Making sense of firms for ocean governance

Abstract

Attention to firms in the ocean economy is growing as oceans face rapid ecological change as well as surges in investment and governance efforts under a “blue economy” paradigm. Concepts and methods that can “make sense” of firms and their positioning within value chains are essential for scholars seeking to inform a more sustainable ocean future. Attention to firms in the ocean economy is growing as oceans face rapid ecological change as well as surges in investment and governance efforts under a “blue economy” paradigm. Concepts and methods that can “make sense” of firms and their positioning within value chains are essential for scholars seeking to inform a more sustainable ocean future. Ocean governance challenges and opportunities are gaining attention as projections suggest that the ocean economy could more than double its contribution to global value added between 2010 and 2030 to reach over US$3 trillion.1Organisation for Economic Cooperation and DevelopmentThe ocean economy in 2030.https://doi.org/10.1787/9789264251724-enDate: 2016Google Scholar Governance questions apply to trajectories of unsustainable resource depletion as well as plans for expanding the “blue economy” and meeting the aspirations identified in UN Sustainable Development Goal 14.2Campbell L.M. Gray N.J. Fairbanks L. Silver J.J. Gruby R.L. Dubik B.A. Basurto X. Global oceans governance: New and emerging issues.Annu. Rev. Environ. Resour. 2016; 41: 517-543Google Scholar Firms are the primary user of the oceans. Tens of thousands of firms—a term that refers broadly to the organizational form of businesses rather than the context-specific legal designation “corporation”—constitute ocean industries including shipping, oil and gas, fisheries, aquaculture, tourism, renewable energy, port activities, dredging, and submarine cables, as well as legal, financial, and insurance sectors, among others. Firms cause environmental impacts that influence critical functions of the biosphere, and they will play a central role in sustainable ocean futures.3Folke C. Österblom H. Jouffray J.-B. Lambin E.F. Adger W.N. Scheffer M. Crona B.I. Nyström M. Levin S.A. Carpenter S.R. et al.Transnational corporations and the challenge of biosphere stewardship.Nat. Ecol. Evol. 2019; 3: 1396-1403Google Scholar They are the central entity being managed in ocean governance bodies such as the International Maritime Organization and regional fishery management organizations (RFMOs) and the suite of eco-certifications and traceability tools aimed at pushing firms to adopt sustainable and socially responsible practices. Firms are also direct players in ocean governance: they are engaged in agenda setting by making individual commitments and participating in venues such as the World Economic Forum’s Ocean Dialogues and the World Ocean Council, the latter of which is a network of more than 35,000 ocean industry stakeholders with a mission to catalyze global leadership and collaboration for “corporate ocean responsibility” (https://www.oceancouncil.org/). In short, firms are key players in the ocean agenda. Yet, it is a challenge to monitor and hold firms accountable. They hold commercial data and business practices in confidence and undertake resource extraction out of sight in the vast space of the oceans, often across multiple jurisdictions and in the high seas outside of state space. These dynamics make recent attention to identifying firms and using new data technologies to examine their activities in ocean industries a welcome advance in sustainability science. A desire to understand the power of firms and related governance possibilities is evident in a recent collection of studies identifying firms and various metrics for assessing their impacts in the oceans.4Österblom H. Jouffray J.-B. Folke C. Crona B. Troell M. Merrie A. Rockström J. Transnational corporations as ‘keystone actors’ in marine ecosystems.PLoS ONE. 2015; 10: e0127533Google Scholar, 5Virdin J. Vegh T. Jouffray J.-B. Blasiak R. Mason S. Österblom H. Vermeer D. Wachtmeister H. Werner N. The Ocean 100: Transnational corporations in the ocean economy.Sci. Adv. 2021; 7: eabc8041Google Scholar, 6Carmine G. Mayorga J. Miller N.A. Park J. Halpin P.N. Ortuño Crespo G. Österblom H. Sala E. Jacquet J. Who is the high seas fishing industry?.One Earth. 2020; 3: 730-738Google Scholar Each study arrives at a conclusion that economic activity in the oceans is “concentrated” in the hands of a few firms and asserts that identifying firms and the assumed extent of concentration in oceanic economic activity is a necessary step to increasing transparency and accountability for better ocean governance. Realizing the promise of studying firms for improved ocean governance requires explicitly defining terms, using analytical tools developed for studying firms, and situating firms within the global value chains of which they are a part. The fields of economics, economic geography, and international business have developed analytics that enhance interpretation of data about firms, market structure, and firm behavior. These should be a part of the essential toolkit of sustainability scientists seeking to meld firm governance and ocean governance. Take, for instance, the analytic of concentration. Österblom et al.4Österblom H. Jouffray J.-B. Folke C. Crona B. Troell M. Merrie A. Rockström J. Transnational corporations as ‘keystone actors’ in marine ecosystems.PLoS ONE. 2015; 10: e0127533Google Scholar identify 13 corporations controlling 11%–16% of the global marine catch in fisheries and 19%–40% of the largest and most valuable stocks and argue that the annual increase in revenues for these firms from 2007 to 2012 illustrates consolidation (an increase in concentration over time) in the global network of seafood production. Carmine et al.6Carmine G. Mayorga J. Miller N.A. Park J. Halpin P.N. Ortuño Crespo G. Österblom H. Sala E. Jacquet J. Who is the high seas fishing industry?.One Earth. 2020; 3: 730-738Google Scholar analyze ownership of fishing vessels operating on the high seas and find that 100 firms are responsible for 36% of fishing effort in areas beyond national jurisdiction; they interpret this as evidence of firm consolidation. Moving beyond a focus on fisheries, Virdin et al.5Virdin J. Vegh T. Jouffray J.-B. Blasiak R. Mason S. Österblom H. Vermeer D. Wachtmeister H. Werner N. The Ocean 100: Transnational corporations in the ocean economy.Sci. Adv. 2021; 7: eabc8041Google Scholar attribute “concentration in the ocean economy” to 100 firms that account for 60% of total revenues in “eight core ocean economy industries” (offshore oil and gas, marine equipment and construction, seafood, container shipping, shipbuilding and repair, cruise tourism, port activities, and offshore wind). However, none of these studies explicitly defines or provides a measure of concentration or consolidation that can help to interpret its significance for ocean governance. These kinds of methodological oversights have implications for the governance possibilities that motivate the analyses in the first place. Concentration is a measure of the dispersal or distribution of one thing (e.g., revenues, pollutants, or fishing effort) within or among another thing (e.g., among people, throughout the atmosphere, or among firms engaged in a specified market). This distribution can be equal or even, but more often it is not. Concentration of one thing (e.g., revenues or fishing effort) in the hands of a few firms presents an alluring pathway to governance reform because if a sector is highly concentrated, a few firms—referred to as “lead firms” in global-value-chain analysis—hold the potential to drive appreciable change in their segment and potentially throughout a value chain. If one or more lead firms in a concentrated segment of a value chain or a concentrated industry can be convinced to commit to sustainable production practices, they might be able to directly change how their industry functions or to require that firms in other segments do so. Additionally, because a concentrated segment or industry has a few lead firms, states and non-state actors can more easily identify and direct regulatory attention and public pressure to the behavior of those firms. For instance, during the retail revolution of the 1980s, supermarkets grew and consolidated significantly, initially in the United Kingdom and the United States and later in the 1990s in western Europe, Japan, and increasingly much of the Global South.7Durand C. Wrigley N. Institutional and economic determinants of transnational retailer expansion and performance: a comparative analysis of Wal-Mart and Carrefour.Environ. Plann. A. 2009; 41: 1534-1555Google Scholar Supermarkets’ increased market share and sales density enhanced economies of scale and buying power and reduced unit costs related to competitors, resulting in an oligopolistic structure.8Burt S. Sparks L. Power and competition in the UK retail grocery market.Br. J. Manage. 2003; 14: 237-254Google Scholar As a result, retailers’ power over suppliers of primary commodities and basic manufacturers increased, enabling them to dictate costs and product attributes. Advocacy groups such as Greenpeace have seized on this power by strategically targeting and pressuring supermarkets to use their buying power to demand that upstream firms shift to more environmentally and socially responsible production practices.9Ponte S. Business, Power and Sustainability in a World of Global Value Chins. Zed Books, 2019Google Scholar In seafood sectors, supermarkets—under pressure and aiming to limit reputational risks and secure long-range supply—now frequently commit to purchasing seafood certified as sustainable by a third-party ecolabel or to reforming their internal procurement practices around environmental and social criteria. Both strategies are predicated on market power over suppliers, which is underpinned by concentration in the retail sector: that is, suppliers (e.g., fishing firms) have few alternative sales outlets and thus must find ways to comply.10Havice E. Campling L. Where chain governance and environmental governance meet: Inter-frim strategies in the canned tuna global value chain.Econ. Geogr. 2017; 93: 292-313Google Scholar However, not all industries or segments of value chains in the ocean economy are concentrated. For instance, Virdin et al.5Virdin J. Vegh T. Jouffray J.-B. Blasiak R. Mason S. Österblom H. Vermeer D. Wachtmeister H. Werner N. The Ocean 100: Transnational corporations in the ocean economy.Sci. Adv. 2021; 7: eabc8041Google Scholar reveal that although the largest ten companies account for 93% of revenue share in the cruise tourism sector, in seafood sectors, the largest ten companies account for only 15% of revenue share, suggesting that governance challenges and tactics are likely to vary significantly for each. Furthermore, the presence of large firms does not always signify concentration and associated market power. For example, at the firm level, the farmed-salmon industry is unconcentrated even though one firm has over 25% of the market share. The global integration of the farmed-salmon market with wild-caught salmon, the potential to farm salmon in many parts of the world with different production methods, and the presence of many smaller firms in the industry together mean that large firms are not able to assert market power or artificially raise the price above the competitive level. Only when viewed from the country level (as if the countries are the producers and not the multi-national firms) do standard measures of concentration suggest market power in the farmed-salmon sector.11Fischer C. Guttormsen A.G. Smith M.D. Disease risk and market structure in salmon aquaculture.Water Econ. Policy. 2017; 3: 1650015Google Scholar How, then, can researchers know whether and when an industry or segment of an industry is concentrated and under what conditions the level of concentration is meaningful for governance? Statistical measures formalize these concepts and help to determine when concentration is meaningful to a specified issue such as sustainability. For instance, the Gini coefficient and Lorenz curve measure how equitable or inequitable the distribution of a variable (e.g., total fishing effort) is within a specified population (e.g., firms in an industry). Both can be measured on a scale of 0–1, where 0 means that distribution is perfectly equal (e.g., each of 100 fishing vessels exerts 1% of total fishing effort) and 1 means that distribution is perfectly unequal (e.g., 1 of 100 fishing vessels exerts 100% of total fishing effort). The Herfindahl-Hirschman index (HHI), expressed as follows, is another standard economic measure of industry concentration:HHI=∑i=1nsi2,(Equation 1) where s is the market share of each firm and n is the number of firms in the industry. The larger HHI is, the more concentrated the industry is. In the HHI, market power can manifest on either side of the market (buyers or sellers) at any point in the value chain, including markets for inputs (e.g., labor or raw materials) or intermediate, wholesale, or retail goods. HHI is relevant in all of these cases, including markets not bound by a single country, as is often the case for ocean economic activities that span multiple jurisdictions and/or operate in the high seas. To illustrate the utility of such measures, we applied the HHI to Carmine et al.’s6Carmine G. Mayorga J. Miller N.A. Park J. Halpin P.N. Ortuño Crespo G. Österblom H. Sala E. Jacquet J. Who is the high seas fishing industry?.One Earth. 2020; 3: 730-738Google Scholar data on firm ownership and effort. By this definition and measure, we calculate that the HHI is 0.004, indicating a “highly competitive” industry. When we treat firms where ownership could not be identified in the dataset as if they were one firm, we find an HHI of 0.059, indicating an “unconcentrated” industry. Calculating HHI by flag state rather than firm owner yields an HHI of 0.2, which falls in the category of “moderate concentration” (for standard HHI cutoffs, see the US Department of Justice and Federal Trade Commission12US Department of Justice and Federal Trade CommissionHorizontal merger guidelines. Issued August 19, 2010.https://www.justice.gov/atr/horizontal-merger-guidelines-08192010Date: 2010Google Scholar). Our point here is that a definition and a measure of concentration, whether the HHI, Gini coefficient, Lorenz curve, or others, provide analytical power that can inform governance of firms in ocean industries. They are routinely used by policymakers and scholars for evaluating the potential effect of concentration on firm behavior in, for instance, seafood sectors with multi-national firms11Fischer C. Guttormsen A.G. Smith M.D. Disease risk and market structure in salmon aquaculture.Water Econ. Policy. 2017; 3: 1650015Google Scholar and studying how shifts in fishery policy might, over time, increase or decrease the concentration of commercial fishing activity, revenue, or quota holdings (i.e., assessing “consolidation,” an increase in concentration over time; see, e.g., Gulf of Mexico Fishery Management Council13Gulf of Mexico Fishery Management CouncilRed snapper individual fishing quota program 5-year review.https://gulfcouncil.org/docs/amendments/Red%20Snapper%205-year%20Review%20FINAL.pdfDate: 2013Google Scholar). Measures such as these provide an analytical foundation for examining firm power and for exploring the relationship between industry structure—whether concentrated or not—and governance changes. For instance, a lack of concentration in the high-seas fishing sector is significant for ocean governance.14Campling L. Lewis A. McCoy M. The tuna longline industry in the Western and Central Pacific Ocean and its market dynamics (Pacific Islands Forum Fisheries Agency).https://www.ffa.int/node/2025Date: 2017Google Scholar Because fishing effort is not concentrated among firms, there is no clear strategy for driving systematic governance reforms by directly targeting individual firms in the fishing segment of the value chain. This is because firms in competitive industries cannot put up barriers to entry (such as requirements for operating in a sustainable manner) as a monopoly or a highly concentrated oligopoly might be able to do. Instead, fishing firms can—and do—reflag, engage in beneficial ownership strategies, and/or create new subsidiaries to obscure ownership information6Carmine G. Mayorga J. Miller N.A. Park J. Halpin P.N. Ortuño Crespo G. Österblom H. Sala E. Jacquet J. Who is the high seas fishing industry?.One Earth. 2020; 3: 730-738Google Scholar, 14Campling L. Lewis A. McCoy M. The tuna longline industry in the Western and Central Pacific Ocean and its market dynamics (Pacific Islands Forum Fisheries Agency).https://www.ffa.int/node/2025Date: 2017Google Scholar (for an elaboration of this dynamic around illicit oil transport, see Cooper et al.15Cooper S. Koettl C. Xiao M. 5 takeaways from investigating covert oil deliveries to North Korea. The New York Times, March 22, 2021.https://www.nytimes.com/2021/03/22/world/winson-north-korea-oil-tankers.htmlDate: 2021Google Scholar). In the high seas, this means that inter-state bodies such as RFMOs—and the accompanying messy geopolitics that they entail—remain essential for direct governance of firm behavior. But concentration is only one element that is consequential for efforts to govern the oceans. Sustainability science will generate meaningful data by also utilizing analytical tools that situate individual firms or groups of firms within the larger value chains of which they are a part. Analyzing global value chains in this way is important because competitive pressures, market dynamics, and inter-firm relationships within any single chain—including tendencies toward concentration—vary by industry.16Gereffi G. Humphrey J. Sturgeon T. The governance of global value chains.Rev. Int. Polit. Econ. 2005; 12: 78-104Google Scholar Furthermore, operating practices and governance strategies of competitor firms operating in the same value chain can—and do—vary significantly, even in concentrated segments, including in terms of firm strategies related to sustainability.17Havice E. Campling L. Corporate dynamics in the shelf-stable tuna industry (Pacific Islands Forum Fisheries Agency).https://www.ffa.int/node/2113Date: 2018Google Scholar Value-chain analysis is an analytical technique designed to disentangle these particularities by offering insights into what kinds of state, non-state, and hybrid forms of governance can most effectively target specified concerns and locating sites in chains where governance tools might have impact. In many value chains, the tendency to concentration in one node of a value chain (e.g., retail) is coupled with a lack of concentration in other nodes of the same chain (e.g., extraction of raw material, such as fishing).10Havice E. Campling L. Where chain governance and environmental governance meet: Inter-frim strategies in the canned tuna global value chain.Econ. Geogr. 2017; 93: 292-313Google Scholar,18World BankWorld development report 2020: trading for development in the age of global value chains.https://doi.org/10.1596/978-1-4648-1457-0Date: 2020Google Scholar The competitive logics of individual firms vary accordingly. For instance, firms in concentrated segments often capture advantage from market power (e.g., intellectual-property protections, transaction cost reduction, and capital investment). Unconcentrated segments often have characteristics such as low profits and low barriers to entry (e.g., limited regulatory oversight) and can be buoyed by supports, such as government subsidies, that create perverse operating incentives; all of these features apply, for instance, in high-seas fisheries.19Sala E. Mayorga J. Costello C. Kroodsma D. Palomares M.L.D. Pauly D. Sumaila U.R. Zeller D. The economics of fishing the high seas.Sci. Adv. 2018; 4: t2504Google Scholar Further drawing out the high-seas fishing case illustrates that although there might be limited potential for driving systematic change through “name and shame” campaigns or market pressure at the vessel level, other points in the value chain could offer opportunities. For example, in value chains for frozen sashimi—a major market component of firms fishing in the high seas—there is a higher level of concentration in the buying segment of the chain in Japan, indicating that corporate engagement could potentially be applied at this node of the value chain.14Campling L. Lewis A. McCoy M. The tuna longline industry in the Western and Central Pacific Ocean and its market dynamics (Pacific Islands Forum Fisheries Agency).https://www.ffa.int/node/2025Date: 2017Google Scholar Given this dynamism in firm strategies and in inter-firm relations through value chains, policy approaches to ocean governance cannot be one size fits all, and the identification of large firms or of concentration is not enough in itself to guide the formulation of sustainability policy. Identifying pathways for governing the blue economy requires identifying firms and attributing their production practices and impacts to them. New data and analyses allow for “seeing” firms in ocean industries, but theory and methods from other fields are required for determining what is meaningful about the view. Rich understanding of value chains in conjunction with explicit measures of concentration helps to identify circumstances when influencing a small number of firms might (or might not) make a difference in governing an industry. As such, attention to firms in sustainability science invites opportunity for collaboration with social scientists who have developed concepts and methods to analyze firms and the sources and limits of their power. Such collaborations are essential for efforts to describe and experiment with the relationships between firm governance and environmental governance for sustainable ocean futures. L.C. and E.H. serve as policy and industry analysts for the Pacific Islands Forum Fisheries Agency.