Globalization: The World's Not So Flat

Globalization: The World's Not So Flat
(CSCB)

This article is extracted from the January 2, 2008 edition of “globeandmail.com”.

Much of the discussion around the issue of globalization has focused on the "flatness" it brings. Buoyed by the release of Thomas Friedman's book The World is Flat in 2005 (and new editions in 2006 and 2007), the notion of a level, borderless world seems to have been accepted as fact by many leading economists and academics.

The basic premise is that globalization has levelled the competitive playing fields between industrial and emerging market countries. But although some aspects hold merit, Mr. Friedman's argument is exaggerated. The real state of the world is neither globalized nor local, but semi-globalized – and it will remain so indefinitely.

In the recent book Redefining Global Strategy, Harvard business professor Pankaj Ghemawat writes that 90 per cent of the world's telephone calls, web traffic and investments are local, suggesting that the proponents of the "flat-world" theory have neglected this empirical data. Instead, the world appears to be divided into a "triad" with strong barriers for entry into the key regional markets of the European Union, North America and Asia-Pacific.

Today's business activity is organized mainly within each of these regions, not beyond. The total amount of the world's capital formation that is generated from foreign direct investment has been less than 10 per cent in recent years. In a truly globalized environment, one would expect this number to be much higher.

There are a number of well-documented examples of large U.S. corporations attempting to tap into markets beyond their own triad, only to quickly see the many linguistic, cultural and political barriers that inevitably lead to failure overseas….

Despite the claims of a borderless world, many large capital-laden companies have suffered when they have treated the world as one and the same. Case in point is Google, the $215-billion search-engine giant. Despite being rated the most globalized website for the third year in a row, by Byte Level Research, the company has had great difficulties trying to enter a number of foreign markets, with culture and loyalty appearing to be the predominant stumbling blocks….

This is not to say that Google should not have entered the Russian market – but rather that it was forced to think differently about how to compete in it. The company has to consider national differences while retaining and exploiting its competitive advantages and unique core competencies.

It appears as though some foreign companies understand this better than their North American counterparts. Japan's Toyota Motor Corp. has recently overtaken General Motors Corp. to become the world's largest auto-maker.

The company has excelled in anticipating expanded free-trade agreements within the Americas, Europe and East Asia, but not across them. They understand this concept of the "triad." Consider Canadian-U.S. trade, the largest bilateral relationship of its kind in the world. In 1988, before the North American free-trade agreement was implemented, merchandise trade levels among the Canadian provinces were estimated to be 20 times as large as their trade with similarly sized and similarly proximate U.S. states. In other words, the domestic-preference bias. Although NAFTA helped reduce this ratio of domestic to international trade to 10 to 1 by the mid-1990s, it is still greater than 5 to 1 today. Clearly, in our seemingly "borderless world," borders still matter to most people.

If there were one realm in which borders should be rendered meaningless and the globalization proponents should be correct in their overly optimistic models, it should be the Internet. Yet Web traffic within countries and regions has increased far faster than traffic among them. Just as in the real world, Internet ties decay with distance….

What this implies for Canadian firms looking to go global is that they need to significantly tailor their strategies to specific foreign environments. What works in North America may not work in Japan. Brand image in North America does not freely hold in these foreign markets – look at Coca-Cola's troubles with international expansion in the 1980s and Wal-Mart's recent expansion difficulties in China.

Companies must adopt different regional strategies and spend considerable time understanding the differing role of governments in the world's three major economic regions. Canadian subsidiary managers must understand regional differences to effectively maintain their place in the firm's evolving global network.

It's not a flat world, but one with hills and valleys – so get out your climbing gear.