies. In the field of energy, the United States and other major economies have agreed to develop petroleum reserves that can be shared among the countries in the case of an emergency. In the wake of the Katrina hurricane disaster, the United States has been able to draw on the stocks of gasoline reserves held by a number of European countries.

Since the end of the Cold War, however, Lynn notes that several trends have led to sharp changes in the nature of the multinational manufacturing firm. First, Lynn argues that specific markets have come to be dominated by a few firms or even a single firm. He quotes Jack Welch, recently retired CEO of General Electric, summing up a global trend with his comment that General Electric had to be "number one or number two in every business."

Second, Lynn stressed how the disintegration of the traditional firm that kept significant parts of its needed supplies under its own roof (what economist's refer to as a vertically integrated company) had been replaced by firms that had retreated from some of the earlier stages of production. As extreme examples, he pointed to semiconductor design firms in Silicon Valley that were completely separated from actual manufacturing. These so called 'fabless firms' send their designed elsewhere – often to Taiwan – for production.

Third, Lynn stresses the impact of companies adopting a global approach to just-in-time inventory. Pioneered by Toyota and other Japanese firms, the just-in-time (JIT) (with parts arriving just as they are needed for assembly) increased the pressure to assure quality in every part and since parts were held very briefly if at all the JIT approach sharply reduced the costs of inventory. The JIT approach often led to the reliance on a limited number of suppliers. As just a few or a single firm dominated a market, the few suppliers often became a single source.

Fourth, Lynn argued that over the last thirty years there has been the rise of what he terms "Radical Market Fundamentalism," a doctrine that emphasizes the magic of the market place and the limitations of state action. He identified the rise of market fundamentalism with Milton Friedman, a Nobel Prize winning economist who is associated with the Chicago (emphasizing markets) school of economics. Lynn points to 1981 as marking the rise of market fundamentalism in American politics. (In the 1980 presidential campaign, President Ronald Reagan often referred to government as the problem and not the solution.)

Lynn argues that the shift to global sourcing, the growing reliance on a single source, and the adoption of a global approach to just-in-time inventory have made the modern corporations and leading economies very vulnerable to supply disruption. He points to the impact of a July 1993 explosion a Sumitomo Chemical plant in Niihama, Japan. The first destroyed half the world's capacity to produce a specialized epoxy resin that was use to create cases for semiconductors. As a result the price of memory chips doubles and the cost of PCs jumped by $100. The September 1999 earthquake in Taiwan disrupted production and shut down manufacturing lines around the world.

In terms of future risks that would be have a devastating impact on global production, Lynn pointed to a war on the Korean peninsula, an uprising in high-tech India, and the possibility of a flu pandemic. When Michael Osterholm, a leading epidemiologist, spoke at the Wilson Center he pointed to Lynn's work and noted the dependence of the United States on just in time imports for the respiratory masks that would needed by first responders and medical personnel.

What can and should the United States do? First, Lynn would limit imports of key parts by nation – he suggested that no more than 25% of a key product come from any one country. Second, he would require firms to dual or triple source – not longer relying on a single company. Third, he would return to a stricter approach to anti-trust or competition policy thus reversing the trend to monopolies in key markets. Fourth, he would require managers to make public the degree of dependence in their supply chains – allowing investors to judge the risks involved and, perhaps, encouraging firms to increase their inventory of truly critical parts.

Paul Magnusson started by reminding the participants of a quote from the Washington Post review of Lynn's book. The Post review, referring to Thomas Friedman's best selling The World is Flat, referred to Lynn's book as The World is Flat "for grownups."

Magnusson added a historical perspective by noting that since the end of World War II, the United States and other leading countries have used economic integration as a way of knitting countries together in peaceful rather military competition. As the integration has proceeded, it has had some significant economic consequences for the United States: private sector health and pension plans are being gradually phased down and, in some cases, out; power has shifted from labor to investors; and the ability of individual countries to regulate corporations has been reduced.

However, Magnusson raised some questions about Lynn's proposed solutions. Magnusson predicted stiff opposition to either increased antitrust activity or a requirement for corporations to double or triple source key components. He suggested a parallel with current "Buy American" requirements for defense purchases that had led to difficulties in Iraq where American suppliers could not meet the sudden surge in demand, most notably for vehicle and body armor.

Questioners asked about other ways to make corporations take into account (internalize) the risks inherent in a global supply chain. They also noted that different industries raised different questions – stressing the scale and network economies that are part of the telecommunications world. Instead of requiring double sourcing, could insurance companies pick up the risk of business interruption? Will a double sourcing requirement simply raise the cost of doing business in the United States? In any case, could, the United States act unilaterally? And would unilateral action be consistent with United States commitments under the World Trade Organization (WTO)?

In response Lynn, again stressed the importance of antitrust and diversifying risk. He thought that the United States could persuade all companies doing business in the United States to meet the double sourcing standard. Lynn and Magnusson disagreed about whether or not the WTO would allow for unilateral U.S. action. Lynn pointed to the exception granted for actions taken for national security purposes and Magnusson arguing that the provision was not so broad as to allow Lynn's double sourcing requirement.