- April 17, 2020
CENTRALIZATION VERSUS DECENTRALIZATION
Centralizationand decentralization have varied meanings depending on the context inwhich they are used. In marketing, for example, centralization refersto the financial market structure where all orders are directed to asingle central exchange with no other competing market. This is,however, different from decentralization where the orders aredirected to a diverse market. Itis evident in the modern world that both centralized anddecentralized systems face challenges and benefits.
Klagge& Martin (2005) first discuss the question based on thecentralized versus decentralized financial systems by comparing thesystems of the United Kingdom and Germany. The writers proclaim thatthe concentration of financial systems and markets have increasedboth geographically and institutionally. They also note that smallbusiness institutions continue to experience financial problems dueto policy interests and that these small entities suffersignificantly regarding funding.With decentralization, there could bea growing challenge for small companies to acquire external financessince these firms may fail to verify readily that the company hasaccess to a quality project.
Thearticle also stresses that highly centralized systems such as thosein the United Kingdom have a high ability to introduce spatialbalance in the flow of resources to small and medium-sizedenterprises. Through their article, Klagge & Martin (2005) alsoput that in more decentralized systems such as Germany, thegeographical organization of financial markets rely on otherinstitutional and regulatory conditions. The decentralized systemmight seem to be more beneficial, but in the real sense, the regionalfinancial markets come across some challenges.
Toconclude, the spatial structure of financial systems can lead touneven regional development. It is harder for firms in a country withcentralized financial systems to access funds compared to those inthe nations with a decentralized system. The decentralized system, onthe other hand, can readily be affected in the sense that nationalcenters may draw business away from the regional centers.
Klagge,B., & Martin, R. (2005). Decentralized versus centralizedfinancial systems: Is there a case for local capital markets? Journalof Economic Geography, Oxford Journals,5(4),387-421. doi:10.1093/jeg/lbh071