Which Market?

This article plugs a couple scholars, comments on intra-firm geographical dispersion and notes multiple definitions of market.

Keep an eye out for the fourthcoming paper from J. Bradford Jensen and A. Gervais on intra-firm geographical dispersion and its relationship to foreign direct investment. Note that FDI refers to economic investment by a firm in a non-native country, not the financial investment act of taking on foreign investors.

Speaking of possibly unclear definitions, I was made aware of different academic definitions of “market” at Jensen’s presentation today. Different academic definitions of an economic market:

  1. Geographic area serviced – by region, by number of establishments and other operationalizations.
  2. Industry serviced
  3. Product mix produced
  4. Some combination

Ostensibly, if geographic area distinguishes a market then time does so as well.

Anyway, Jensen had a great presentation and his paper was very interesting. His study seems to focus on estimation of the importance of the number of firm establishments of plants in relation to Foreign Direct Investment.

Two points I made are 1: If there were no trade barriers then we would still expect a distribution by logistical costs. He very much agreed, but I don’t think I was clear about the fact that I meant that this would imply that FDI becomes equivalent to investment at that point; the market can no longer be distinguished as ‘foreign’ in the absence of trade policy costs. The second point I made, or perhaps merely hypothesized, was that plant/establishment numbers matters today, and it did yesterday, but it will not tomorrow.

In a shallow way this is due to the economic shift toward information technology as time goes on. In information technology, establishment/plant number doesn’t matter, because transportation/logistical costs are near 0. A single plant or establishment can provide for worldwide production, purchase and sale. Moreover, Info tech as an industry is moving to entirely displace other industries. As 3D printing emerges, even manufacturing is becoming digitized, and manufacturing is one of those sectors where plant number is currently critically important.

More deeply, the optimal plant number will converge in the long run to 1 plant per firm, and in fact 1 person per firm, due to the distributive efficiency of markets. Now, this is a long run phenomenon which we are a long way from, but the point remains. We have seen the move from the era states to the era of corporations to the era of consultants. Now we are a foot in the era of consultants and a foot in the era of networks. After networks we will enter the era of individuals, due to reasons of the distributive efficiency of markets. Remember, this is not an effect to be caused. Markets are self-optimizing. It’s just gonna happen, simple as that.

In the meantime, Jensen’s work can get us a baseline for the importance of plant number. We can repeat his work some other time and get a feel for the move of this importance over time. This will lead to an approximate discovery of the rate of approach toward this long-term equilibrium! That, I think, is very interesting. I would hypothesize that we are moving toward an 1 person, 1 plant, 1 firm ideal size with a nonlinear approach toward that equilibrium.

His paper should be out in the next year-ish. Keep in mind that this article is largely my thoughts, so please don’t blame him for any nonsense! The guy is sharp.

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