The network of global corporate control (1107.5728v2)

Abstract: The structure of the control network of transnational corporations affects global market competition and financial stability. So far, only small national samples were studied and there was no appropriate methodology to assess control globally. 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.

• The paper reveals a bow-tie network structure for global corporate control, highlighting a dense core dominated by financial institutions.
• It applies three control models to convert ownership data from over 43,000 transnational corporations into measurable influence metrics.
• It shows that 737 top holders and the richest 0.61% of nodes control 80% of global TNC value, pointing to systemic risks in the financial network.

The Network of Global Corporate Control

The paper "The Network of Global Corporate Control" by Stefania Vitali, James B. Glattfelder, and Stefano Battiston provides a thorough quantitative analysis of the ownership structures of transnational corporations (TNCs) on a global scale. The authors employ a novel methodology to uncover and measure the control exerted by these corporations, offering significant insights into the interconnectedness and concentration of corporate control across the globe.

Methodology

The authors begin by identifying 43,060 TNCs from the Orbis 2007 database, which contains comprehensive ownership information on about 30 million economic entities. They then use complex network analysis to map the ownership relationships among these entities, creating a global picture of the ownership pathways originating from and pointing to TNCs. The resulting network includes 600,508 nodes and 1,006,987 ownership ties.

The paper defines ownership using a matrix $W$, where $W_{ij}$ denotes the percentage of firm $j$ owned by shareholder $i$. Control, $C_{ij}$, is estimated from ownership using three models: the Linear Model (LM), which assumes control is proportional to ownership; the Threshold Model (TM), which grants full control to majority shareholders; and the Relative Control Model (RM), which takes into account the relative distribution of ownership shares. Network control ($c^{\textrm{net}}$) is then computed recursively, considering both direct and indirect ownership and control pathways.

Key Findings

Bow-Tie Structure

The paper reveals that the global corporate control network exhibits a bow-tie structure, similar to the architecture of the World Wide Web. The largest connected component (LCC), encompassing 94.2% of the total operating revenue of TNCs, is organized into a bow-tie with a small, densely connected core, referred to as the Strongly Connected Component (SCC). The SCC contains 1,318 nodes, primarily comprising financial institutions, which collectively control a significant fraction of the TNC network.

Concentration of Control

The analysis shows an extreme concentration of control within the core of the network. Approximately 147 TNCs within the SCC hold nearly 40% of the total control over global economic value, revealing the presence of a tightly-knit "super-entity" with substantial influence over the global market. Notably, financial institutions dominate this core, suggesting that the architecture of corporate control is highly intertwined with the financial sector.

Numerical Insights

Specifically, the topological and control measures reveal that:

• A mere 737 top holders accumulate 80% of the control over the value of all TNCs.
• The richest 0.61% of nodes control 80% of network value, highlighting a remarkable disparity in control distribution compared to wealth distribution.

Implications

Financial Stability

The dense interconnections among financial institutions within the SCC raise concerns about systemic risk. The paper suggests that the global financial network, assumed to mirror the ownership network, is precariously interconnected. In times of economic distress, the dense connectivity could facilitate rapid contagion, leading to simultaneous failures of multiple financial entities.

Market Competition

The control structure identified in the paper has implications for market competition. The overlapping domains of activity among SCC members could enable the formation of blocs, potentially undermining competitive practices. The intricate web of ownership ties observed might facilitate coordinated actions that influence market outcomes, despite the lack of explicit empirical evidence for such behavior at the global level.

Conclusions and Future Work

The paper provides a pioneering look into the global architecture of corporate control, emphasizing the need for further research into its implications for financial stability and market competition. The development of methods to handle extensive networks and the insights into the control dynamics among global corporations offer a foundation for future studies exploring the evolution and influence of corporate ownership networks. The authors suggest that similar bow-tie structures might exist in other types of complex networks where rich-get-richer mechanisms are prevalent.

Acknowledgments

The research acknowledges financial support from the ETH Competence Center "Coping with Crises in Complex Socio-Economic Systems" and the European Commission FP7 FET Open Project "FOC." The authors thank F. Schweitzer, C. Tessone, D. Garcia, and the program Cuttlefish for their valuable contributions.

The paper, by mapping the global corporate control network, sheds light on the significant concentration of power among a few key financial players, raising questions about the robustness and fairness of the current global economic system.