How globalized is the world today, and has globalization been increasing or decreasing? Believe it or not, many managers canāt answer those basic questions correctly, even though the wrong answers can lead to costly business blunders. In other words, managersā mental maps of globalization tend to be highly distorted.
Some of the distortion doubtless reflects the turbulence of the environment, which can widen the gap between perceptions and reality. Some distortion might reflect media noise. The media are particularly prone to yo-yoing, since no one ever attracted more eyeballs by declaring that ānot much has changed.ā And quite a bit of misinformation reflects powerful biases that operate at the personal (and interpersonal) level and that will be discussed in some detail later in this chapter.
I begin this chapter by confronting the news headlines about globalizationās trajectory with hard data on international flows of trade, capital, information, and people. Because the available evidence does not indicate that globalization has gone into reverseāat least not yet, I turn next to a finer-grained examination of what I refer to as the depth and breadth of globalization. This assessment provides a clearer view of how globalized the world is today. It also illustrates two regularities that are so powerful they merit recognition as scientific laws: the law of semiglobalization and the law of distance.1 I also present data from a multicountry survey that highlights how managers tend to believe that the world is far more globalized than it really is. The chapter therefore concludes with a discussion of the steep costs such exaggerated perceptions or globaloney impose upon companies and the world at large.2
Globalization in Retreat?
The 2008 global financial crisis shattered the confidence about globalizationās prospects that had dominated the public and corporate discourse at least since 2001, when China joined the World Trade Organization (WTO) and memories of the 1997 Asian financial crisis began to fade. In the span of just three weeks in 2015, the Washington Post ran one headline declaring, āGlobalization at Warp Speed,ā and then another asking, āThe End of Globalization?ā3 Ambiguity reigned.
Then came Brexit. To use the same newspaper as a bellwether, after the June 2016 referendum, the Washington Post published an article bearing the headline, āBritain Just Killed Globalization as We Know It.ā4 Returning the favor, after Trumpās election, the Guardian in the United Kingdom starkly proclaimed, āGlobalisation Is Dead.ā5
These two newspapers werenāt alone in their pessimism. A broader tonal analysis of newspaper stories mentioning globalization reveals a sharply negative turn from 2015 to 2016. On average, negative stories outnumbered positive ones in 2016 by a factor of four to one in the United States and by two to one in the United Kingdom and India.6
Pessimism about globalization carried over from the newsstand to the bookstore with titles such as From Global to Local appearing in 2017 and Us vs. Them: The Failure of Globalism in 2018.7 Public and business sentiment about globalization was clearly on a downswing. But weāve seen this before, and perceptions can veer far away from reality. Do the facts support such a bleak depiction of globalizationās trajectory? In light of hard data, the answer is āno.ā
My colleague Steven Altman and I compile the biennial DHL Global Connectedness Index, which measures international interactions across 140 countries accounting for 99 percent of the worldās economic output and 95 percent of its population. The most recent edition, released in November 2016, tracked international flows of trade, capital, information, and people from 2005 through 2015.8 Figure 1-1 summarizes the results of the index at the global level demonstrating that although globalization was hit hard during the 2008ā2009 financial crisis, it recovered and eventually surpassed its precrisis peak in 2014. And although globalization slowed in 2015, it had notāat least as of the end of the period studiedāshifted into reverse.9
FIGURE 1-1
DHL Global Connectedness Index, 2005ā2015
Source: Adapted from Pankaj Ghemawat and Steven A. Altman, DHL Global Connectedness Index 2016: The State of Globalization in an Age of Ambiguity (Bonn: Deutsche Post DHL, 2016), figure 1.3.
Figure 1-1 aggregates across the depth and the breadth of globalization. Depth captures how much of flows that could take place either domestically or internationally cross national borders. Breadth focuses on the flows that are international and measures whether they are dispersed globally or more concentrated, for example, among neighboring countries.
To focus first on depth, figure 1-2 unpacks trends along the four pillars of the index: trade, capital, information, and people. Trade (measuring both merchandise and services trade) turns out to be the only pillar on a multiyear decline. Capital (based on flows and stocks of FDI and portfolio equity) fell the farthest at the onset of the financial crisis, but has recovered somewhat since 2011. Information (capturing international telephone calls, international internet band-width, and trade in printed material) has surged over the last decade, although the increase in its depth is moderated by the explosion in domestic information flows that has also taken place.10 And while visa and work permit restrictions continue to constrain migration, the steady growth of international tourism has been driving consistent increases in international people flows.
FIGURE 1-2
DHL Global Connectedness Index depth pillars, 2005ā2015
Source: Pankaj Ghemawat and Steven A. Altman, DHL Global Connectedness Index 2016: The State of Globalization in an Age of Ambiguity (Bonn: Deutsche Post DHL, 2016), figure 1.5.
Although the depth of trade and capital flows remained below their precrisis peaks, the depth of globalization as a whole had clearly not gone into retreat through 2015. And even the large drop-off in trade depth was almost entirely a price effect, driven by plunging commodity prices and the growing strength of the US dollar. (The value of merchandise trade fell 13 percent in dollar terms in 2015, but trade volume grew a modest 2.6 percent.)11
If the depth of globalization shows no signs of having collapsed, what about its breadth? While breadth can be measured in several ways, given breathless predictions of the ādeath of distance,ā the average distance traversed by international flows supplies a convenient metric. If the breadth of interactions was shrinking, one might expect distances to become shorter. In fact, the opposite is true. Figure 1-3 plots the average distance covered by the flows included in the DHL Global Connectedness Index and reveals that international flows continued to stretch across greater distances through 2015.12 This expansion has slowed, however, compared to its brisk pace between 2008 and 2010, a period when the share of flows from emerging markets (which tend to interact over greater distances) was rising swiftly and when firms from crisis-hit countries desperately sought growth far from home.
FIGURE 1-3
Average distance traversed by international flows, 2005ā2015
Source: Pankaj Ghemawat and Steven A. Altman, DHL Global Connectedness Index 2016: The State of Globalization in an Age of Ambiguity (Bonn: Deutsche Post DHL, 2016), figure 1.4.
In short, neither depth nor breadth metrics indicate that globalization declined over the decade in question, although its growth has slowed. Devoted gloom-and-doomers might retort that these metrics donāt tell the whole story, and that 2016 or 2017 data will reflect a decline. Maybe, but not yet. Limited data from the year of Brexit and Trump points to more of the same, namely, close to flat trade and FDI depth. Trade depth declined less in 2016 than in 2015 and preliminary data shows it growing in the first two quarters of 2017.13 And even though FDI flows in 2015 were inflated by a wave of overseas corporate inversions by US companies (the wave ended in April 2016, when the US Treasury issued new rules cracking down on such transactions), FDI depth surrendered only a fraction of its prior year increase.14 Data across all the components of the DHL Global Connectedness Index isnāt available yet, but factoring in people and information flows will probably reinforce the conclusion that neither āLeaveā nor āAmerica Firstā has managed to stop globalization, let alone throw it into reverse.
Depth and the Law of Semiglobalization
Since globalization has not collapsed (at least not yetāits future prospects are the subject of the next two chapters), we can look for useful patterns in the data to examine in more detail how globalized the world really is today. Weāll see how the depth and breadth of globalization supply evidence for my proposed laws of globalization across many types of international activity and over time.15
My first law of globalization can be summarized as follows:
In other words, national borders still present formidable barriers to international interactions, but the flows that do get across them are too significant to allow firms to focus exclusively on domestic opportunities and threats. I call this the law of semiglobalization because it highlights how the depth of globalization is significantly above zero but still far smaller than it would be in a perfectly integrated world.
Figure 1-4 provides depth metrics for macro-level trade, capital, information, and people flows, and figure 1-5 reports depth metrics pertaining to the business activity of multinational firms. Across both figures, the measures shown are simple depth ratios. For any type of activity that could happen either within or across national borders, I divide the amount of international activity by the total activity (international plus domestic). Across both figures, the average depth ratio is about 20 percent. Not only is domestic activity much more intense than international activity, domestic activity also almost always far surpasses international activity in absolute terms.16
FIGURE 1-4
The law of semiglobalization in trade, capital, information, and people flows
Sources: See chapter 1 endnotes on page 220.
Note: agri. = agriculture; GDP = gross domestic product; GFCF = gross fixed capital formation; ind. = industry; intāl = international; merch. = merchandise; svcs. = services
FIGURE 1-5
The law of semiglobalization at the firm l...
