Abstract
I examine the apparent deverticalization of firms in the world economy and their adoption of relational contracting and modularization, necessitated by rapid product change, cheap and rapid transport, and new technologies. I argue that relational contracting is superseded by modularization when possible in the interest of more control over suppliers, and modularization in turn leads to consolidation, when possible, through buying up suppliers or making them captives. The result is increased concentration of economic power in the world economy, and examples of this are presented.
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Notes
“Linear interactions” are those in expected and familiar production or maintenance sequence, and those that are quite visible even if unplanned. Think of an assembly line. “Complex interactions” are those of unfamiliar sequences, or unplanned and unexpected sequences, and are either not visible or not immediately comprehensible. Think of a chemical refinery or nuclear power plant (Perrow 1999:78).
Loosely coupled systems tolerate processing delays, changes in the order of sequences, and alternative methods; there is slack in resources, and buffers, redundancies, and substitutions are available. Tightly coupled systems are not tolerant in these ways (Perrow 1999:96).
Whenever we come across injunctions to “balance these two effects,” we should be cautious. It is similar to Aristotle’s frequent withdrawal to the weak notion of the “golden mean.” To choose the two endpoints of a dimension is in effect to rig the argument by determining the golden mean in advance. To avoid the cost of building modules we should assemble more parts; to avoid assembly costs we should build more modules. Therefore we should choose the mean of some, but not too many, modules. But what if we changed the endpoints to maximizing arms-length bargaining versus intimate contact with suppliers? The mean would now be maximum modularity. It provides some bargaining and some intimacy. But this ignores the costs of building modules and the costs of assembly.
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Acknowledgments
Colleagues at Stanford’s Center for International Security and Cooperation provided help and encouragement, as did Jennifer Bair of Yale, and Jennifer Bernal, an undergraduate at Stanford, was a most able research assistant.
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Perrow, C. Modeling firms in the global economy. Theor Soc 38, 217–243 (2009). https://doi.org/10.1007/s11186-009-9083-7
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DOI: https://doi.org/10.1007/s11186-009-9083-7