Strategy Selection for Firm Development in a Region

W O R K I N G PAPER

Ma? 1986 YP-86-22

I n l e r n a t l o n a l l n s t l l u l e for Appl~ed Systems Analysis

NOT FOR QUOTATION

WITHOUT THE PERMISSIOK OF THE AUTHORS

SITATEGY SELECTION

MIR FIRM

DEWLOPMENT

IN

A REGION

May 1986 WP-86-22

W o r k i n g Papers a r e interim r e p o r t s on work of t h e International I n s t i t u t e f o r Applied Systems Analysis a n d h a v e r e c e i v e d only limited review. Views o r opinions e x p r e s s e d h e r e i n d o not n e c e s s a r i l y r e p r e s e n t t h o s e o f t h e I n s t i t u t e o r of i t s National Member Organizations.

INTERNATIONAL INSTITUTE FOR APPLIED SYSTEMS ANALYSIS 2361 Laxenburg, Austria

PREFACE

The r e s e a r c h r e p o r t e d h e r e i n was p e r f o r m e d u n d e r t h e a u s p i c e s of t h e Technolo- gy, Economy, and S o c i e t y (TES) P r o g r a m at IIASA. A t t h e same time, t h e a u t h o r s h a v e i n c o r p o r a t e d in this new r e s e a r c h area some r e s u l t s o b t a i n e d in 1985 from t h e Regional Issues P r o j e c t .

This p a p e r r e p o r t s o n establishing a preliminary ( f i r s t version), c o n c e p t u a l , and instrumental solution t o t h e complicated problem of s t r a t e g i c c h o i c e s f o r com- panies, taking into a c c o u n t t h e i r p r o b a b l e technology/production c a p a b i l i t i e s and t h e s t r a t e g i c b e h a v i o r of o t h e r competing companies. The model developed i s used a l s o t o a c c o u n t f o r t h e r e q u i r e m e n t s imposed on s t r u c t u r a l c h a n g e s by social (e.g., employment) a n d n a t u r a l h a b i t a t (e.g., pollution) b a l a n c e s f o r t h e region a n d / o r company.

The system-based evaluation of company a n d / o r r e g i o n c a p a b i l i t i e s allow poli- c y m a k e r s t o examine t h e f a c t o r s of long-run sustainable c h o i c e s in addition t o m o r e immediate values of profitability.

The r e s e a r c h work is c a r r i e d o u t by IIASA in c o l l a b o r a t i o n with All-Union R e s e a r c h I n s t i t u t e f o r System S t u d i e s (USSR). The second final computerized v e r - sion of t h i s model i s t o b e completed by t h e end of 1986,

P r o f . A. Kochetkov Assessment of Technology a n d E n t e r p r i s e s

Technology, Economics and S o c i e t y P r o g r a m

m T E G Y SELECTION FOR FLTX DE;VELOPKENT IN A REGION A.Kochetkov, K L i v s h i t s a n d 0.PcheLintsev

1. The _{M a i n} Problems

The systems a p p r o a c h r e q u i r e s t h e i n t e g r i t y of t h r e e units: t h e problem- o r i e n t a t i o n p r i n c i p l e ( t h e predominant c h a r a c t e r i s t i c ) , t h e wide i n t e r a c t i o n of scientific methods, a n d a d v a n c e s in t h e empirical b a s e of r e s e a r c h s u b j e c t s a n d methods. The l a s t point must b e p a r t i c u l a r l y emphasized. N e w information tech- nology e n a b l e s t h e i n t e g r a t i o n of information flows t h a t are g e n e r a t e d at d i f f e r e n t l e v e l s of t h e socioeconomic system. This p r o d u c e s a wide s p e c t r u m of l a r g e - s c a l e a n d long-term consequences. In p a r t i c u l a r , sociological information systems form a technological basis f o r g r e a t e r public p a r t i c i p a t i o n in decision making.

All t h e a b o v e methodological c o n s i d e r a t i o n s a r e of value t o r e s e a r c h of r e - gional problems. Nowadays, r e g i o n a l development f a c e s many o b s t a c l e s g e n e r a t e d primarily by a l a c k of understanding of t h e n a t u r e of r e g i o n a l systems. These in- clude a s p e c i f i c institutional c o n t e x t , s i n c e t h e basic p a r t of a r e g i o n ' s economic b a s e i s , in f a c t , removed from t h e r e g i o n a l p r e r o g a t i v e and managed by l a r g e in- d u s t r i a l firms o r , in c o u n t r i e s with planned economies, by t h e r e s p e c t i v e c e n t r a l a n d s e c t o r a l a u t h o r i t i e s .

A s t r a i g h t f o r w a r d solution t o problems of r e g i o n a l development i s impossible unless t h i s a s p e c t i s managed. The s e t t i n g up of a regional economic b a s e should b e c o n s i d e r e d as a n a r e a suited t o coordination based on information e x c h a n g e and close c o o p e r a t i o n between industrial f i r m s and local a n d c e n t r a l a u t h o r i t i e s .

The major problem h e r e is t h e compatibility of regional a u t h o r i t i e s a n d t h e i r responsibilities. This implies t h a t t h e management of r e g i o n a l development cannot b e r e d u c e d t o a d i r e c t allocation of r e s o u r c e s , since t h e r e a r e many o t h e r influ- ences. Thus, t h e c o r e of t h e p r o p o s e d solution i s t h e coordination of management activities:

Between companies in a region.

.

Between companies a n d local a u t h o r i t i e s .

The development of r e g i o n a l information systems a n d s e r v i c e s i s evidently a sine qua non of t h i s activity.

The f o c u s of s t r a t e g i c r e g i o n a l analysis on s p a t i a l i n t e r a c t i o n between indus- t r i a l Firms implies a wider u s e of economic c r i t e r i a . The r e s u l t i n g model should b e a n instrument f o r in-depth efficiency analyses. This c a n b e provided, in o u r opin- ion, only by optimization techniques.

An efficiency-analysis a p p r o a c h i s n e c e s s i t a t e d a l s o by t h e h i s t o r i c a l c o n t e x t of r e g i o n a l s t r a t e g i c analyses. In many c o u n t r i e s , including t h e USSR, production intensification i s today t h e basis of national socioeconomic development. Under t h e s e conditions, r e g i o n a l planning and management should Focus upon t h e t e r r i - t o r i a l a s p e c t s of economic intensification, such a s t h e r e s t r i c t i o n of new i n d u s t r i a l c o n s t r u c t i o n , i n c r e a s e d r e p l a c e m e n t investment, a n d improved e f f i c i e n c y of t h e existing i n d u s t r i a l a s s e t s . Various a s p e c t s of institutional s u p p o r t a n d implemen- t a t i o n of s u c h a s t r a t e g y h a v e b e e n developed and used in Lhe USSR a n d o t h e r so- c i a l i s t c o u n t r i e s , s u c h a s t h e GDR.

All t h e s e p r i n c i p l e s were embodied into t h e s t r u c t u r e of Lhe p r o p o s e d model, which should b e f u r t h e r developed along f o u r lines:

(1) Labor market analysis.

(2) Ecology analysis, o r , in a wider sense, the calculation o f externalities.

(3) The redistribution e f f e c t s o f development o f the regional economic base, in- cluding the so-called complex social standard o f living.

(4) Resources f o r regional strategy implementation.

Here we shall concentrate upon the first o f these problems, labor market analysis; the three other questions will be only slightly touched upon.

An introductory remark is necessary. We have just mentioned that the region- al economic base is a set o f large industrial firms located in t h e region. A firm is but a specialized institution fitted t o solve mostly economic problems (economic in a wide sense o f the term, i.e., including problems that are technological, manageri- al, etc.). I t is unlikely that a firm will be an adequate tool f o r solving many other problems

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social, ecological, cultural, etc. These can be solved only by interac- tion between various specialized institutions

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industrial firms, national and locai authorities, public organizations, and the like. Close cooperation and partnership between all o f these are t h e r e f o r e a necessary condition f o r a well-balanced re- gional development.

Development o f a regional economic base increases pressure on local iabor markets. To include in the model constraints t o regulate the workforce t o an upper limit ( t o involve a workforce that is less than or equal t o the available man- power o f the region) and a lower limit (the employment in the region should exceed a given high share o f all the labor stock) is, o f course, only a formal way t o solve this criticai problem. It seems t o be impossible (except when enormous subsidies or compensations are invoived) to provide full regional employment based only on the spontaneous decision-making o f large, profit-seeking firms. The only way t o al- leviate the acuteness o f the problems is, many experts believe, t o reduce the

number of weekly working h o u r s , a s discussed by D r . Moeller from t h e Institute f o r Applied Systems Analysis a n d P r o g n o s i s in Hannover, FRG, in his p a p e r Finding Strategic Labour Market Policies for Lower Sazony v i a Systems Analysis (Moell- e r , 1985). One e s s e n t i a l r e s e r v a t i o n i s t h a t t h i s could not b e o r d e r e d by s t a t e law

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i t i s only possible to convince t r a d e unions a n d e n t e r p r i s e associations t h a t a q u i c k e r r e d u c t i o n in working time i s t h e only way to avoid s e v e r e unemployment problems.

Conversely, in c o u n t r i e s with planned economies t h e r e i s a t i g h t l a b o r market.

This p r e v e n t s t h e development of m o r e f l e x i b l e ways of unemployment based on dif- f e r e n t i a t i n g t h e l e n g t h of t h e work d a y , work week, a n d work y e a r f o r women with small c h i l d r e n , f o r p e n s i o n e r s , f o r s t u d e n t s , a n d s o on. Some r e s u l t s h a v e been a c h i e v e d by planning work p l a c e s a n d information e x c h a n g e between i n d u s t r i e s a n d l o c a l a u t h o r i t i e s in r e g i o n a l systems within t h e USSR a n d Czechoslovakia. In p a r - t i c u l a r , t h e r e g i o n a l r e g i s t e r of population, c o n n e c t e d with t h e national o n e , may become a useful tool for solving t h i s problem. The balance between new i n d u s t r i a l c o n s t r u c t i o n a n d improvement of existing jobs i s a key problem t o b e d e a l t with by both c e n t r a l a n d l o c a l a u t h o r i t i e s .

A set of well-known demographic a n d migration models c a n b e used t o p r e d i c t t h e national a n d r e g i o n a l manpower c o n s t r a i n t s . In p a r t i c u l a r , t h e Markovian-type models of i n t e r r e g i o n a l migration, developed at IlASA by R o g e r s a n d h i s colleagues (Rogers, 1981), are u s e f u l f o r r e g i o n s a n d c o u n t r i e s with a s t a b l e network of set- tlements a n d stabilizing demographic p r o c e s s e s . The e f f i c i e n c y of t h i s a p p r o a c h h a s been p r o v e d by a Swedish case-study in South-Western Skane. Soviet e x p e r i - e n c e of microanalytical socioeconomic prediction based on r e g i o n a l sociological e n q u i r i e s c a n a l s o b e used. We r e f e r h e r e primarily t o new techniques of so- cioeconomic d a t a p r o c e s s i n g t h a t h a v e b e e n developed at t h e All-Union I n s t i t u t e f o r Systems S t u d i e s a n d r e f e r r e d to g e n e r a l l y as "determination analysis".

Determination a n a l y s i s i s a tool to e v a l u a t e r e g u l a r i t i e s a n d to f o r m typolo- gies using s t a b l e local r e l a t i o n s between p a r t i c u l a r values of q u a l i t a t i v e v a r i a b l e s . It p r o v i d e s a c l e a r i n t e r p r e t a t i o n of r e s u l t s at e a c h s t e p of t h e a n a l y s i s a n d a ve- rification of t h e significance of e a c h v a r i a b l e while g e n e r a t i n g typologies. I t a l s o e n a b l e s o n e t o o b s e r v e "the density of packing" of g r o u p s within typologies, so in- c r e a s i n g t h e r e l i a b i l i t y of t h e r e s u l t s (Chesnokow, 1982).

This new t e c h n i q u e was successfully used f o r p r o c e s s i n g t h e d a t a of many so- ciological e n q u i r i e s , including t h o s e c a r r i e d o u t by t h e All-Union I n s t i t u t e in 1979, 1980, a n d 1 9 8 2 in a c l u s t e r of towns a n d villages of t h e K r a s n o y a r s k r e g i o n in Si- b e r i a .

Determination a n a l y s i s c a n b e of significant value in p r o c e s s i n g microlevel d a t a a b o u t p r e f e r e n c e s a n d b e h a v i o r of firms, households, local r e p r e s e n t a t i v e s , etc.. c o l l e c t e d in sociological a n d e x p e r t enquiries.

E x t e r n a l i t i e s , r e d i s t r i b u t i o n e f f e c t s , a n d r e s o u r c e provision f o r r e g i o n a l development should a l s o b e investigated. The b a s i c h y p o t h e s e s t h a t may by dis- c u s s e d a r e a s follows:

(1) F o r e x t e r n a l i t i e s : t h e well-known c o n c e p t t h a t it i s only t h e d i r e c t compensa- tion of negative e x t e r n a l i t i e s (and, c o n v e r s e l y , subsidies f o r positive e x t e r - nalities) t h a t may lead to a Pareto-optimal economic state.

(2) F o r d i s t r i b u t i v e e f f e c t s : seeking a trade-off between tendencies of i n t e r r e - gional equalization a n d t h e s t a b i l i t y of distributional s h a r e s of a l l t h e r e g i o n s c a n b e c o n s i d e r e d as t h e fundamental p u r p o s e of r e g i o n a l s t r a t e g i c c h o i c e . (3) F o r r e s o u r c e provision: t h e system of i n t e r r e l a t e d t e r r i t o r i a l funds

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nation-

a l , r e g i o n a l , a n d l o c a l

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should b e developed a n d s u p p o r t e d as a n e c e s s a r y tool f o r t h e c o r r e s p o n d i n g budget formation.

The concise p r e s e n t a t i o n of t h e a b o v e t h e s e s c a n b e made with t h e h e l p of t h e seven l i s t s t h a t foliow.

L i s t 1. The systems methodology a p p r o a c h i n t e g r a t e s t h r e e elements:

(1) Problem o r i e n t a t i o n t o give t h e s u b j e c t . (2) S c i e n t i f i c tools t o give t h e method.

(3) I n t e g r a t i n g information flows from macro- a n d micro-levels t o give t h e empirical (information) basis.

L i s t 2. Theory: Region in t h e Socioeconomic System. A p o l y h i e r a r c h i c a l s t r u c - t u r e of t h i s system i s postulated, including:

(1) ^A set of i n d u s t r i a l firms t h a t f o r m s t h e economic b a s e of r e g i o n s . (2) A set of local a u t h o r i t i e s .

(3) A c l u s t e r of c e n t r a l functional a n d programming institutions.

L i s t 3. Theory: Regional S t r a t e g y should b e Focused on t h e Analysis of t h e Economic Base. The economic b a s e i s t h e key element of r e g i o n a l s t r u c - t u r e a n d t h e c o r e of r e g i o n a l s t r a t e g i c planning a n d management. This im- plies t h a t :

(1) Efficiency a n a l y s e s of s p a t i a l i n t e r a c t i o n between firms are n e c e s s a r y f o r r e g i o n a l s t r a t e g i c planning. They r e q u i r e a wide u s e of optimization techniques.

(2) The coordination between firms i s t h e main tool of r e g i o n a l s t r a t e g i c management.

L i s t 4. Problems t o b e discussed:

(1) Labor m a r k e t s t r u c t u r e . (2) Ecology and e x t e r n a l i t i e s .

(3) I n t r a - and inter-regional distribution of income and wealth; complex so- cial s t a n d a r d of living.

(4) R e s o u r c e s f o r regional s t r a t e g y implementation.

L i s t 5. Regional s t r a t e g y a p p r o a c h t o labor-use problems:

(1) Use of nationwide p r e d i c t i o n s of demographic c h a n g e and migration.

(2) I n t e g r a t e d analysis of employment and education.

(3) Regional programming systems of work places.

(4) Development of flexible employment systems f o r women, p e n s i o n e r s , stu- dents. etc.

L i s t 6. Determination analysis (DA) of socioeconomic data:

(1) ^DA i s a new method f o r multidimensional calculation of conditional f r e - quencies.

(2) DA c a n b e used f o r analysis of d a t a from both sociological and e x p e r t en- quiries.

(3) DA s t r e n g t h e n s t h e possibilities of processing information g e n e r a t e d a t t h e microlevel of r e g i o n a l systems.

L i s t 7 . Problems f o r t h e f u t u r e :

(1) Do regional e x t e r n a l i t i e s r e q u i r e a system of d i r e c t compensations and subsidies?

(2) Distribution

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a trade-off between r e g i o n a l equalization a n d stabilization should b e a c h i e v e d .

(3) R e s o u r c e s f o r r e g i o n a l s t r a t e g y c a n b e accumulated t h r o u g h a system of funds

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national, regional, a n d local.

A s h a s been r e m a r k e d . optimization methods a n d t h e c o r r e s p o n d i n g t e c h - niques a r e v e r y s u i t a b l e f o r finding s t r a t e g i e s f o r firm development within a re- gion.

This a p p r o a c h allows us to a c c o u n t f o r t h e most important f a c t o r s t h a t d e t e r - mine r e g i o n a l policy, both in i t s o b j e c t i v e a n d in i t s c o n s t r a i n t s . The most impor- t a n t factors of t h e system include l a b o r r e s o u r c e s , employment a n d migration.

ecology a n d living conditions, i n t e r a c t i o n between r e g i o n s , a n d i n t e r a c t i o n o f f i r m s within t h e region. T h e s e c o n s i d e r a t i o n s are d e s c r i b e d in t h e model for selection of a f i r m ' s development s t r a t e g y . This example i l l u s t r a t e s well t h e possibility of us- ing optimization methods f o r forming t h e elements of r e g i o n a l development.

2. Model for Selecting Strategies for Dwelopment of Firms within a Region

2.1. Formulation of the problem and initial premises

An important t r e n d in modern r e g i o n a l investigations i s t o develop methods of s t r a t e g i c r e g i o n a l policy r e a l i z a t i o n in d i f f e r e n t r e g i o n s . This involves t h e problem of g e n e r a t i n g t h e r e g i o n a l economy on t h e b a s i s of i n d u s t r i a l a u t h o r i t i e s and u n d e r m a r k e t conditions

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a c c o r d i n g t o decisions made by some of t h e firms.

The problem will b e c o n s i d e r e d as follows:

(1) In some r e g i o n s o f t h e s t u d y , s e v e r a l f i r m s a r e a c t i v e . O t h e r r e g i o n s a r e c o n s i d e r e d as a unit without being divided into firms.

(2) E v e r y f i r m c a n p r o d u c e some goods, any of which c a n b e o n e of t h e t h r e e t y p e s (mass, s p e c i f i c , new) a c c o r d i n g t o t h e firm's c a p a c i t y r e s t r i c t i o n s . (3) T h e r e a r e some areas of consumption with a fixed m a r k e t c a p a c i t y a n d fixed

p r i c e s f o r e a c h good.

(4) T h e r e are assumed m e a s u r e s of stimulation ( o r limitation) f o r some productions. The a c t i v i t y of e a c h firm in t h e m a r k e t can b e i n c r e a s e d t o a determined value.

(5) Considered as being needed f o r s t u d i e s of t h e long t e r m a r e t h e possible v a r i a n t s in firm specialization, t h e u s e of d i f f e r e n t innovations, p r o g r e s s i v e technologies, e t c . , a n d t h e production c o s t s a n d investments a n d t h e i r d i s t r i b u t i o n f o r e a c h v a r i a t i o n . T r a n s p o r t c o s t s between t h e r e g i o n s a n d a l s o s a l e s a n d consumer-service costs a r e assumed.

(6) P r o d u c t i o n a n d s a l e costs a r e nonlinear.

(7) L a b o r , ecological, a n d o t h e r r e s t r i c t i o n s a r e t a k e n into consideration.

(8) R e s t r i c t i o n s of profitability ( t o c o v e r investment) a n d of t h e a c t i v i t y of s e v e r a l f i r m s in t h e m a r k e t s are a l s o c o n s i d e r e d .

The model follows t h e simple c r i t e r i o n t h a t a s c a l a r optimization problem i s u n d e r consideration.

In t h e model some assumptions a r e a c c e p t e d :

(1) The c h a r a c t e r i s t i c s of t h e r e a l situation are a g g r e g a t e d . Thus, t h e number of r e g i o n s , m a r k e t s , f i r m s in a r e g i o n , v a r i a n t s of s t r a t e g y , a n d goods i s assumed to b e a b o u t ten. Under t h e s e conditions f i r m s in o n e r e g i o n a r e c o n s i d e r e d d i s a g g r e g a t i v e ( f o r o t h e r r e g i o n s i t i s assumed t h a t only o n e firm p r o d u c e s a l l t h e goods).

(2) It is assumed that development strategies f o r a firm and all the data can be a prior* ( o r by interactive process) formed by representative experts. This data comprises ( f o r every variant) the following:

( i ) Data on goods specialization and modification f o r the period under consideration. In this case, experts determine, o f course, not t h e value o f production, but t h e possibility o f production.

( i i ) The e f f e c t o f d i f f e r e n t methods o f production in t h e various scenarios (including new technologies) and d i f f e r e n t restrictions o f production capacity

(iii) The volume o f investments and present-value costs o f production, transportation, and sale f o r the period under consideration (or use a calculation method depending on production structure and production volume).

( i v ) Possible influence on the environment, influence coefficients f o r d i f f e r e n t ingredients, and weight coefficients fo r individual influences.

( v ) Normative values o f employment f o r professional groups and as a whole.

with assumed upper and lower limits.

( v i ) Forecast o f production demand and prices in the markets.

( v i i ) Use o f economic characteristics, such as discount rate and the dynamic, marginal period o f investment. covering possible volumes o f subsidies, duties, etc.

( 3 ) I t is assumed that production restrictions f o r specific and new goods are known f o r all firms and regions, but those f o r mass goods only f o r the firms o f a given region.

(4) I t is assumed that all goods delivered t o the markets are sold and demand is

satisfied.

(5) The c r i t e r i o n f o r s e l e c t i n g of t h e most e f f i c i e n t v a r i a n t (including specialization, innovations, e t c . ) i s t h e minimum t o t a l c o s t s of production.

t r a n s p o r t a t i o n , a n d s a l e a c c o r d i n g t o f o r e c a s t e d demand of goods in a l l markets.

( 6 ) A l i n e a r approximation i s a d o p t e d f o r functions of p r o d u c t i o n , t r a n s p o r t a t i o n . a n d s a l e c o s t s , including a p a r t t h a t i s independent of t h e s t r a t e g y v a r i a n t .

Some of t h e s e assumptions c a n b e easily eliminated, r e l a x e d , o r i n t r o d u c e d in d i f f e r e n t ways. The formal model of development of t h e r e g i o n a l economic b a s e involves optimization models widely used in planning. In p a r t i c u l a r , i t is b a s e d on t h e Soviet e x p e r i e n c e of solving problems in economic s e c t o r s a n d i n t e r s e c t o r problems of production allocation a n d t r a n s p o r t development.

The d i f f e r e n c e s between existing models a n d o u r model involve t h e following f a c t o r s :

(1) Variations t h a t involve d i f f e r e n t goods production a n d specialization.

(2) Large-scale innovations (new technologies)

(3) The possibility of goods production using t h r e e modifications (new, mass, s p e c i f i c ) .

(4) Social r e s t r i c t i o n s (employment. environmental p r o t e c t i o n , a n d o t h e r s ) . ( 5 ) The expediency o f economic stimulation ( o r , o t h e r w i s e , r e s t r i c t i o n s ) t o

p r o d u c e d i f f e r e n t goods with t h e h e l p of subsidies. t a x e s , e t c .

(6) S p e c i f i c c o s t s of r e a l i z a t i o n a n d consumer s e r v i c e f o r e a c h r e g i o n a n d market.

Accordingly, t h e v e c t o r s t h a t d e s c r i b e t h e v a r i a t i o n s a v a i l a b l e to a f i r m ' s s t r a t e g y h a v e a complex s t r u c t u r e . T o g e t h e r with i n t e g e r v a r i a b l e s t h a t c h a r a c t e r i z e goods p r o d u c t i o n o r nonproduction by t h e firms, v e c t o r s include t h e

-

number of technologies used, f e a s i b l e c a p a c i t y , investment, a n d o t h e r v a r i a b l e s . The formal model i s a d e q u a t e f o r problems of development of i n t e r c o n n e c t e d economy s e c t o r s in t h e r e g i o n u n d e r conditions of economic independence a n d i n c r e a s i n g firms' responsibility. Use of t h i s model c a n p r o v i d e t h e n e c e s s a r y information a n d c o n t r o l of firm's a c t i v i t y by c e n t r a l a n d local a u t h o r i t i e s .

The model is b a s e d on p r i n c i p l e s of system analysis. namely:

(1) N e c e s s a r y coordination between t h e micro- (including firms) a n d macro-level p a r a m e t e r s of t h e socioeconomic system.

(2) Efficiency analysis as t h e main tool of r e g i o n a l s t r a t e g i c planning, in p a r t i c u l a r t o d e t e r m i n e t h e optimization model.

(3) Use of coordination between f i r m s as a main tool of s t r a t e g i c r e g i o n a l management.

The most i m p o r t a n t p a r t of t h e model i s t h e analysis of l a b o r r e s o u r c e s . H e r e , t h e following a r e assumed:

(1) Wide use of national demographic a n d migration f o r e c a s t s .

(2) I n t e g r a t i o n of employment a n d education a n a l y s e s (including professional t r a i n i n g a n d r e t r a i n i n g ) .

(3) E l a b o r a t i o n of long-term r e g i o n a l development p r o g r a m s of employment.

(4) Combination of national r e g u l a t i o n of t h e length of t h e working d a y , week, a n d y e a r with f l e x i b l e forms of employment f o r working women, p e n s i o n e r s , a n d youth.

2.2. Basic designations

a. volume of p r o d u c t i o n c a p a c i t y .

- -

C , C , C , t h e production, t r a n s p o r t a t i o n , a n d s a l e c o s t s , r e s p e c t i v e l y . C, ,C,, lump-sum a n d present-value ( o p e r a t i n g ) components of t h e c o s t .

d , D ; a c t u a l a n d admissible influence o n t h e environment.

C , set of aamissible values ( f o r i n s t a n c e , G n i s t h e set of possible s t r a t e g i e s f o r firm n ) .

i , index of t h e r e g i o n . j , index of goods.

k , index of s t r a t e g y v a r i a n t .

L , employment (number of w o r k e r s ) .

n , index of t h e firm in t h e r e g i o n c o n s i d e r e d . P, goods p r i c e in t h e m a r k e t .

r , index of t h e m a r k e t .

s , index of goods modification ( s =1, mass: s =2, s p e c i f i c ; s =3, new).

t

.

index of time ( y e a r ) .

u , index of p r o f e s s i o n a l g r o u p .

X, volume of goods p r o d u c t i o n ( s c a l e r o r v e c t o r ) . Z , demand f o r a good in a r e g i o n .

7 , d u t i e s (subsidies) f o r goods sale on t h e m a r k e t . 6, subsidy (fine) f o r goods production.

E , coefficient of goods modification a n d interchangeability.

(, value of goods demand.

7 , i d e n t i f i e r f o r s e l e c t e d s t r a t e g y variation.

19, index of poilution mode.

v , contribution of t h e firm t o t h e market.

T, marginal p e r i o d .

Tot, f e a s i b l e p e r i o d t o c o v e r investment.

v ,

discount r a t e .

q , weight c o e f f i c i e n t f o r t h e significance of t h e ingredient.

In t h e o b j e c t i v e function (1) t h e indexes

=7,tT,

a n d r e p r e s e n t production.

t r a n s p o r t a t i o n , a n d s a l e , r e s p e c t i v e l y .

Although a c c o r d i n g t o t h e assumptions a l l t r a n s p o r t e d goods a r e sold, t h e d i f f e r e n t designations a r e used in (1) f o r s t r u c t u r a l c l a r i t y .

When a value h a s u p p e r and lower limits a n a s t e r i s k marks t h e lower limit a n d a double a s t e r i s k t h e u p p e r limit.

2.3. T h e o b j e c t i v e f u n c t i o n

Total c o s t s of t h e p e r i o d a r e minimized:

2.4. A l g o r i t h m of the c o s t v a l u e c a l c u l a t i o n

The following equations a r e s e p a r a t e l y r e l a t e d to t h e firms of t h e f i r s t r e g i o n ( n

=

1 , 2 , . . , N ; i

=

1) and t o t h e o t h e r r e g i o n s (i

=

2.

...

^I).

Production c o s t s in t h e f i r s t region:

T r a n s p o r t a t i o n c o s t s from t h e f i r s t region:

F=lk =

-0 t

Cni ⁺

C

^{C j s r} . ,-C,js, f , S , T

S a i e c o s t s of goods from t h e f i r s t region:

Production c o s t s in o t h e r regions:

T r a n s p o r t a t i o n c o s t s in o t h e r regions:

S a i e c o s t s of goods from o t h e r regions:

In t h e a b o v e formula, t h e u p p e r index 0 means t h a t t h e function i s a component of t h e t o t a i c o s t t h a t is independent of t h e production value. F o r instance,

F;it

is independent of t h e t r a n s p o r t a t i o n component of t h e total c o s t of t r a n s p o r t a t i o n of firm n f o r s t r a t e g y k f o r its development in t y e a r s .

Accordingly,

FijST

is t h e specific c o s t to firm n f o r t r a n s p o r t a t i o n of goods j with modification s from t h e f i r s t region t o m a r k e t r . Other components of t h e c o s t are i n t e r p r e t e d analogously. Moreover, t h e two summands in p a r a n t h e s e s a r e not i n t e r p r e t e d a s a sum t o show t h e information s t r u c t u r e of t h e c o r r e s p o n d i n g p a r t s of t h e costs.

2.5. The main bounding conditions of the model

( a ) The production value c a n n o t b e more t h a n t h e production capacity

(b) Demand f o r e v e r y good in e v e r y r e g i o n i s satisfied

(c) Only o n e v a r i a t i o n c a n b e r e a i i z e d f o r e a c h region a n d f o r e a c h firm

(d) Pollution in a r e g i o n c a n n o t b e m o r e t h a n t h e admissibie Levei f o r e a c h pollutant

As a w h o l e

(e) Employment in t h e r e g i o n should b e r e s t r i c t e d t o lower a n d u p p e r Limits For e v e r y p r o f e s s i o n a l g r o u p

As a whole

( f ) The c o n t r i b u t i o n of t h e firm t o t h e m a r k e t should h a v e limits (lower bound a c c o r d i n g to p r o f i t a b i l i t y , u p p e r a c c o r d i n g t o anti-monopoly r e g u l a t i o n )

= t

GI.. ^{< -}

^t

"njsr "njsr

C

G j s r ⁺

C

e j s r

n f > l

(g) P r o d u c t i o n should b e p r o f i t a b l e f o r e a c h firm

(h) Marginal p e r i o d of investment r e t u r n should not b e m o r e t h a n f e a s i b l e

S u b s c r i p t s e a n d z mean t h a t only lump-sum investments o r present-value c o s t s are given in t h e c o s t s within t h e b r a c k e t s .

2.6. Analysis and modification of the model for selection of development strategies for firms i n a region

The model d e s c r i b e d i s o n e of many possible types. Different modifications of t h i s model c a n b e developed a c c o r d i n g t o t h e o b j e c t i v e function a n d boundary system, by changing t h e number of p a r a m e t e r s c o n s i d e r e d in t h e model, by t h e method used t o c o n s i d e r t h e dynamics, by d a t a limitation, etc.

F o r instance, in t h e c a s e w h e r e t h e demand

zL,

f o r e a c h good in t h e r e g i o n i s c o n s i d e r e d unknown a n d c a n n o t b e f o r e c a s t a n d w h e r e t h e flexible ( a c c o r d i n g t o demand) p r i c e s of t h e goods in t h e m a r k e t are given with t h e help of some function J":,,(Z~,), c r i t e r i o n (1) should b e c h a n g e d t o give t h e maximum p r o f i t

Some modifications of t h e model may b e r e q u i r e d b e c a u s e a number of f a c t o r s ( p a r a m e t e r s ) included might not b e e s s e n t i a l u n d e r a l l conditions. More often than not t r a n s p o r t c o s t s a r e considerably smaller f o r some s t r a t e g i e s . And if t h i s a s p e c t i s excluded c r i t e r i o n (1) would b e

In s u c h c a s e s t h e algorithm of c o s t calculation, equations (2)-(4), should b e changed, a s well a s t h e c o n s t r a i n t s system.

2.7. Algorithm of the problem solution

The model d e s c r i b e d i s a r a t h e r complex problem f o r mathematical programming, being of l a r g e dimensions a n d with nonlinear o b j e c t i v e functions a n d mixed (both i n t e g e r a n d continuous) v a r i a b l e s . A common a p p r o a c h t o solving t h i s kind of problem i s t o u s e a p p r o x i m a t e methods of l o c a l optimization, b a s e d on methods l i k e " b r a n c h a n d bound", d i r e c t random c h o i c e of v a r i a n t s combined with h e u v r i s t i c techniques. In t h e USSR w e h a v e used a t w o - s t a g e o p t i m i z a t i o n t o solve problems like this.

The two-stage optimization i s b a s e d on t h e p r i n c i p l e of dividing into two g r o u p s of v a r i a b l e s (Benders, 1962). Approximate stepwise methods are used f o r t h e g r o u p of continuous v a r i a b l e s , a n d c o r r e s p o n d i n g algorithms of c h o i c e o r methods of i n t e g e r programming a r e used f o r t h e g r o u p of i n t e g e r v a r i a b l e s .

E x p e r t methods are v e r y i m p o r t a n t f o r solving t h i s c l a s s of 2roblem.

Moreover, using e x p e r t s becomes r a t h e r useful a n d n e c e s s a r y at e a c h new s t e p of t h e model, especially when analyzing a n d i n t e r p r e t i n g t h e r e s u l t s . The

intensification of t h e r o l e of e x p e r t s h a s led t o c h a n g e s in t h e p r o c e d u r e f o r s e a r c h i n g f o r a local optimal solution a n d t h e new p r o c e d u r e s h a v e b e e n formed with t h e h e l p of a n i n t e r a c t i v e p r o c e s s .

T h e r e a r e two e x t r e m e positions in t h e set of i n t e r a c t i v e p r o c e d u r e s used f o r s e l e c t i n g t h e development s t r a t e g y f o r firms in a region.

(1) Selection of t h e s t r a t e g y i s r e a l i z e d by e x p e r t s . A s h a s been r e m a r k e d , in t h i s p r o c e d u r e a f e a s i b l e set of s t r a t e g i e s a n d a l l t h e d a i a are obtained from e x p e r t s . Values of t h e o b j e c t i v e function are c a l c u l a t e d with t h e h e l p of computers. E x p e r t s c h o o s e t h e s t r a t e g y with t h e b e s t value of t h e o b j e c t i v e function a c c o r d i n g t o r e s u l t s of t h e analysis, taking into consideration f a c t o r s t h a t could not b e r e f l e c t e d in t h e formalized model.

(2) Selection o f t h e s t r a t e g i e s i s r e a l i z e d automatically. In t h i s p r o c e d u r e t h e

r o l e of t h e e x p e r t s i s a l s o v e r y important, s i n c e t h e y p r o v i d e a l l t h e initial d a t a a n d s e v e r a l p a r a m e t e r s in t h e calculating scheme. The b e s t s t r a t e g y i s determined as a r e s u l t of c o m p u t e r model solution, with t h e h e l p of s p e c i a l p r o c e d u r e s of two-stage optimization. The solution i s t h e n s u b j e c t e d t o e x p e r t analysis a n d c o r r e c t i o n if n e c e s s a r y . Thus, both using s p e c i a l c o m p u t e r p r o c e d u r e s a n d c o r r e c t i n g solutions d u r i n g t h e i n t e r a c t i v e p r o c e s s are s u i t a b l e f o r t h e s e two cases.

-

20

-

G E N E R A L S C H E M E O F T H E M O D E L

L

P R O D U C T I O N

REGION 1

F I R M S

REG. 2 REG. I

...

-

1V

.

w

T R A N S P O R T A T I O N

.

1 2

1 I ^\

MARKET 1

S A L E MARKET

2

MARKET R

REFERENCES

B e n d e r s , L.F. (1962). P a r t i t i o n i n g p r o c e d u r e f o r s o l v i n g m i x e d - v a r i a b l e p r o g r a m m i n g p r o b l e m s , ~ Y u n t e r i s c h e Mathematik ( B e r l i n ) , 4 ( 3 ) .

Chesnokow, S.W. (1982). W t e r m i n a t i o n A n a l y s i s ofSocio-Economic D a t a ( N a u k a , Moscow: in R u s s i a n ) .

Moeller. K. (1985). F i n d i n g S t r a t e g i c Market P o l i c i e s f o r Lower S a z o n y v i a S y s t e m s A n a l y s i s , S t r a t e g i c R e g i o n a l P o l i c y ( e d s . A . S t r a s z a k a n d J.Owsinski.

Warsaw. 1 9 8 5 ) .

R o g e r s , A. (ed.)(1981). A d v a n c e s i n MultiregionaL W m o g r a p h y , RR-81-6, IIASA, L a x e n b u r g .

Vasiljeva. E., Levit. B.. a n d L i v s h i t s . V. ( 1 9 8 1 ) , UnLinear T r a n s p o r t a t i o n m t i m i z a t i o n S o l u t i o n s o n Networks. F i n a n c e s a n d S t a t i s t i c s . Moscow (in R u s s i a n ) .