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Page added on July 31, 2011
A fashionable consensus among MBA students, managers and luminaries such as Colin Powell, George Soros and Tom Friedman, to name but a few, has been building around the notion that the world is globalized—that borders don’t matter at all.
But fashion is no substitute for the facts—so consider some data about globalization.
Despite the perception that people, money, trade and information are more mobile than ever before, the reality is somewhat different.
Take people. First-generation immigrants represent only 3% of the world’s population and the percentage of the world’s population comprised of immigrants is the same as it was in 1910
In terms of financial flows, foreign direct investment is about 10% of global fixed capital formation. FDI-intensity bounces around with merger and acquisition activity, but has never exceeded 20%. Some pre-crisis measures of cross-border capital flows/stocks are actually comparable to earlier peaks more than 100 years ago—and thanks to the crisis, are now lower.
Information is also characterized as global. Yet less than 20% of the bits transmitted on the Internet cross national borders. And the international and particularly the intercontinental component of Internet traffic is decreasing rather than increasing.
And as for products and services, international trade accounts for close to 30% of global GDP, but that percentage recedes back toward 20% if we strip out double counting. And while trade-intensity has been setting new records, the big drop-off in 2009 is a reminder that trends can be reversed.
Many of these cross-border flows are non-negligible, but if the world is truly flat, one would expect to see values in the 80-100% range. Given the evidence above, there is also no evidence that a flat world is on the horizon.
Instead of viewing the world as a collection of standalone countries neatly divided by clearly marked borders (a worldview that I refer to as World 1.0) or as completely integrated and borderless (World 2.0), we need to think of the world in terms of countries that are embedded in space, at varying distances from each other (World 3.0). In World 3.0, linkages between countries can be substantial (unlike World 1.0), but the countries themselves remain distinct and the world diverse (unlike World 2.0).
Focusing on such distances or differences and how to deal with them is to unlock what, to use an acronym, seem to be the seven “secrets” of successful globalization.
1. Sensitivity to differences.
Overlooking international differences is a recipe for one-size-fits-all strategies. Thus, when former Wal-Mart CEO Lee Scott was asked in 2003 why he thought the retailer could succeed internationally, he responded that: “People said we would struggle when we left Arkansas and got to places like Alabama.”
With this attitude, Wal-Mart profited only in markets close to home—Canada, Mexico and the U.K.—and made losses elsewhere. It has since realized that the farther it goes from home, the more it has to change its domestic strategy. This has long been clear to more successful globalizers: thus, McDonalds offers lamb burgers in India, the McShawarma in Israel, and the Bulgogi Burger in South Korea.
2. Evaluation of cross-border moves.
In the presence of large differences, cross-border moves cannot be taken for granted. Yet 90% of the respondents to an online survey Harvard Business Review conducted for me agreed that global expansion is an imperative rather than an option to be evaluated.
Such simple faith underpins disasters such as the Daimler-Chrysler mega-merger, which was clearly problematic when it was conceived. The proposed cost savings were focused on selling, general and administrative expenses, excluding advertising, which amounted to only 7% of revenues, and were clearly offset by a host of cost penalties and differentiation-related problems.
But it was justified anyway on the grounds that the car industry was getting more concentrated (which is, by the way, untrue). Smart companies, in contrast, look carefully at the costs as well as benefits of a cross-border expansion.
3. Closeness versus distance.
Foreign countries are neither equally far (as World 1.0 emphasizes) nor equally close (as World 2.0 would have it). Rather, as the maps presented at the bottom of this article indicate, some are much closer than others—with the clear implications that where you are from should affect where you go, and that if you do go very far from home, you need to pay more attention to the greater distances that intervene.
Consider U.S. companies that operate in just one foreign country: for 60%, that country is Canada, and for another 10%, the U.K.. And companies from the EU are more likely to enter other EU countries before they look elsewhere.
Yet 50-60% of the respondents to my online survey agreed that a “truly global” company has no home base and that it should attempt to compete everywhere.
4. Regional realities.
Whether one looks at trade, FDI, phone calls or immigrants, 50-60% of international flows take place within continental regions rather than across them.
From a company perspective, even among the Fortune Global 500, nearly 90% derive more than half of their sales (an average of 80%, actually) from their home regions.
Many of the very few companies with a big presence in more than one region often take a regional approach to global strategy. Thus, Toyota relies on regional hubs, platforms and mandates to achieve some cross-border economies of scale but doesn’t attempt to push them farther by being “truly global” because of differences in fuel prices and protectionism.
5. Economic arbitrage.
Cross-country differences aren’t just a constraint but also a potential source of value creation.
Arbitrage strategies that exploit wage differences are the most talked-about globalization story of our time but are probably still underplayed. For example, Wal-Mart’s gains from procurement in China are several times as large as profits from all its international stores.
Then there is capital arbitrage of the sort evident in listing shares on foreign stock exchanges to tap into foreign pools of capital. And tax arbitrage is practiced by most major multinationals, even though they are loath to talk about it much.
Timing is a hallmark of successful global strategies in a number of different ways. One manifestation as noted above, is sequencing: companies often start with markets that are relatively close or similar before moving to others that are farther away that present much more difficult challenges.
Another involves exploiting downturns: Cemex, the global buildings materials supplier, for instance, typically waited for the bottom of local construction cycles to buy into new markets. The more frequent approach, however is to expand at times of euphoria about globalization—as Cemex did recently when it purchased Rinker, and which is why it is now having to restructure.
7. Strategy options.
Adaptation to differences, aggregation at the regional level (or on some other basis) and arbitrage are just some of the strategy options touched on in this article. Recognition of the full set of options—instead of simply treating globalization as a matter of cloning the domestic business model everywhere—is essential to increasing the odds of global success, and to maximizing value creation.
Pankaj Ghemawat is the Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona. The arguments and data above derive from his book, “World 3.0: Global Prosperity and How to Achieve It,” recently published by Harvard Business Review Press. His website is www.ghemawat.com where you can see more than 200 of his globalization maps.
U.K. Bilateral Trade
U.K. Foreign Bank Exposure
Barclays Bank’s Revenues
HSBC Gross Loans and Advances to Customers (end-2010)