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The state of globalization in 2019 and its significance for strategists

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The state of globalization in 2019 and its significance for strategists

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Globalization has been shaped by a tug-of-war between economic fundamentals and political threats since the Brexit and Trump shocks of 2016. But predictions that globalization would collapse under a wave of economic nationalism have proven no more accurate than the proclamations of a flat world that dominated global economic discourse a decade ago. The new DHL Global Connectedness Index (which we wrote together with Phillip Bastian) shows that the world ended in 2017 more global than ever. While 2018 brought new obstacles – from customs disputes to blocked acquisitions – the result has been a shift in the playing field rather than an end to global business competition. In the face of such turbulence, how should executives think about building their company? Because smart business decisions depend on an accurate perception of the environment, executives should start with a clear view of trends in globalization.

In 2017, strong growth in most parts of the world drove the DHL Global Connectedness Index to record highs. The share of cross-border trade, capital, information and people flows increased significantly. The last time was in 2007.

However, in 2018 major political threats moved from rhetoric to reality. Disputes between the United States and its largest trading partners led to tariff increases. Meanwhile, countries tightened scrutiny of foreign corporate acquisitions, advanced data localization guidelines, and restricted immigration. While we do not have complete 2018 data, there is evidence that such developments have started to affect some international flows. Trade continued to grow, but more slowly, while foreign direct investment (FDI) flows decreased.

Given the strong dynamism of globalization and strong headwinds, it is important to recognize that market integration is still limited in absolute terms. The overseas activities of multinational companies around the world only account for around 9% of global production. Exports of goods and services account for 29% of world GDP, but even that figure drops to around 20% if we take into account cross-border production more than once. Surprised? You are in good company. The managers we surveyed in six countries in 2017 estimated these international production and trade figures at 37% and 41%, respectively.

This striking juxtaposition of global flows that are close to all-time highs but still well below managerial perceptions underscores both the opportunities and challenges that globalization continues to bring to multinational corporations. Succeeding across borders and distances is still much harder than winning at home, but some of the same barriers that limit international flows also add to the perks for businesses finding ways to overcome them.

To help executives navigate through the turbulence of globalization and even benefit from it, we offer recommendations for strategy (how to compete), presence (where to compete), architecture (how to organize) and non- market-related strategy (how to better engage). with society):

How can you compete? If the threats of globalization continue to grow, companies with marginal competitive positions abroad are particularly at risk. As Warren Buffet likes to say, “You don’t find out if you’ve swum naked until the tide is out.” As the political environment continues to change, avoid the temptation to react to any short-term developments. But consider whether your company has enough advantages over its competitors in the long run to stay in the game. If not, a strategic retreat may be warranted.

In particular, consider whether your company needs to rebalance the tried and tested international strategies of aggregation (use of scalable assets across national borders), arbitrage (exploitation of differences, e.g. in labor costs) and adjustment (adaptation to differences). Aggregation and arbitrage directly create cross-border value. So first think about your approach to these two strategies. Current trends suggest that many companies may lean towards aggregation, or at least need to be more prudent about arbitrage. Notice how the “new NAFTA” (United States-Mexico-Canada) agreement reduces the opportunities for arbitrage in automotive manufacturing by limiting the use of workers who earn less than $ 16 an hour.

Adjustment can expand the geographic reach of aggregation and arbitrage, but it comes at a price in the form of economies of scale or limited access to foreign inputs. As barriers to globalization rise, promoting customization through localization is a logical answer, but with clear boundaries. If you need to localize so much that you no longer have a significant advantage over local competitors, you may need to reconsider withdrawing from some markets.

Where to compete In an imperfectly integrated world, it depends very much on where you are from. Around half of all international flows that we record in the DHL Global Connectedness Index 2018 take place between countries and only their three most important origins and destinations, which are often neighboring countries. Even if we look at the world’s largest multinationals, categorized by foreign assets, the subset of these companies that publish country-specific sales data generate around 60% of their sales in just four countries (domestic and their three main foreign markets). . The question of where to stand in the competition is an important one for practically every multinational corporation, regardless of its size.

The prevailing political trends indicate selective changes in the openness of countries to international business. Trade and investment between the United States and China are in the crosshairs, but barriers are being broken between many other countries. In 2018, several important trade agreements were signed, including the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership with 11 Countries (CPTPP), the African Continental Free Trade Agreement (AfCFTA) and the Economic Partnership Agreement between the European Union and Japan.

These trends imply that companies should continue to prioritize markets by weighing their opportunities in particular countries against the cultural, administrative / political, geographical and economic (“CAGE”) distances between them. What is new is that administrative / political distances change faster than usual. Companies cannot reconfigure their operations with every shift in a volatile geopolitical environment, but now the time may have come to invest in more flexible supply chains, review contingency planning, etc. While trade tensions are already dampening global growth, some companies and even some countries could benefit. The International Monetary Fund, for example, predicts short-term gains for Canada / Mexico, the Eurozone and Japan from the tariff escalation between the US and China in some scenarios.

How do you organize? If your company changes its competitive strategy or geographical presence, adjustments to its organizational architecture may have to follow. A tendency towards aggregation could require a strengthening of your R&D function in order to strengthen your technological lead. On the other hand, promoting adaptation usually means strengthening the role of leaders in the country abroad. And every major shift in a company’s geographic footprint has repercussions on reporting and decision-making structures.

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A convenient way to think about possible organizational changes is to ask three questions: What structure? Who leads And how do we work together? Structural changes are the most disruptive, but more complex strategies, such as those that combine significant amounts of aggregation and adaptation, often require more complex organizational structures. Companies that take them over are often organized according to regions or employ matrix organizations. As for leadership, many multinational corporations have long had national diversity deficits. Their higher ranks are more like their home countries than their target markets. If adaptation is a priority, a more representative leadership team may be required. And careful consideration of the cross-departmental way of working helps to avoid overly focusing on the lines and boxes of the organizational chart. Think of linking relationships, incentives and information flows to bring people together across geographical and functional boundaries.

How can you better connect with society? The backlash against globalization is in part also a backlash against big business. However, according to the 2018 Edelman Trust Barometer, the public still trusts business more than government, and the majority of respondents felt that “CEOs should take the lead in making change rather than waiting for government to impose it”. For companies that operate across political borders, such as US multinationals in China, this requires a leader to walk a tightrope between competing national interests. And competing interests within countries exacerbate the challenge.

To maintain balance, do not fall under the illusion that your company can be considered a local company in all of its markets. Highlight the real benefits your company brings to the countries it operates in, but don’t feign false allegiances. Remember that citizens care more about the citizens of their own country than about foreigners. According to a survey, Americans would support a hypothetical trade policy that adds one job in the US at the cost of 1,000 losses abroad than a policy that sacrifices one job in the US but creates 1,000 overseas. In such a context, a leader trying to be a “citizen of the world” is likely to be seen, as British Prime Minister Theresa May famously put it, as a “citizen of nowhere”.

With most businesses still more domestically than overseas, much of society’s anger over globalization is in fact domestic – and can only be addressed through tough domestic compromises. For example, concerns about inequality in the US can hardly be resolved by reducing imports, as the US is already the richest country that imports the least for the size of its economy and is still at the forefront in inequality. Engaging in the domestic arena on technological change, taxation, labor market regulation, etc. can be dangerous for even the most well-meaning executives, but corporate leaders need to get involved to fuel these debates.

We cannot predict with confidence whether the coming year will bring greater or lesser globalization. But we can safely say that international flows and the restrictions that borders and distances impose on them will continue to matter. The biggest winners, regardless of whether globalization is increasing or decreasing, are therefore likely to be companies that embrace the complexities of globalization rather than purely local or global visions of their business environment.

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