Rehabilitation of the Decentralization in the Centralizing Process of Global Communities


by Professor Hiroshige Tanaka

Faculty of Economics, Chuo University

Tokyo, Japan



Historically, the economic and social mechanisms in the global communities are based on ether the decentralized or the centralized system. Recently, the innovation of ICT influences on the sharing rule between the two systems. This paper explores theoretically the development of systems brought by the globalization and the innovation. The decentralized and the centralized systems are defined distinctly by the one way and the two way communication mechanisms. Main results in this paper are summarized as follows. Firstly, the mass production of manufacturing and the administrative organization of the large government have grown the centralized system globally. The increasing external costs in this expansion appear to prevent the system from rising inappropriately. However, the communication mechanism of the centralized system is not enough to achieve sustainability of global communities. Secondly, the innovation of ICT improves two way communication and enhances the feasibility for the decentralized system to perform the sustainability. The decentralized system can convey the needs of production efficiently to the upstream and retain production lesser than the centralized system. Thirdly, the decentralized system also induces the contribution of the corporation to move more closely to regional benefits than the centralized one.    


Key words; Innovation of ICT, Decentralized system, Sustainability of global communities. Two way communication, Contribution on local vitalization.


1.     Introduction

Since the 1980s the globalizing economies have brought about the scale merit of markets. The centralized production system has provided efficient supply chains to maximize profits. The economies to attain scale merits are assumed to utilize merits of the central system largely. The modern production and administrative systems pursue and develop the scale merit of mass production efficiency by the foundation of the one way communication[1]. However, enlarged economies have not only developed efficient production but also taken some market and government failures such as global financial crises, climate change problems into global communities[2]. The failures might threaten global communities to be unsustainable. The global communities have been obliged to construct the mechanism of sustainability to prevent the crises[3].    


In the 2010s, the innovation of ICT has created and developed remarkably new businesses to bring about a large scale of structural reform in economies and societies. The development of ICT can afford to proceed enlarging amount of information. Internet services such as SNS develop many types of profitable businesses of information by utilizing the big data from the users. By analyzing the accumulating data in the cyber space intensively, the corporations become to provide more accurate approximation of the evaluation of the stakeholders to raise the market value of products. Individuals could encounter information of the corporation in many channels beyond the market[4]. Although the corporation could manage to achieve profits in the market transactions, the public view about the inappropriate governances lowers rapidly the share value of the corporation. If the market information takes one way communication from suppliers, the innovation of ICT displaces another way of communication. Information does not only come down from the production to the consumption but also can stream reversely.


The traditional communities before the industrial revolution had based mainly on the trusty relations to create cooperation. The two way communication can pave the way to form commons for the cooperation. At the same time, the two way communication incubates new businesses and triggers the fierce competition in the growing industries. Since the decentralized system does not present the complete design precedently, the new connections of stakeholders follow into the system one after another. However, increasing partners and competitors will reform the features of communities. Without appropriate rules to govern the expanding communities, the merits of enlarging communities become to be lesser than the actual costs to maintain global communities. We should construct a sustainable mechanism to avoid disordering development of the system[5].


This paper explores theoretically how the new industrial revolution influences on the global economic and social system. In the centralized system the corporation divided the community into the core and the other related members. In this system the scheme is designed precedently, goods and services flow from the production to the consumption downwardly. As the community enlarges, the core member remains to be unchanged but the other related members increase and raise external cost rapidly. The innovation of ICT grows virtual communities and accelerates to raise the external cost of the centralized mechanism. In the decentralized system two way communication promotes the trust of communities to fund cooperation. The main results demonstrated in this paper are summarized as follows. The production and the social welfare loss in the decentralized corporation is lesser than in the centralized one. The centralized corporation distinguish contributions on regions selectively. On the other hand, the decentralized corporation makes more contribution on regions than the centralized one.


The preceding researches of the theoretical analysis is stated briefly. Enlarging global economies had brought serious environmental and social problems. Many discussants recognize CSR; Corporate Social Responsibility to achieve sustainability of the global communities. Arrow (1973) argues the importance of the economic theoretical analysis to explore CSR. Tirole (2001) develops an incentive analysis to focus on the shareholder value of the corporation. Tanka (2004) states in Japanese a basic theoretical model to analyses sustainability of corporation with multi stakeholders. This method based on the approach by the environmental integration with Bührs (2009). This theoretical framework on sustainable global communities with multi stakeholders makes clear the following critical issues. Tanaka (2009) argues that this theoretical approach brings could explore the instability of the global financial crisis 2008-09. Tanaka (2016) and (2017) explore the sustainability mechanism to integrate global and local communities by using this theoretical model. Tanaka (2018) demonstrates that this sustainability mechanism promotes the new industrial revolution triggered by the innovation of ICT and makes effects on regions differently by depending on the domestic industries.


This paper is organized as follows. Section 2 formalizes the scheme between the corporation in the centralized system and the one way communication with stakeholders. This section discusses that the corporation of this scheme has an efficient channel with core members but increases the external cost with enlarging stakeholders in the global communities. Section 3 defines that the new industrial revolution triggered by the innovation of ICT evolves the decentralized system by using the two way communication. The corporation in the decentralized system is demonstrated to correct the excess provision by the corporation in the centralized system and leads the global communities to the sustainability. Section 4 explores implications of the restoration decentralized system. Since it has been prevalent before the period of large production system to thrive the centralized system, the decentralized system is prospected to prevent over supply of products and services and to contribute on the local communities closely.


2. A theoretical framework for the centralized mechanism


The new industrial revolution has been proceeding to conduct globalized communities toward a new direction. The innovation of ICT is promoted to enlarge the network of information rapidly and has displaced the decentralized system into the global system of economies and societies swiftly and steadily. This paper states theoretically that the centralized manufacturing system established in the period of the industrial revolution is probably coming to be unsustainable in the two reasons. Firstly, the innovation of technologies enables the stakeholders of the corporation to expand flexibly beyond the controllable territories by the supply chain. Secondary, to seek some merits of decentralized systems the large manufacturing mechanism of governance must be reformed to achieve the diverse needs in the global communities.


It is assumed that the centralized system has been encountering the enhancement of the decentralized systems to be brought by the innovation of technologies. To explore a theoretical foundation the two systems are defined precisely as follows. In the centralized system the corporation is supposed to perform by the base of the firmly constructed framework with scope and feature. In this framework the one way communication is assumed to perform efficiently with the some limited stakeholders. In the other decentralized system the corporation could govern the mechanism with distributing stakeholders by using the methods of the two way communication. 


igure 1 provides an illustrative image of the centralized mechanism to proceed the discussion efficiently, and will be referred in comparison with the decentralized mechanism on Figure 3. Figure 1 exhibits a total view of the one way communications or transactions. The head corporation is the center of organization and obliged to manage the total scheme of Figure 1. In Figure 1 information and knowledge are controlled to move systematically. The corporations and become the supplement of and the integrated organization to be composed by ,,③ is sometimes referred simply as the internalized organization[6]. The supplementary organization could provide the products and services of to the regionto . The supply mechanism in Figure 1 is determined mainly by this supplementary organization and could not correspond flexibly with the rapidly changing needs from external system. The head corporation must design the total scheme in detail by basing on the information provided by the organizations ,,[7]. Although stakeholders B, D, F belonging to the different regions should obey the decisions of this head corporation,



the regional interests are not probable to harmonize with the decision of the head corporation. However, innovations of ICT could remove the obstacles to separate regions and industries and increase the stakeholders outside the supply chain. After a while, the new entering stakeholders have experienced that their needs can not be evaluated sufficiently in this system. They raise the requests or the protests for the corporation by lawsuits, public campaigns and others. If the corporation can not construct cooperative relations with the expanding stakeholders, the performance of managements is expected to decrease. The corporation in the centralized system is obliged to pay a large amount of the external costs.


The performance of the corporation with the centralized system is formulated by a theoretical model[8]. It is assumed that the corporation obtains the net benefit defined by the expression (1).




The notation of this model is extended by basing the decentralized system named as the method of Tanaka[9]. The corporation performs the production activity  and has concerned with  stakeholders[10]. It obtains the net private profit  and takes the payment  for the stakeholder . The summation of  is stated by ). The stakeholder  brings the evaluation  and the communication or transaction cost. The stakeholders who present increasing evaluation of the corporation with production  are named as positive stakeholders. The stakeholder with deceasing evaluation on the corporation production  is referred as -the negative stakeholders[11]. By using mathematical expression (2), the positive and negative stakeholders are defined for  and .


  ,                              (2)


In the centralized system, the corporation is supposed to construct the core part of organization with the stakeholders 1,, In particular, the mass production system of manufacturing seeks to make effects of decreasing average costs and to improve the competitive advantages by reforming organizational structures such as pooling information of the production and constructing the vertical network of industries. The market structure has been developing to distribute efficiently massive products from the upstream of production to the downstream of consumption. The mass production of manufactures is supposed to be provided by the efficient vertical network of corporations. Since the members of the network have a closely related or common interest, the organization of the network should be constructed and managed by the qualified members.


The limited core members are the center of the network of stakeholders in the centralized mechanism. The both sides of the corporation and the stakeholders are obliged to pay the cost of communication in global communities. The effort of the stakeholders ( is assumed to contribute on improving efficiency of communication with the corporation. The total value is exhibited by  In the centralized manufacturing industries, the corporation has constructed more efficient communication with some stakeholders of the network to lower the average cost of  production[12]. The relevant stakeholders (obtain the higher sensitive index  to describe the evaluation of the corporation performance by the practical communication among the core members.  expresses the identical value for all relevant group and is supposed to be controllable by bargaining or cooperation for closely related stakeholders. And the related stakeholders have the scheme to determine  with the corporation in production to be independent of . However, the other stakeholders are assumed to remain in a low level of contact with the corporation. The communication gap between the core members and other stakeholders is represented by   expresses an externality index of this centralized system. The corporation obtains the passively determined index of evaluation  for the other stakeholders by basing on the market and legal rules and social customs. As rising  enhances the external request on the corporation, is assumed to be increasing with The relation to be discussed above is stated simply by the inequality,




The first order maximization conditions for the one way communication of corporation are stated as follows.



,   .                                       (5)

,                                     (6)


In the centralized system, we suppose that the relevant group obtains the dominance of positive stakeholders but the other stakeholders show the negative stakeholder as the group. Since are supposed to be obtained, in the expression (4), the right hand means that the first negative term is subtracted by the second negative term. That is, globalized economies increase the negative stakeholders as well as the positive stakeholder and raise external social costs. The centralized system is supposed to establish the relevant stakeholders in order to share the information of the organization. Innovation of ICT implies to increase  rapidly for a fixed number nder the condition of one way communication globalized economies increase  and the relative weight of the second term of the right hand of (4). When the production exceeds globally a certain amount , beneficial marginal benefits on the core members from a monopolistic bargaining of the organization are supposed to decline. This assumption is exhibited by the inequality  To explore the implication of (4) simply, we use the linier approximation. Firstly, we describe the linear expression for each term of (4) by using the following notations for positive constants  and.



Secondly, the graphical presentation is normalized by removing the scale effects. We eliminate the effect of production scale to explore the performance of various types of corporation with moralization by dividing (4) by .





We obtain the inequality  from the above discussions.   The globalization and the innovation of ICT technologies means that  increases. Considering that  also increases, the slope of the marginal social cost of the corporation in the centralized system shifts upwardly by the enhancing evaluation of external organization group.




















  Source: produced by the author

 Figure 2. Welfare losses by the centralized and decentralized systems


The cost benefit analysis of the corporation in the system is exhibited by Figure 2. The marginal net profit in the left side of (4) or (7) is expressed by the curve AD. The social marginal cost curve 0H depicts the right side of (4) or (7). The marginal cost of the core members is the first term of right side in (4) or (7) and represented by curve 0I. The gap between the curve 0H and 0I denotes the evaluation of the external cost by the other stakeholders. Figure 2 shows that the corporation in the centralized system moves the equilibrium point F into the point C in the new industrial revolution by innovation of ICT. The corporation reduces production activities x*** to x**.


Proposition 1. The rising external cost by triggered by innovational technologies makes a pressure the corporation in the centralized system to shrink the inefficient production activities.


3.     The decentralization and the development of ICT

In the previous section, we have discussed that the innovation of ICT has raised the merit by globalization of centralized production. At the same time the movement is possibly to increase social cost of the global communities. The optimal performance of centralized corporation has appeared to bring about the global market and government failures. In this section we explore that the two way communication system promoted by innovation develops the decentralized mechanism.


Figure 2. The two way connection develops global communication



It is supposed that the two way communication mechanism may not complete in a single region but could be concerned with issues to overlap multiple regions. In particular, an identical resident is possible to invest his or her money in corporations of different regions. And the types of transactions referred as B to B or C to C might spread over the two regions. The figure 1 illustrates the two way communication by using the stakeholders from A to H, the corporations from through and the regions fromthrough . The corporation is connected directly with the stakeholder A,B,C,D. The corporation has transactions with the stakeholders C,D, E,F and the corporation . The corporation has relations with the stakeholders F,G,H and the corporation . In the condition of the two way communication the stakeholder D could influence on the corporations and at the same time. For example, D requires both the corporations and belonging to different regions and by the PRI standard of ESG[13]. Consequently, a decentralized mechanism with two way communication is possible to develop pervasively without regional restrictions. We argue that the spontaneous development brings about confusion or disorder in global social systems. We should attempt to construct sustainable mechanism to prevent the global society from crises. The sustainable mechanism could be performed not from the view of a single region or state but by the consent of global community[14].   


Since the two way communication must be organized by a trustworthy method,  improving security of the system should enhance the priority. The benefit of the internal organization should be replaced by the new method of communication. Based on the comparative analyses of governance performances by corporation and , the investment agent D decides provision of the financial support for the two corporations.


The stakeholder constructs a governance mechanism to share knowledge with the corporation and .The two way communication connects the stakeholders, B and H that belong to be separated communities. If the corporations  and  could communicate openly,  the services and knowledge provided by the stakeholder D are available for the stakeholder H[15]. This type of connection develops the sharing economies.


Although the centralized system evolves to survive the surging waves in the fourth industrial revolutions, the decentralized mechanism displaces steadily the main places of the centralized mechanism. The decentralized system has developed with cooperative relations in the communities. The method of Tanaka focuses on the cooperative framework of the corporation. The corporation should aim to maximize the welfare of communities as well as the net profit. In this framework the two indexes, altruistic coefficient and risk coefficients to be defined precisely in this section, are key concepts. It is assumed that the corporation can not obtain accurate information of the evaluation  but have only   is referred as the altruistic coefficient[16]. As the coefficient increases, the corporation is willing to make more weight to the social evaluation in global communities than the private profit. The altruistic property of corporation could be improved by enhancing observance and survey methods which depend on the payment or the effort by the stakeholders. In mathematical expression, the total contribution y (is assumed to increase the altruistic coefficient,  


The risk coefficient is stated as follows. It is supposed that the decentralized system keeps well performance under the balancing condition of the two types of stakeholders. Precisely, the two types of stakeholders are classified into two groups and defined by (8).



   ,                  (8)


he above expression (8) states that the balanced growth of the two types of stakeholders ensures the development of the decentralized system[17]. In the mechanism of sustainability the corporation is designed to perform the incentive initiatives to require regulation, tax and penalty. The stakeholder i is assumed to require the corporation the target  to be achieved[18]. The target  to be set up by the stakeholder i is a basis to calculate payments of the corporation. In the distributional mechanism, performances of the corporation can be evaluated by the network effects of community. The corporation must construct the two way communication with stakeholders to improve the trust of the network. The incentive scheme including the legislative and regulative scheme aims to improve the competitive and cooperative behaviors in communities. Theoretically, the corporation is obliged to pay the cost for the stakeholder i to decrease the welfare loss. The cost function  is stated precisely    for the positive variable  


In the decentralized mechanism, the objective function that the corporation maximizes is written by



  ,      (9)



regarding the n+1 variables, 


It is assumed that the centralized framework (1) describes the communication and the external cost estimated by the corporation. Considering that the expression (9) reflects the evaluation of many stakeholders, this paper demonstrates that the two way evaluation (9) is a more appropriate than this one way estimation (1).


Emerging major corporations to take advantage of advanced ICT tend to occupy lesser employers regarding the amount of output than traditional major corporations and are supported by the shareholders to be pleased with high prices of the stock market. In this situation the expression (9) presents high level of the marginal net profit and the altruistic coefficient. The optimal conditions with the first order differentiation of (9) is exhibited by (10) and (11).





We explore comparatively the performance of global corporations in the centralized and the decentralized system by contrasting the two set of expressions (4), (5), (6) and (10), (11). When the corporation makes the private profit and the social evaluation compatible, Tanaka (2018) states that the first best condition of sustainability is obtained. This condition is described in the decentralized scheme and defined by




If the corporation is governed under the rules of the decentralized mechanism, (12) is supposed to becomes less than one. Considering (3) and that the centralized mechanism  loses the risk coefficient, we assume that the expression(13) is obtained.




We denotes the smallest  (9) is rewritten into




The marginal evaluation of the corporation in the decentralized system to be denoted by (14) is greater than the counter part of the centralized system expressed by (7). In Figure 2  the marginal evaluation curve in the decentralized system is depicted by 0G curve. The equilibrium point B indicates production that is lesser than and . The corporation in the decentralized system declines production efficiently to lower the social welfare loss. Figure 2 indicates that the decentralized system improves the social welfare loss by the area of triangle BCJ from the advanced centralized form[19]. Even if the transformation in the centralized system is inferior to displacement of the decentralized system, the reform in the centralized system moves the equilibrium point F into C and decreases social welfare loss by area of trapezoid JCFE. We presents Proposition 2 to focus on the main discussion.



Proposition 2. The displacement of decentralized systems in the centralized can take greater social welfare to the global communities than even the most efficient form of the centralized systems.


This paper discusses that the fourth industrial revolution reforms sharing relation between the centralized and decentralized systems. From the 1980s, the corporation in centralized system propels to develop global economies. The above propositions focuses on the argument that displacement of the decentralized into the centralized system raises global social welfare. The decentralized system could save a surplus of production by enhancing the evaluation and the audit of global communities. In global economies multi national corporations seek the own advantage in tax policies. Tanaka (2018) suggests that the corporation to miss a proper allocation of benefits among regions could not take sustainable way.


We explore comparatively payments of the corporation for the stakeholder such as tax or contribution for the region by using (13). The corporation in the centralized system takes payments for core member and other stakeholders according to (5) and (6). The corporation in decentralized system follows the rule stated by (11). The marginal evaluation of stakeholder  expressed in the right side of (5), (6), (11) is exhibited by the curve AB in Figure 4. The marginal cost of payment on stakeholder  is depicted by the  curves BK and CL for the centralized and DM for the decentralized. In the centralized system the core member receives more payment  than the payment   for the other stakeholders. However, the stakeholder in the decentralized takes more payments than any stakeholder in the centralized. By comparing with the decentralized system the losing surplus in other stakeholder the area of triangle EGJ is greater than losing surplus of core member HIJ. The corporation in the centralized system provides more contributions for the core member than for the other stakeholders. We summarize the results in Proposition 3.



Proposition 3.  The corporation in the decentralized system provides the stakeholder more benefits or surpluses than one in the centralized system. The corporation in the centralized system provides more benefits or surpluses for the core member than for the other members.



Source: produced by author

Figure 4.  Social surplus by improving globalized problems.



4.     Concluding Remakes

The global economies and societies have been composed by the centralized and the decentralized systems. In the recent several decades the evolution of the centralized system has been the main force to enlarge the global economies and societies in a large scale. The development of centralized system has utilized the global market systems and led to concentration of benefits on the core members. At the same time, the members outside of the core are designated to receive less benefits from the system than the core members. The outside member aims to depress the expansion of the globalized economies and societies to preserve the sustainability of global communities. To construct the sustainable mechanism we must restore the balance between the centralized and the decentralized systems by correcting incomplete communication mechanism. Recently, the innovation of ICT improves communication mechanism and rehabilitates the decentralized system. This paper demonstrates that the decentralized system can make global communities approach more closely the sustainability than the centralized system.


Historically, the evolution of the decentralized system reverses the progressive developments of the economic and social systems since the presence of mass producing manufactures. In this process, the communication moves one way into two ways. The excessive provision of goods and services is reduced effectively and the social welfare improves appropriately. The virtues in preindustrial societies, such as cooperation, sharing and saving, will come back in the new forms[20]




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[1] The term of the one way expresses the change of communication by contrasting with the two way communication. Innovation of ICT displaces two way communication into the traditional the economic and social systems with increasing scales. This paper argues that the dominant systems have been shifting from the centralized to decentralized in the large social and economic fields.

[2] Roubini and Mihm (2010) and others discuss this issue intensively.

[3] Tanaka (2016b).

[4] Many discussants such as Parker and others (2016) and McAfee and Brynjolfesson (2017) emphasize the platform revolution. This paper distinguishes the functions of the platform between the centralized and the decentralized system.

[5] Tanaka (2011) and (2016d) develop the experimental researches in Japan and China.

[6] Many authors such as Williamson (1975) and Leibenstain (1976) discuss that the vertical connection of organization performs lower transaction cost than the market mechanism.

[7] The relation with notations in the expression (1) is explained as follows. The corporation is possible to expresses the head corporation or the group of corporations , , in the relevant context. In the former case, the corporations and are classified into the stakeholders.


[8] Tanaka (2012) demonstrates that the corporation in this analysis is applicable for social enterprises or nonprofit organizations.

[9] Tanaka (2004) has stated this formulation in Japanese to explore corporate social responsibility. By using this formulation, Tanaka (2009),(2012),(2016) and (2017) provide the theoretical foundation on the global issues such as the global financial crises, social innovation, ESG, and global and regional sustainability .

[10] The two systems of the centralization and the decentralization constructs different communities. This paper defines distinctly the number of stakeholders  and  for the centralization and decentralization systems.

[11] Becker (1983) and (1985) explore the influence of the pressure groups. This model is applied on the behavior of stakeholders in this paper.

[12] Rifkin (2014) states that the evolution of the internet influences on the restructuring the network of the societies.

[13] UNEP FI and UN Global Compact. (2006),

[14] We need to construct the mechanisms of sustainability such as SDGs(Sustainable Development Goals) and ESG(Environment Society Governance) are constructed and promoted by the international organizations such as UN. GSIA. (2017) provides a survey of this issue.

[15] In a comparative statement between Figure 1 and 3, the decentralized system allow each corporation of the three to place the corporation of (9) alternatively.

[16] The approach on the altruism obtains the precedents in Andreoni (1990) and Tanaka (1998). The altruistic coefficient contains a similar meaning with the externality coefficient in the previous section. However, the two concepts are defined in the distinct centralized and decentralized systems.  

[17] If the two types of stakeholder are out of balance, the communication in the decentralized is congested and lowers the efficiency.

[18] The target is satisfied with inequality,

[19] This paper demonstrates that global communities decline to small scales. The impacts of  shrinking cities are analyzed by Leigh and Blakely (2013) and McLaren  and  Agyeman (2015).

[20] McLaren and Agyeman (2015) and May and Perry (2018) survey the related topics.