Risk, Activity Modularization, Sourcing, and Economic Geography

Abstract

Economic geography is fundamentally concerned with describing spatial variation in the economic landscape and explaining the processes through which this geography takes form. Firms are the primary units through which these processes operate. I reinterpret portfolio theory to provide a novel way of explaining and modeling the spatial implications of control structures and organizational decisions within and between firms. In this paper, I argue that each activity of the firm is like an asset with an expected rate of return and a level of risk. Firms implement spatial strategies to manage risk that trade profits for reductions in risk. These strategies encourage geographic switching and perpetuate regional disequilibria in production technology and employment. Risk management and the structure of control in a production chain explain the geographic distribution of economic activity better than do transaction costs, flexible specialization, or agglomeration economies.

Emerging (internet) industry and agglomeration: Internet entrepreneurs coping with uncertainty

“…Uncertainty is also linked to the idea of reputation which is an important factor in the local and increasingly also the global milieu (Scott and Walsham 2005). Penfold (2002) argues that risk management and structures of control in the production chain will explain the spatial distribution of firms and economic activity in a more sufficient way than traditional variables like transaction costs or agglomeration economies.…”

Networks of organizational learning and adaptation in retail TNCs

“…Motion. From a portfolio theoretic perspective, the TNC represents a spatial strategy of risk management: a form of business organization that favours the ongoing spatial distribution of corporate activities as a means of diversifying risk and managing the uncertainty that is created by uneven costs and growth across the global economy (Penfold 2002). Risk diversification unleashes the mobile nature of capital by allowing firms to exploit the local economies of different places, while still retaining the ability to move on at short-term notice.…”