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Globalization Reset

image of Deven Sharma

Deven Sharma, Founder of Inflexon (www.inflexon.com) , Fellow at Connection Science @ Media Lab, and former President of Standard & Poor

Globalization is under assault. What should a reset look like?

Globalization pullback is here. However, the promise of global markets also remains very much intact. The pace of globalization has slowed, and its nature is changing. Global forces unleashed over the last few decades have transformed the way companies, societies, and people work and live. Large numbers of big and small businesses from advanced, rising and emerging economies are participating in capturing the growth and benefits of global markets. Globalization is attitudinal in exchange of ideas, knowledge, norms, behaviors, and people, as it is about politics and policy. Globalization is highly unlikely to reverse. However, worldwide unease and negative political discourse towards globalization will alter the future pace of evolution and path.

Reset

Global business leaders face a turbulent path in the years ahead and an urgency to reset their globalization strategy and approach. For Western multinationals, the importance of growth and earnings from global markets raises the urgency of crafting and navigating a new path in light of the signs of a globalization pull back. Emerging market multinationals find themselves in the vise of slower domestic demand in their markets and increased uncertainty of developed markets.

Global companies face the following new realties to reset their globalization path:

  • Global economy grows, mix shifts, albeit slowly: Rising economies continue to grow and markets become larger and, relatively more influential in global politics. Economies undergoing transformation will reorder the global market growth mix. For example, by shifting to a more consumption economy, China is likely to see stronger growth in domestic products and services. Brexit is likely to, reorder European export flows. Saudi Arabia recently announced a plan to diversify its economy.
  • Global markets remain open, with higher friction: Markets are likely to remain open and connected; however, do expect to see higher friction and cost of doing business across borders. Increased friction will come from national regulations and policies on trade, data, capital, IP, tax and immigration. Increased currency volatility is likely to continue given the uncertainty of monetary policy. For example, many non-US western banks are pulling back from emerging markets because of fear of the extra-territorial reach of US regulations. Data regulations in Europe, will impact the operating strategies of not only the technology companies, but also companies in financial and other sectors. National cultures are taking on a dominant emphasis, with global influences fused with the local tastes and preferences.
  •  Innovation networked: Ubiquitous access to technology and broadband connectivity means smart and fast innovation can happen anywhere. The competitive advantage moat of western global companies is narrowing.
  • Arbitrage declines: Wage, regulation, and capital arbitrage are fast closing across countries. Most economies have embraced a global regulatory mindset and then added national regulations. Regulations vary across borders, though the arbitrage opportunities may be limited.
  • Capital available, and expensive: With a savings glut, low interest rates are likely to be the norm, even with recent indications by US Federal Reserve to raise rates. However, uncertainty and regulations will add friction for capital access and availability.
  • Technology, even more disruptive: New technology will reorder cross border flows. Technology such as AI, robotics, and 3D will bring manufacturing and support processing closer to home markets. . Powerful cyber intelligence capabilities are escalating the mistrust across countries around data security and privacy and could possibly raise new barriers in cross border data and capital flows. Over long periods of time, increased connectivity and access to information and data will continue to induce greater melding of interests, preferences and behaviors.
  • Risk remains high: Risk will rise from the uncertainty of monetary, fiscal, tax, and trade stance across different countries, which are likely to adopt to protect the jobs and growth in their economies. Currency volatility, transfer pricing, and taxation are likely to change the dynamics of the cost of global supply chains and product flows. Frequency of disruption from political and terrorism events are unlikely to recede, however severity and duration of impact may remain limited given the recent experiences from events such as Brexit or the Paris bombing or the coup in Turkey.

Reset Calls for a Tip to Local, Global 

New realities call for tipping the approach towards globalization on its head to “Local, Global”. For more than a decade, the globalization mantra for businesses has been “Global, Local”: pursue markets outside the home market with global products to realize the efficiencies of scale, and adapt to local where it is a must. In an uncertain global market with rising friction, a prudent strategy calls for greater emphasis on local—supply, products, brands, and people. With greater shift towards local, political and policy related risks will also rise, and multinationals will have to pay greater attention to proactively mitigating and managing these risks.

A reset will call for a look at all aspects of the global business: product, supply, innovation/R&D, people and organization, branding, and risk management. Operating scale will be disrupted and require fresh thinking. This disruption will require a wholesale re-examination of the value chain, and the same questions that have often been asked in pursuing globalization: What is produced in which location? What is designed, developed, and innovated, and where? How are local cultures accommodated within a global single company culture to attract the best talent? How are products and brands marketed? How does one balance varying regulations and environmental standards while striving toward a commonality to realize global efficiencies? How does one build goodwill with customers, communities, and policy makers? How does attain operating scale while mitigating the uncertainty and risks of large number of local markets?

Many western multinationals, like GE, PepsiCo, Cargill and Nestle, have been on a path of a more “local” strategy for a few years. Others have only begun.

Few emerging market multinationals appear to have embarked on a reset as yet. Emerging market multinationals have a greater upside from globalization even with the shifting dynamics. With more South-South trade agreements and similarity of affordable product expectations across these countries, prospects for emerging multinationals look promising. Emerging multinational have the potential to bridge the quality and innovation gaps with the western multi nationals and that could let them pry open and capture share in advanced markets facing slow growth and income stagnation. SMBs are not likely to be spared either. While SMBs benefited from the digital networking platforms, such as Ebay, Amazon and Paypal, they are also likely to face more friction in doing business globally.

Transition to Local, Global approach will require leadership agility to build a global business across vast market differences, and policy and political uncertainty and market risk.