Globalization at a Crossroads

Earlier this year I wrote about the future of global firms, based on two recent articles on the subject, - The retreat of the global company in The Economist, and The Global Enterprise: Where to Now? in Foreign Affairs by IBM’s former CEO Sam Palmisano.  As both articles noted, global firms boomed over the past few decades, driven by IT advances that made it much easier to do business around the world and by the fierce global competition that forced companies to become more efficient and lower costs.

But now, “The biggest business idea of the past three decades is in deep trouble,” said The Economist.  Palmisano pointed out that the world stands at a major crossroads.  “A rising chorus of nationalism echoes across developed countries; it calls for tighter borders and restrictions on immigration.  Global trade negotiations have essentially ceased, and regional trade deals face strong headwinds of opposition.”

How should business address the very important issues now surrounding globalization?  This question was explored in two recent Harvard Business Review articles, - People Are Angry About Globalization. Here’s What to Do About It, by NYU and IESE professor Pankaj Ghemawat, and An Agenda for the Future of Global Business by BCG strategists Martin Reeves and Johann Harnoss.

The US, the UK and much of continental Europe are convulsed by a “more-or-less generalized anger against globalization,” wrote Ghemawat.  Whether we like it or not, “The anger is real, and its possible implications are too threatening for us to simply wait for it to dissipate by itself… And although purely economic countermeasures are important,… they are unlikely to suffice because emotions, not just economics, are involved.”

Ghemawat has long been conducting research and writing about globalization.  His latest book, The Laws of Globalization, was published this past October.  He believes that the current anti-globalization wave is due in part to globaloney, that is, the tendency to overestimate globalization levels.  For example, when asked to guess the percentage of first generation immigrants in the US population, Americans said that the figure was in the 32%-42% range, while the actual number is under 15%.  People in more than a dozen European countries overestimated the number of immigrants in their countries by even wider margins.  Similarly, while we continue to hear that everything is now made in China, products made in China accounted for less that 3% of US personal consumption expenditures in 2010.

The private sector has a huge role to play in making the case for globalization.  “Simply put, business is the 800-pound gorilla where this issue is concerned: 80% of global trade is orchestrated by supply chains of multinational firms,” said Ghemawat.  “The truth is, most of us just don’t hear that many international perspectives.  Although the internet is a global network, it is used primarily to transmit information within national borders.”

Making such a case is important because “there’s a strong correlation between not knowing a lot about other countries and thinking your own country is superior.  Countries that are deeply connected to international information flows are less likely to view their cultures as superior.  Previous surveys have found trade opposition to be directly related to a sense of national superiority.”

In their HBR article, Reeves and Harnoss nicely articulated the benefits of globalization while acknowledging its negative consequences.  “For all of the uncertainty and anxiety in headlines today, the world is a much better place than it has ever been.  In emerging markets, billions of people have moved out of extreme poverty.  In the developed world, we enjoy better medicines, connectivity, and mobility than most of us could have imagined even 20 years ago.”  This narrative of progress “has rested on three propositions: that globalization is a major driver of growth and prosperity; that technological progress enriches our lives; and that shareholder returns reflect businesses’ contributions to societal progress.”

On the other hand, “The promise of global progress has become a reality for many - but not for all…  While globalization has increased aggregate prosperity and reduced inequality across nations, it has also created winners and losers within nations.  Rising income inequality has become a driver of the widening trust gap between the elites and everyone else, which has helped fuel the rise of populism.”

“And there is an increasing fear that technology could make matters worse by displacing jobs on a large scale.  With policy makers distracted by political polarization and limited fiscal and monetary room to maneuver in, one thing seems certain: Global businesses must advance a new, credible narrative for globalization, technology, and the role of corporations - and support it with purposeful action.”

For much of the past century, the essence of capitalism has been embodied in the phrase The Business of Business is Business.  It was further elaborated by economist and Nobel Prize recipient Milton Friedman in a 1970 article, - The Social Responsibility of Business is to Increase its Profits.  But, while absolutely necessary, this view is no longer sufficient if capitalism is to succeed in the 21st century.

Reeves and Harnoss propose a new business leadership agenda, based on balancing two apparently conflicting objectives.  The prime responsibility of business leaders continues to be the viability and prosperity of their own companies.  But, in addition, they must now secure “the conditions for sustained prosperity, which requires a more inclusive model for global economic integration and technological progress.”  Their proposed agenda comprises seven areas of opportunity:

Shape the Next Wave of Globalization.  Don’t just focus on accessing foreign markets and creating low-cost global supply chains.  The new wave of globalization must be “more cognizant of social impact, and focused on building local capabilities… by looking beyond cost-based offshoring and emphasizing the benefits of trade and technology across a wider geographic and demographic base.”  For example, companies can move time-sensitive, highly customizable forms of production closer to their customers “thus turning global supply chains into two-way streets.”

Support Entrepreneurial Business Growth.  A few years ago I learned about a surprising paradox.    Given the advent of inexpensive digital technologies and cloud-based services, it should be easier than ever to become an entrepreneur and start your own company.  But in fact, entrepreneurship has been declining for years.  Instead, we’re seeing the rise of global superstar companies.  Major new advances, like platform ecosystems, could either exaggerate or ameliorate this recent trend.  For example, such dynamic ecosystems could help level the playing field by enabling thousands of individuals and small firms to participate in global supply chains.

Leverage Technology from Front to Back.  Leveraging technology to primarily increase back office efficiencies and reduce costs will result in the displacement of labor.  “Businesses should start from the front, with a clear focus on solving unmet customer needs and delivering tangible new value.”  This will not only enhance customer value but it will also help create new jobs an improve people’s lives.

Invest in Human Capital.  “Finding effective and affordable ways to help people acquire transferable skills during their careers, not just before they start out, is a large social challenge.  Education is critical in creating career mobility and equality of opportunity, which are at least as important as, and closely tied to, income gaps.  But it takes too long for new work skills to become codified and for the education system to deliver them.  Firms can help close the loop…  As new tools become available to build or rebuild human capital more effectively and efficiently, corporations could seek to broaden their mandate in this area, both with their own staff and in the communities where they operate.”

Broaden Access to Basic Goods and Services.  While the prices of many consumer goods have significantly declined, the costs of some fundamental services, - e.g., housing, education, health care, - have substantially increased over the last few decades.  “Providing access to such goods is often a consequence of competitive business activity and disruptive innovation, which starts with someone creating a simpler, more affordable version of a product… Broadening access to basic goods and services can be a winning strategy for investors, companies, and society.”

Rebalance and Align Rewards.  “Mismatches between rewards and performance along the entire pay scale, from entry-level workers to leaders, undermine perceptions of fairness and faith in the system.  Bringing rewards into a healthy relationship with performance presents an opportunity for corporate leaders to directly shape people’s perceptions of self-worth, fairness, and access to opportunity.”  On executive compensation, for example, companies should increase transparency on the criteria for performance-based pay and ensure that executive remuneration is governed effectively.

Revitalize Society through a Social Business Mindset.  “Business needs to remain deeply embedded in society to positively affect it.  In fact, business can create solutions to society’s most fundamental problems…  Such social business initiatives, if kept close to the core, also help build strategically relevant capabilities such as the external orchestration of people and assets, a key skill in executing a shaping or ecosystem approach to strategy.”

Left unattended, discontent with globalization will only grow.  “It does not require a degree in modern history to imagine the ends that await us if we accept deep political polarization in our societies as the new normal,” wrote Reeves and Harnoss in conclusion.  Business must take pragmatic steps  “toward more actively shaping society, to not only sustaining economic progress but also helping to bring about broad-based prosperity.  Now is the time to act.”

Comments

[Hawi Moore]

This is very helpful. Thanks for posting

[James Drogan]

This is all well, and good, and I agree.

However. it seems to me that the global transformation sketched herein requires a level of global business and governmental leadership that is in very short supply.

It's not clear where or when, or perhaps even if, this leadership will emerge. In the interim, and maybe inevitably, we are left to muddle along.