Master Thesis: Port-City Networks

Master Thesis: Port-city networks. The case of London-Piraeus maritime network of APS producers.

Author: Anangnostopoulos Georgios

Supervisor: Dr Jacobs Wouter

Department of Applied Economics

Faculty of Entrepreneurship, Strategy and Organisation Economics

Erasmus University Rotterdam

Abstract

This Master Thesis has been written as a partial fulfillment of the requirements of the MSc Entrepreneurship, Strategy and Organization Economics at the Department of Applied Economics - Erasmus University Rotterdam. The work has been carried out in the cities of Rotterdam, Piraeus and at London by phone.

First of all, I would like to thank my supervisor in Rotterdam, Dr. W. Jacobs for his valuable guidance and advice. I am also especially grateful to the Managing Director of Post &Co P&I Club Mr. D. Post and Mr. van der Valk of AKD PrinsenVan Wijmen, for giving me the opportunity to gain insights on the core of the subject that proved valuable on following interviews.

Finally, I would like to acknowledge the precious help of Mr. A. Karampelas, former Managing director of the Justice Department of the National Bank of Greece for recommending me to other maritime experts. Moreover, I would like to thank Mr. Fasolis, maritime lawyer, for the time dedicated and great interest he showed during the interview. Finally, I would like to help all the participants in this research, Mr. I. Psychoyios of Eletson Corporation, Mr. I. Trantalidis maritime lawyer, Mr. D. Vasilakos Managing Director of Maritime Affairs of the National Bank of Greece and Mr. D. Vergottis of Valliant Shipping. Without their useful insights this work would not have been the same.

Table of Content

Abstract 2

Chapter I: Introduction: Research aim and questions 5

1.1Background Research 5

1.2Research Aim 8

1.3Research Questions 9

1.4 Research Methodology 10

1.5 Structure of the Report 11

Chapter II: Agglomeration economies, clusters and networks

2.1.1 Introduction 12

2.1.2 Agglomeration economies 12

2.1.3 The concept of clusters 13

2.1.4 The creation of networks 16

2.2.1 Types and role of proximity in clusters and networks 19

2.2.2 Cognitive proximity 20

2.2.3 Organizational proximity 22

2.2.4Social proximity 24

2.2.5 Institutional proximity 25

2.2.6 Geographical proximity 28

2.3 World Cities 30

2.4 Global production networks 32

2. 5 World port cities 35

Chapter lll: Empirical Analysis 40

3.1 Introduction: Characteristics of Greek maritime industry 40

3.2 Measuring the connectivity of APS providers 42

3.3 Findings from World Shipping Register Database 44

Chapter IV: The London-Piraeus network 48

4.1.1 The maritime network of Piraeus:History and evolution of Piraeus cluster 48

4.1.2 Importance of commodity Chains at Piraeus port 52

4.1.3 Legislation and regulation at Piraeus cluster 55

4.1.4 Role of proximity at Piraeus cluster 58

4.1.5 Strengths and weaknesses of Piraeus APS cluster 59

4.1.6 The relation of Piraeus maritime network with the urban web 61

4.2.1 The importance of London at the maritime world and for the Greek maritime network 62

4.2.2 British Legislation and its importance for London maritime cluster 64

4.2.3 Weaknesses of the London cluster 66

4.3 The relation between the London- Piraeus network 67

Chapter V:Conclusions &Recommendations 71

5.1 Conclusions 71

5.2 Policy recommendations 73

5.3 Research limitations 75

Literature References 76

Interviews 83

Chapter I

Introduction: Research aim and questions

1.1Background Research

Around the globe the disconnection of ports from the host cities can be observed, both spatially but also economically. Reasons that may explain the spatial disconnection of ports away from the cities can be the increased port activities with all the negative consequential impacts like pollution, congestion in combination with the rapid urban growth, lack of space for further expansion of the urban web as well as environmental concerns. Economically, ports are less dependent from the city centers for labor force due to the automatization and rationalization of their activities but also due to disconnection of other industrial activities from the cities that where a prime cliental base for port activities. Cities on the other hand try to reduce their dependency for their local economic growth from port activities by diversifying and upgrading other sectors of their economy that do not have the negative externalities of port activities we have mentioned before(Hoyle 1989, Jacobs et al 2007). However there is a school of thought that port-city relations still exist through more sophisticated and less obvious links between the port clusters and the APS providers.

Ports in order to survive the fierce competition with other locations, they developed into a geographical concentration of highly specialized, added-value activities, with demand for specialized labor (Fujita&Mori (1995), De Langen (2003)). Using a phrase of Humphrey& Schmitz 2002, ports can be considered as ‘export-oriented clusters that are inserted into global value chains’. For Ducruet&Lee (2006) port function is more or less important for local economies and they suggest that port city ‘Is destined to become a general city through successful stages of economic diversification’ (Murphey 1989). As a first stage the local economy is dependent on port and maritime activities. At a second phase the local economy attracts additional activities (industrial, shipbuilding) and finally the transformation of the local economy to a service economy occurs by attracting APS providers, allowing the separation between the city and the port(Charlie 1988). Another stage of evolution was added by Pesquera&Ruiz (1996) where at a post-industrial stage the ‘interdependency’ between urban and port logistics activities takes place. Some cities with advanced economies managed to enhance and redefine their port activities by including and attracting broader, added-value services like financial services, maritime insurance, law services etc at their territory and not restrict their activities only to cargo or port related like cargo handling, storage and bunkering . By doing so, they managed to keep their port functions stable or increased even when the port traffic and commodities transferred decreased(Fujita&Mori 1995).

Scientifically, the purpose of this research is to investigate the level of independency between the port cluster and the APS providers and whether the port users prefer the local APS providers or they whether they prefer to purchase these services from another distant location. Moreover, it is not well studied the importance of co-location of APS providers with their competitors and other providers from different fields. Except that, the vertical relations between APS providers and maritime companies will be examined, as well as the importance of maritime players to be located at close geographical proximity. We should take into account the rapid evolution of communication technology that minimizes the communication cost and facilitates the contact of port users with distant APS producers as well as the extent use from maritime companies of an extent network around the globe of agents and representatives. Thus, a central question of our research will be whether spatial proximity is important for the commercial interactions of maritime clusters and maritime-specialized APS providers.

In order to investigate the above issues the maritime network of London-Piraeus will be examined and more specifically the general characteristics of the location of each node and the connectedness of maritime APS providers between the two locations as well as the vertical connections with maritime companies.

The reasons for the choice of these specific locations are the following: At London, there is a large concentration of offices of Greek maritime companies that take advantage of low taxation, flexible regulations, the high concentration of Advanced Producer Services (APS) like law firms, P&I clubs, tacit knowledge that is provided by institutions stationed there like Lloyds of London, classification societies, Baltic Exchange, the International Maritime Industries Forum(IMIF) and many others, as well for all other benefits that stream from the location near the world’s shipping and financial center. Moreover, London is considered the maritime center of the world, for historical reasons but also due to its large concentration of maritime expertise and knowledge that cannot be found anywhere else.

Piraeus port is the biggest port in Eastern Mediterranean with a crucial role in transshipment activities. Its growth started at the late 1960’s with the application of a flexible legislation and taxation framework for shipping companies which allowed foreign (non-Greek) shipping and shipping related service companies, to establish branch offices in Greece and benefit from certain tax benefits. Moreover a large number of local APS providers are located there but also there are a large and increased number of branches from large, multinational APS producers and a significant number of branches of large British APS producers.

Greek-owned maritime industry is leading in terms of numbers of ships and tonnage worldwide. A critical characteristic of Greek shipping industry is that it consists to a large percent (80%) of small companies that own 1-9 vessels, usually aged ships(Goulielmos 1996). The merchant fleet owned by Greeks nowadays was based on commercial and maritime networks and mainly at London and New York (Harlaftis 1996). The vulnerability of small shipping companies to changes of the structure of shipping market, for example the increased demand for transportation at the globalized environment, the decrease in transportation costs, the existence of large dominant private or government firms, makes information crucial and that is the reason why many firms have representatives or offices at world city centers like New York and London that are the maritime capital for historical but also for expertise reasons. A strong Greek maritime community exists at London from the 19th century to take advantage of the expertise and knowledge that is rooted at London and since then it is among the main links, with significant importance for the Greek maritime network. The fact that at both ends of the network we find Greek maritime firms gives additional interest to the study since we examine a partly homogenous network.The link between the two locations is the ‘Greekness' of a part of the network, which is extremely important for the economic survival of Greek maritime companies at both ends of the London-Piraeus network. It provided access to all the expertise of shipping: market information, chartering, financing, and insurance and P & I clubs (Harlaftis 1996).Except for the existence of cognitive proximity (family bonds, cultural or kinship) the effectiveness of the transmission of such tacit knowledge is facilitated with the existence of close geographical proximity since maritime and APS firms are co-located to facilitate the frequent face-to-face contact. Moreover, maritime companies at both nodes share the same organizational practices since members of the family raised abroad returned to Piraeus port to start their own firm or to open a branch of the family business. These special characteristics and the importance of both geographical but also cognitive (and organizational) proximity for the growth and survival of the Greek maritime network as well as the strong and established connections between the two nodes of the network gives additional interest for the investigation of the location and connectedness of the two locations.

To sum up, the study of the connectedness between London, the main maritime and financial center of the world and Piraeus a service center with the largest concentration of Greek-owners that own the larger share of the world’s tonnage gives additional interest to the investigation of the relations between the two locations regarding the importance of APS providers as well as the special characteristics of each location and that will be the aim of this research paper. The practical relevance of this study stands to the understanding of the special characteristics of each location regarding the APS providers that will assist the policy makers to improve their position by removing the obstaclesthey face to their growth and by enhancing further their competitive advantages within the maritime market. Finally, it may provide better insights to the governments and the principals of the maritime network of London- Piraeus to undertake strategic policies and actions that will lead to the further development of the interactions between the two clusters by realizing the added value of APS activities to the local economies.

1.2 Research Aim

The goal of this research is to increase our understanding about the geography and economics of maritime-specialized Advanced Producer Services within the shipping industry by examining the connections between the maritime network of London- Piraeus that will enable us to understand the type of their relation and the strengths and weaknesses of each location. I shall try to assess the general character of the maritime network but also understand the cluster, economic- geographical relationships between the two locations and the factors that influence the type of their interactions. Both the horizontal connections between APS providers will be examined but also the vertical connections between APS producers and their cliental base, the maritime companies.

From the economic-geographical theory, the following three related factors are of importance:

1)Location patterns of maritime specialized APS and the role of geographical proximity to clients within seaport clusters.

2)The local embeddedness of specialized APS within a specific region and whether these services are strongly connected to a geographic region and a structure of economic, social and institutional relationships or these relationships do not play any role to their potential location.

3)Strategic coupling between local players and global networks, which is the capacity of local actors to interact and insert themselves with corporate networks of APS (W. Jacobs 2009).

1.3Research Questions

The main issue of this research is whether Greek ship owners will use the local APS or they will purchase such services from firms based at London. Taking into account that the big percentage of Greek owned maritime companies are of small size and that large APS firms like P&I clubs based in London have high fees (entry and calls) and choose to represent only high quality and small age vessels that usually large companies and multinational corporations own, lead the smaller shipping companies to choose local, smaller APS firms. This research will try to investigate the importance of geographical proximity of APS to small maritime companies. Taking all these into account the following questions will be answered:

• What is the relation of London-Piraeus network? Is it competitive or complementary?
• What are the criteria of choosing APS? Economic based or cognitive?
• What is the importance of firm size at choosing APS?
• What is the relation of geographical and cognitive proximity for the Greek maritime network? How it affects the choice of APS services and what is the role of common practice for Greek maritime companies.

Hypothesis 1: Maritime companies base their choice of APS providers on qualitative- cognitive criteria and spatial proximity with them does not play significant role in their decision.

At this case study the relation between APS providers at two different locations will be examined using the framework of port cities as created by Jacobs et al 2007. We can expect that within port-city location the creation of non-linear relations between agents will occur at greater frequency both between APS producers but also the vertical connections between APS producers and their cliental base, the maritime companies. Another advantage of the port-city location is that it enable us to examine whether the existence of APS producers at close proximity to a port can lead to an increase on the commodities transferred or vice versa.

Other issues that this research will deal with are:

• Where maritime-specialized APS providers are located and what markets (local, international) do they serve?
• What is the importance of the proximity to seaports for APS providers?
• What is the importance of the proximity to maritime companies for APS providers?
• What is the importance of the proximity to other APS providers?
• What other factors explain the location pattern of APS providers?
• What strategic policies can cities or politics undertake in order to strengthen their position with-in the global maritime networks?

Hypothesis 2: Maritime-specialized APS producers are expected to be located at close geographical proximity to a port where maritime companies are concentrated.

The total traffic of Piraeus port is not significant at a global level, but it is an important gateway to a regional level and especially the car and container terminals have significant position at the Mediterranean market. Most ports target is to increase their traffic and consequently their profits but also to attract more maritime companies and APS providers.

Based on the case of the network London-Piraeus, the most suitable strategy in order to increase port traffic and added value of port facilities will be examined. Is it the concentration of shipping companies that subsequently attracts APS producers or vice versa? Moreover this case study will try to investigate the importance of an increase in port traffic to the attraction of APS and whether it is a prior or a facilitative factor and whether this is the case of Piraeus cluster.

1.4 Research Methodology

The research is explorative in nature and it mainly uses qualitative methods but also to a smaller extent quantitative research. My methodology will be based in the concept of integrating the theories of World City Networks and Global Production Networks by focusing on the territorial and functional-economic relations of a world city and a service center as first described by Jacobs et al 2007. I will focus in the concept of a leading city at local level-in terms of commodity chains- as well as a service center and its links with another stronger cluster located elsewhere.

Since the introductory and theoretical part of the thesis is based on research done on existing literature, the method applied will concentrate on criticizing and analyzing the main points and try to arrive to certain conclusions and more specifically to understand the clustering and network formation of firms.