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Saturday, September 3, 2011

Who Runs the World ? – Network Analysis Reveals ‘Super Entity’ of Global Corporate Control \

Who Runs the World ? – Network Analysis Reveals ‘Super Entity’ of Global Corporate Control

In the first such analysis ever conducted, Swiss economic researchers have conducted a global network analysis of the most powerful transnational corporations (TNCs). Their results have revealed a core of 787 firms with control of 80% of this network, and a “super entity” comprised of 147 corporations that have a controlling interest in 40% of the network’s TNCs.
global netweook analysis of corporate control, strongly connected core
Strongly Connected Component (SCC); layout of the SCC (1318 nodes and 12191 links). Node size scales logarithmically with operation revenue, node color with network control (from yellow to red). Link color scales with weight.
[Note to the reader: see the very end of this article for a ranking of the top 50 'control holders']
When we hear conspiracy theorist talk about this or that powerful group (or alliance of said groups) “pulling strings” behind the scenes, we tend to dismiss or minimize such claims, even though, deep down, we may suspect that there’s some degree of truth to it, however distorted by the theorists’ slightly paranoid perception of the world. But perhaps our tendency to dismiss such claims as exaggerations (at best) comes from our inability to get even a slight grip on the complexity of global corporate ownership; it’s all too vast and complicated to get any clear sense of the reality.
But now we have the results of a global network analysis (Vitali, Glattfelder, Battiston) that, for the first time, lays bare the “architecture” of the global ownership network. In the paper abstract, the authors state:
“We present the first investigation of the architecture of the international ownership network, along with the computation of the control held by each global player. We find that transnational corporations form a giant bow-tie structure* and that a large portion of control flows to a small tightly-knit core of financial institutions. This core can be seen as an economic “super-entity” that raises new important issues both for researchers and policy makers.” [emphasis added]
* This “bow tie” structure is similar to the structure of the WWW (analyzing for most    influential/most trafficked websites); see diagram below.
bow tie structure of global corporate control
A bow-tie consists of in-section (IN), out-section (OUT), strongly connected component or core (SCC), and tubes and tendrils (T&T).
Data from previous studies neither fully supported nor completely disproved the idea that a small handful of powerful corporations dominate much or most of the world’s commerce. The researchers acknowledge previous attempts to analyze such networks, but note that these were limited in scope to national networks which “neglected the structure of control at a global level.”
What was needed, assert the researchers, was a complex network analysis.
“A quantitative investigation is not a trivial task because firms may exert control over other firms via a web of direct and indirect ownership relations which extends over many countries. Therefore, a complex network analysis is needed in order to uncover the structure of control and its implications. “
To start their analysis, the researchers began with a list of 43,060 TNCs which were taken from a sample of 30 million “economic actors” contained in the Orbis 2007 database [see end note]. TNCs were identified according to the Organization of Economic Co-operation and Development (OECD) definition of a transnational corporation [see end note]. They next applied a recursive search algorithm which singled out the “network of all the ownership pathways originating from and pointing to these TNCs.”
The resulting TNC network includes 600,508 nodes and 1,006,987 ownership ties.
Bow-tie structure of the largest connected component (LCC)
Bow-tie structure of the largest connected component (LCC) and other connected components (OCC). Each section volume scales logarithmically with the share of its TNCs operating revenue. In parenthesis, percentage of operating revenue and number of TNCs
In terms of the connectivity of the network, the researchers found that it consists of many small connected components, but the largest one (encompassing 3/4 of all nodes) “contains all the top TNCs by economic value, accounting for 94.2% of the total TNC operating revenue.”
Two generalized characteristics were identified:
1] A strongly connected component (SCC), that is, a set of firms in which every member owns directly and/or indirectly shares in every other member. The emergence of such a structure can be explained as a means of preventing take-overs, reducing transaction costs, risk sharing and increasing trust between “groups of interest.”
and
2] The largest connect[ed] component contains only one dominant, strongly connected component (comprised of 1347 nodes). This network, like the WWW, has a bow tie structure. What’s more, they found that this component, or core, is also very densely connected; on average, members of this core have ties to 20 other members. “Top actors” occupy the center of the bow tie. In fact, a randomly chosen TNC in the core has about 50% chance of also being among the top holders, as compared to, e.g., 6% for the in-section. [emphasis added]
“As a result, about 3/4 of the ownership of firms in the core remains in the hands of firms of the core itself. In other words, this is a tightly-knit group of corporations that cumulatively hold the majority share of each other.”
In examining the details of this core, the analysis also showed that only 737 top holders accumulate 80% of the control over the value of all TNCs (in the analyzed network). Further,
“despite its small size, the core holds collectively a large fraction of the total network control. In detail, nearly 4/10 of the control over the economic value of TNCs in the world is held, via a complicated web of ownership relations, by a group of 147 TNCs in the core, which has almost full control over itself. The top holders within the core can thus be thought of as an economic “super-entity” in the global network of corporations.” [emphasis added]
Concerning the implications of this super entity, the researchers asked two fundamental questions: First, what are the implications for market competition, and, second, what are the implications for economic stability?
Regarding the first question, the authors  assert that no matter the origin of the SCC, due to its high degree of TNC network control, “it weakens market competition”.
It is clear just from the history of anti-trust laws in this country that concentrated ownership stifles “free market” competition and innovation, reduces over-all employment, and leads to excessive pricing.
some major TNCs in the financial sector.(source: Orbis 2007)
Zoom on some major TNCs in the financial sector. Some cycles are highlighted. Note: data for this analysis comes from the 2007 Orbis database -- prior to the 2008 financial crisis, thus, firms such as Bear Stearns and Lehman Bros. are included.
In regards to the second question, the researchers note that “the existence of such a core in the global market was never documented before and thus, so far, no scientific study demonstrates or excludes that this international ‘super-entity’ has ever acted as a bloc.
However, there is historical data — such as within the airline, auto and steel industries — supporting this possibility.
“…top holders are at least in the position to exert considerable control, either formally (e.g., voting in shareholder and board meetings) or via informal negotiations.”
Additionally, recent studies (Stiglitz J.E., 2010, Battiston S. et al, 2009) have shown that densely connected financial networks are highly susceptible to systemic risk. Despite the fact that such networks may seem robust in good economic times, in times of crisis however, member firms tend to enter “distress mode” simultaneously. This was seen recently in the 2008 (“near”) financial collapse (note: 3/4 of the network core in this analysis are financial intermediaries).
Calling their findings “remarkable”, they suggest that because “international data sets as well as methods to handle large networks became available only very recently, [this] may explain how this finding could go unnoticed for so long.”
While the researchers acknowledge that verifying whether the implications of their findings “hold true for the global economy” is beyond the scope of their current research, they assert that their unprecedented attempt to uncover the structure of corporate control is “a necessary precondition for future investigations.”
The paper, The network of global corporate control (Vitali, Glattfelder, Battiston) was published July 26, 2011, on arXiv.org
End Notes:
The Orbis 2007 marketing database comprises about 37 million economic actors, both phys
ical persons and firms located in 194 countries, and roughly 13 million directed and weighted ownership links (equity relations).  This data set is intended to track control relationships rather than patrimonial relationships. Whenever available, the percentage of ownership refers to shares associated with voting rights. Accordingly, we select those companies which hold at least 10% of shares in companies located in more than one country. Overall we obtain a list of 43060 TNCs located in 116 different countries, with 5675 TNCs quoted in stock markets.
The definition of TNCs given by the OECD states that they “…comprise companies and other entities established in more than one country and so linked that they may coordinate their operations in various ways…”
Diagrams: (source) The network of global corporate control (Vitali, Glattfelder, Battiston) 
= = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = = =
Top 50 Control-Holders Ranking:
{source: the following is quoted directly from the research paper]
This is the first time a ranking of economic actors by global control is presented. Notice that
many actors belong to the financial sector (NACE codes starting with 65,66,67) and many of
the names are well-known global players.
The interest of this ranking is not that it exposes unsuspected powerful players. Instead, it shows that many of the top actors belong to the core. This means that they do not carry out their business in isolation but, on the contrary, they are tied together in an extremely entangled web of control. This finding is extremely important since there was no prior economic theory or empirical evidence regarding whether and how top players are connected.
Shareholders are ranked by network control (according to the threshold model, TM). Columns indicate country, NACE industrial sector code, actor’s position in the bow-tie sections, cumulative network control. Notice that NACE codes starting with 65,66, or 67 belong to the financial sector.
Rank , Economic actor name, Country, NACE code, Network Cumul. Network position, control (TM, %)
1 BARCLAYS PLC  GB 6512  SCC 4.05
2 CAPITAL GROUP COMPANIES INC, THE  US  6713  IN  6.66
3 FMR CORP  US  6713  IN  8.94
4 AXA  FR  6712  SCC  11.21
5 STATE STREET CORPORATION US 6713 SCC 13.02
6 JP MORGAN CHASE & CO. US 6512 SCC 14.55
7 LEGAL & GENERAL GROUP PLC GB 6603  SCC 16.02
8 VANGUARD GROUP, INC., THE  US 7415 IN 17.25
9 UBS AG  CH 6512  SCC 18.46
10 MERRILL LYNCH & CO., INC. US 6712  SCC 19.45
11 WELLINGTON MANAGEMENT CO. L.L.P. US 6713  IN 20.33
12 DEUTSCHE BANK AG DE 6512  SCC 21.17
13 FRANKLIN RESOURCES, INC. US 6512  SCC 21.99
14 CREDIT SUISSE GROUP  CH 6512 SCC 22.81
15 WALTON ENTERPRISES LLC US 2923 T&T 23.56
16 BANK OF NEWYORKMELLON CORP. US 6512 IN 24.28
17 NATIXIS   FR 6512 SCC 24.98
18  GOLDMAN SACHS GROUP, INC., THE US 6712 SCC 25.64
19 T. ROWEPRICE GROUP, INC. US 6713 SCC 26.29
20 LEGG MASON, INC. US 6712 SCC 26.92
21 MORGAN STANLEY US 6712 SCC 27.56
22 MITSUBISHI UFJ FINANCIAL GROUP, INC. JP 6512 SCC 28.16
23 NORTHERN TRUST CORPORATION US 6512 SCC 28.72
24 SOCIÉTÉ GÉNÉRALE FR 6512 SCC 29.26
25 BANK OF AMERICA CORPORATION US 6512 SCC 29.79
26 LLOYDS TSB GROUPPLCGB 6512 SCC 30.30
27 INVESCOPLCGB 6523 SCC 30.82
28 ALLIANZSE DE 7415 SCC 31.32
29 TIAA US 6601 IN 32.24
30 OLD MUTUAL PUBLIC LIMITED COMPANY GB 6601 SCC 32.69
31 AVIVAPLC GB 6601 SCC 33.14
32 SCHRODERSPLC GB 6712 SCC 33.57
33 DODGE & COX US 7415 IN 34.00
34 LEHMAN BROTHERS HOLDINGS, INC. US 6712 SCC 34.43
35 SUN LIFE FINANCIAL, INC. CA 6601 SCC 34.82
36 STANDARDLIFEPLCGB 6601 SCC 35.2
37 CNCE FR 6512 SCC 35.57
38 NOMURA HOLDINGS, INC. JP 6512 SCC 35.92
39 THE DEPOSITORY TRUST COMPANY US 6512 IN 36.28
40 MASSACHUSETTS MUTUAL LIFE INSUR. US 6601 IN 36.63
41 INGGROEP N.V.  NL 6603  SCC 36.96
42 BRANDES INVESTMENT PARTNERS, L.P. US 6713 IN 37.29
43 UNICREDITO ITALIANO SPA IT 6512 SCC 37.61
44 DEPOSIT INSURANCE CORPORATION OF JP JP 6511 IN 37.93
45 VERENIGING AEGON  NL 6512 IN 38.25
46 BNPPARIBAS  FR 6512 SCC 38.56
47 AFFILIATED MANAGERS GROUP, INC. US 6713  SCC 38.88
48 RESONA HOLDINGS, INC.  JP 6512  SCC 39.18
49 CAPITAL GROUP INTERNATIONAL, INC.  US 7414 IN 39.48
50 CHINA PETROCHEMICAL GROUP CO.  CN 6511 T&T 39.78


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