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| Ball of power: A central core of extremely powerful actors (red dots) dominate international corporate finance, a new mathematical analysis finds |
By Rachel Ehrenberg, Science News, September 14, 2011
Conventional wisdom says a few sticky, fat fingers control a
disproportionate slice of the world economy’s pie. A new analysis suggests that
the conventional wisdom is right on the money.
Diagramming the relationships between more than 43,000 corporations
reveals a tightly connected core of top economic actors. In 2007, a mere 147
companies controlled nearly 40 percent of the monetary value of all
transnational corporations, researchers report in a paper published online July
28 at arXiv.org.
“This is empirical evidence of what’s been understood anecdotally for
years,” says information theorist Brandy Aven of the Tepper School of Business
at Carnegie Mellon in Pittsburgh.
The analysis is a first effort to document the international web of
relationships among companies and to examine who owns shares — and how many —
in whom. Tapping into the financial information database Orbis, scientists from
ETH Zurich in Switzerland examined transnational companies, which they defined
as having at least 10 percent of their holdings in more than one country. Then
the team looked at upstream and downstream connections, yielding a network of
600,508 economic actors connected through more than a million ownership ties.
This network takes on a bowtie shape, with a large number of diffuse
actors in the wings and a few major players tangled up in the tie’s knot. So
while it’s true that ownership of publicly held corporations is broadly
distributed, says complex systems scientist James Glattfelder, a coauthor of
the new work, “take a step back and it’s all flowing into the same few hands.”
While any man on the street may have predicted this outcome, the
economic literature portrays markets as so dynamic that they lack hot spots of
control, Glattfelder says.
Researchers aren’t sure what to make of the core’s interconnectedness.
On the one hand, it could expose the whole network to risk.
“Imagine a disease spreading,” says Aven. “If you have a high school
where everyone’s sleeping together and one person gets syphilis, then everyone
gets syphilis.”
But on the flip side, she notes, interconnectedness can lead to better
self-policing and positive behaviors, such as fair labor practices or
environmentally friendly policies.
And even though the status of many players in the analysis has changed
drastically since 2007 (now-defunct Lehman Brothers is a key element of the
core), the analysis shows that ownership is becoming increasingly concentrated
and increasingly transnational, says Gerald Davis of the University of Michigan
in Ann Arbor.
Because interpreting and analyzing these kinds of data is difficult,
he says, the analysis serves more as “an impression of the moon’s surface you
get with a telescope. It’s not a street map.”
Ownership can be difficult to study internationally because holding
shares in a mutual fund doesn’t necessarily mean the same thing in the U.S. as
it does in communist China. And even within a single country ownership can be
hard to tease out, says economist Matthew Jackson of Stanford University. For
example, when an individual invests in a mutual fund or even purchases shares
through an institution like Merrill Lynch, the firm is often still the official
owner of the assets. And even when shareholders do have voting rights, they may
not exercise them.
“This
becomes worrisome if everyone is like me and says I’ll let Vanguard do the
voting,” says Jackson. “Maybe we should be a little bit worried. I don’t know
if we should be.”
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