The New Global Road Map

Enduring Strategies for Turbulent Times

Pankaj Ghemawat

• Publisher: Harvard Business Review Press
• Year: 2018
• Print ISBN: 9781316615027, 9781633694040
• eBook ISBN: 9781633694057
• Topic: Business
• Subtopic: Business General
• Index: Business

Global strategy expert Pankaj Ghemawat helps business executives around the world make sense of the changing views on globalization and provides frameworks, tools, and advice for realigning their strategies and organizations around the new realities.

• Corrects misperceptions about globalization drawing upon the most up-to-date data available
• Explains how levels of globalization are changing
• Focuses on the implications for strategy and gives leaders new ways to think about where to compete, how to compete, and how to organize on a global stage
• Provides clear and actionable tools and frameworks, including how to apply time-tested frameworks in the new global environment
• Spells out the distinct implications of the changing environment for firms in advanced versus emerging economies
• Makes ideas concrete via fresh company examples selected for diversity across countries/regions and industries
• Supported by a rich set of online resources (>20,000 maps, custom visualization platform, new version of CAGE Comparator analysis tool, etc.)

Audience:

• Senior executives who formulate global strategy
• Leaders, managers, and employees in MNCs
• Consultants in related fields around the world
• Ghemawat followers

Announced first printing: 20,000
Laydown goal: 4,000

PART ONE

Mapping Globalization

What Is—and Isn’t—Changing

Part one maps the present state of globalization and examines how the international environment is changing over time. Chapter 1 debunks popular and dangerous myths that prevent managers from thinking clearly about globalization while introducing a pair of laws on which firms can ground their international strategies. Chapter 2 stress-tests those laws considering the twin shocks of Brexit and the Trump presidency as well as the historical experience of the last global trade war, in the 1930s. Chapter 3 examines how the rise of emerging economies is likely to impact globalization over a longer time horizon.

1

The State of Globalization

How globalized is the world today, and has globalization been increasing or decreasing? Believe it or not, many managers can’t answer those basic questions correctly, even though the wrong answers can lead to costly business blunders. In other words, managers’ 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 “not much has changed.” 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.

But first, the good news: there are stable patterns behind the turbulence, on which firms can build strategies for sustained success. This chapter uses up-to-date data to present two laws of globalization and to debunk dangerous myths. This characterization of the state of globalization sets the stage for the analysis of how various types of shocks might change globalization in the short to medium run (chapter 2) and in the long run (chapter 3). These assessments of globalization over different time frames then underpin the recommendations for what firms should do about globalization (part two).

I begin this chapter by confronting the news headlines about globalization’s 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 reverse—at 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 globalization’s 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, “Globalization at Warp Speed,” and then another asking, “The End of Globalization?”³ 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, “Britain Just Killed Globalization as We Know It.”⁴ Returning the favor, after Trump’s election, the Guardian in the United Kingdom starkly proclaimed, “Globalisation Is Dead.”⁵

These two newspapers weren’t 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 we’ve seen this before, and perceptions can veer far away from reality. Do the facts support such a bleak depiction of globalization’s trajectory? In light of hard data, the answer is “no.”

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 world’s 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 2008–2009 financial crisis, it recovered and eventually surpassed its precrisis peak in 2014. And although globalization slowed in 2015, it had not—at least as of the end of the period studied—shifted into reverse.⁹

FIGURE 1-1

---

DHL Global Connectedness Index, 2005–2015

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, 2005–2015

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 “death of distance,” 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, 2005–2015

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 don’t 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 isn’t available yet, but factoring in people and information flows will probably reinforce the conclusion that neither “Leave” nor “America First” 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 yet—its 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. We’ll 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:

International interactions, while not negligible, are significantly less intense than domestic interactions.

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; int’l = international; merch. = merchandise; svcs. = services

---

FIGURE 1-5

---

The law of semiglobalization at the firm l...

Table of contents

• Cover
• Title Page
• Copyright
• Dedication
• Contents
• Foreword
• Introduction
• PART ONE: Mapping Globalization: What Is—and Isn’t—Changing
• PART TWO: Managing Globalization: SPANning the World
• Notes
• Index
• Acknowledgments
• About the Author