The Myth of Americas Decline: Why the U.S. Wont Lose the Globalization Game
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Remember too that staying at home is an option. Only about 0. For companies based in large emerging economies, focusing on the domestic market, where they enjoy home court advantage as well as rapid growth, can be a particularly attractive proposition.
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Leaders must resist the idea that a global company has to compete in every market. And in light of changes brewing in the policy environment, this seems like a particularly inauspicious time to think that one can go global just by setting up a website or joining an online platform. If you conclude that your company should continue to do business in a variety of markets, you still need to figure out whether to change the type or mix of strategies that you use in response to protectionist pressures.
At a high level, globalization strategies have three components, as described in my book, Redefining Global Strategy. Companies use adaptation when they want to adjust to cross-country differences in order to be locally responsive. They use aggregation to achieve economies of scale and scope that extend across national borders.
And arbitrage strategies are used to exploit differences, such as low labor costs in one country or better tax incentives in another. Take adaptation. Firms should look for opportunities to amp up their adaptation efforts, because becoming more responsive to differences can help reduce the impact of protectionism. The most obvious way for a company to adapt is to vary products, policies, market positioning, and so on to suit local markets. However, each variation increases costs and complexity. Therefore, smart adaptation typically involves limiting the amount of variation as well as finding ways to improve the effectiveness and efficiency of any changes that are introduced.
For example, companies can design common platforms upon which local variants are offered. Or they can externalize some of the costs of adaptation via franchising, joint ventures, or other types of partnerships. But while more adaptation may make sense, multinationals should not automatically put it above all else—doing so would only undercut their sources of competitive advantage relative to local competitors. Global companies—especially those from advanced economies—typically justify their cross-border strategies primarily on the basis of aggregation.
In the most classic cases, they invest in intangible technological or marketing assets that they can scale across national borders. Those advantages normally have to be pretty large in order to overcome the home court advantage of local competitors. Turning to arbitrage, the opportunities for vertical multinationals to globalize on the supply side rather than on the demand side have narrowed somewhat in recent years, but they still remain large. Even with rising prosperity in large emerging markets, U.
GDP per capita is still seven times that of China, and 33 times that of India. Differences in tax regimes across countries are not going away either, and will continue to provide arbitrage opportunities. According to the OECD, the dispersion of corporate tax rates across countries has barely changed since , and progress at curbing tax havens has been slow. Furthermore, cross-country differences in safety, health, and environmental standards continue to persist as well—although exploitation of these differences raises ethical concerns.
Multinationals coming out of emerging markets tend to get their start from advantages rooted in arbitrage—competing abroad on the basis of low costs at home. For example, developed-world incumbents in IT services, such as Accenture and IBM, have expanded their workforces in India, while Indian companies are trying to strengthen their brands and technological capabilities. But GE—like most other multinationals—cannot give up on aggregation or arbitrage.
Except in highly regulated industries, companies have historically treated interactions with governments, media, and the public as an afterthought in setting strategy. I would add to the list the rise of NGOs, the proliferation of social media, and increases in anti-globalization sentiment. Companies are constrained in their responses to these developments by a range of factors. First of all, the backlash against globalization is also—in part—a backlash against big business. The general reputation of business is at an all-time low.
In a recent survey, the Pew Research Center asked respondents in the U. Business executives ranked next to last, ahead only of lawyers.
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In such a context, just speaking up more about social issues—as business leaders today are often instructed to do—is no panacea. While it is hard to offer simple instructions about how to cope with these complexities, the law of semi-globalization does suggest one injunction and one insight. First the injunction: Falling in line with what governments want wherever a company operates is unlikely to be a sustainable strategy.
Multinational companies need to craft governmental and societal agendas that are both localized and linked across countries. Anti-globalization pressures require that multinationals deliver more local benefits—and communicate about them—in the countries where they operate. Such efforts must go well beyond compliance to include contributions in the form of jobs, technology, and so forth. The backlash against globalization is also—in part—a backlash against big business. Of course, there are dangers to shifting too far toward localization.
Rather than pulling back—even as it became clear that the census IBM was supporting was being used to identify Jews for persecution—IBM sought to grow its business with the Nazi government. The law of semi-globalization affords an important insight as well: Addressing much of our current malaise—including but not confined to anti-globalization sentiment—requires domestic policy changes rather than the closing of borders.
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For example, one of the principal complaints about globalization today is the sense that it has contributed to rising income inequality and that a large swath of the population in advanced economies has been left behind. In the U. Meanwhile, corporate profits are running close to their highest historical levels. The widespread perception that globalization is primarily to blame for this problem, however, is empirically implausible. Most research suggests that technological progress and in the United States the decline of unions have been bigger contributors to inequality than globalization.
Corroboration is supplied by real-world examples: If the Netherlands can preserve a more reasonable income distribution despite having a trade-to-GDP ratio six times that of the United States, it seems odd to blame globalization for the much higher level of inequality in the U. And even if one is inclined to point fingers at globalization, it is clear that protectionism is a much more expensive solution than government safety nets, increases in the minimum wage, changes in tax policy, job-training programs, and the like.
Such policies are not typically favored by big business, so corporate voices advocating them make a powerful statement. Furthermore, closing borders does nothing to prepare a country to deal with the automation-related threats to jobs that dominate the debate about the future of work.
World 3. My research into the book, World 3. I expected the present backlash to arrive several years before it did. Some, such as the risks associated with international imbalances in trade and investment, are indeed real and significant. Most others, however, turn out to be overblown in relation to actual levels of international integration.
For example, the contribution of international air transportation to energy-related greenhouse gas emissions is only one-tenth as large as British air travelers estimated in a survey. To deal with global warming, it would be far more effective to tackle bigger sources such as housing or driving. My research suggests that international openness should be coupled with targeted domestic policies in addressing such side effects as globalization does have. Over the long run, companies that rely heavily on sourcing from abroad such as Walmart and those that export far more than they import such as GE would benefit from joining forces to oppose protectionism.
In his classic Foreign Affairs article Samuel Palmisano, then chairman and CEO of IBM, pointed out that years ago, companies that crossed borders engaged mostly in trade, but by the early s, they had started to invest in localizing production. But there is some good news for those tasked with leading multinational companies. First, the global corporation never became nearly as integrated as Palmisano prophesied, so the amount of change required if globalization does go into reverse is less than people might think.
And third, even if globalization suffered a violent reversal similar to that experienced at the beginning of the s, the world would still remain more globalized in terms of trade and foreign direct investment than it was in the s, let alone in the 19th century.
So reverting to the multinational structure of years ago or the trade-based structures of years ago strains plausibility. Globalization strategy and practice have advanced well beyond the prescriptions those historical models would imply, and leaders would be ill-served by going backward. Pankaj Ghemawat. Protectionism will change how companies do business—but not in the ways you think.
Executive Summary Business leaders are scrambling to adjust to a world few imagined possible just a year ago. In Brief The Problem Countries throughout North America and Europe have experienced waves of anti-globalization sentiment, but most business leaders are uncertain about whether to retreat, change strategy, or stay the course.
Two are particularly worth highlighting: Region-based structures.
Research also shows that many jobs in advanced economies have been created in the non-tradable sectors. On the whole, tradable sectors like technology, consulting and finance have performed well but have not created a significant number of jobs. This shows that there is a relation between import competition and offshoring and the reduction in tradable sector jobs, mainly in the productive sector, which has resulted in the decline of typical middle-class jobs. What about the higher-skilled workers in the middle class? Furthermore it seems that, at least for European and American firms, when firms start employing high-skilled workers offshore, they also increase the numbers of high-skilled workers employed at home.
This means that offshoring is not, as yet, having a negative impact on jobs created in the higher-skilled segments of the labour market.
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That explains the trend of job polarization and the upward job mobility in many European countries. However, the evidence is focused on the micro-level of large corporations while, for an economy as a whole, there is no guarantee that the higher skills will not be affected by economic globalization. Especially because most jobs — including high-skilled jobs that have been created by economic globalization which is more than just offshoring — are in sectors with low-productivity growth, are likely to be concentrated more in the non-tradable sectors, while also threatened by automation.
This will in time have an impact on higher-skilled jobs as well. Till now the evidence focused mainly on what jobs have been created. But what impact are offshoring and trade openness having on wages?
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There is evidence that higher levels of social protection and investments in training to reduce skill gaps could adjust to the shocks caused by trade openness.