24 Principles of Globalization
Reprinted with permission from The Financial Management Network.
by Marvin Zonis
Globalization may be the most significant development of our time. Driven by the spread of technology, the collapse of communism, and the ever-wider adoption of market economies, companies are spreading their operations across countries while peoples are interacting as never before. The consequences will continue to unfold over the decades. But here is an attempt to suggest the major consequences for companies as they globalize—as they adopt new methods of doing business—and as they increasingly adopt the Internet as the principal medium for globalization.
The International Monetary Fund defines globalization as the “growing economic interdependence of countries worldwide through the increasing volume and variety of crossborder transactions in goods and services and of international capital flows, and also through the more rapid and widespread diffusion of technology.” The IMF leaves out some important elements and focuses on the wrong central element. Globalization also entails the greater movement of people across national borders and the relentless rise of similar standards across the globe. The increasing similarity of standards is driven by the diffusion of technology and the diffusion of American popular culture and by the dictates of industrial and commercial economic organizations. But the central element of globalization is that it is driven by companies in their relentless search for market share and profits. Companies are at the heart of globalization.
Twelve Elements of Globalization
- Increased Exposure to Political Risk. Companies that expand across national boundaries increase the uncertainties they face. The uncertainties of the greatest potential consequence are those brought about by the actions of governments. Government actions may be aimed specifically at the particular company and its operations within the country. Numerous US firms in Indonesia have been targeted by the post-Suharto government because they have been widely perceived to have won their sweetheart contracts by bribing members of the former president’s family.
But more frequently, companies face immense political risks because of the general policies of the governments in the countries in which they operate. Changes in labor laws, tax structures, profit-repatriation regulations, currency-conversion rules, and import and export regulations can be devastating, but so too can poor public policies.
Governments that mismanage their public finances can debase their currencies, drive inflation, and stimulate political unrest and instability. Companies need to institute processes that allow them more effectively to identify, assess, monitor, and manage political risk.
- Increased Exposure to Natural Disasters. As IPE has pointed out (see “Political Volatility is Certain as the Costs of Natural Disasters Increase,” in IPE Vol . Marvin Zonis + Associates, Inc. 4 IPE, Volume 7, Number 6, March 20, 2000 6, No. 19, October 11, 1999), the major, global tectonic plates lie, to a substantial extent, under the emerging markets. It is largely in the emerging markets that the great earthquakes and volcanic eruptions occur. But worse, it is also in the emerging markets that governments have built the least dependable infrastructures. When floods and storms or typhoons and hurricanes strike, the power supplies and telecommunications systems in the emerging markets fail most readily and are restored the most slowly. To be a successful global company means building redundancies into plants and facilities and countries at risk, as well as building in “cutouts”—to allow a global firm to continue to operate successfully even absent the components from any particular country.
- Increased M&A Activity. Given the greater commonality in standards and in business across national borders, enhanced profits and market share can be achieved through mergers and acquisitions more quickly than through building operations in different countries. Massive, new horizontal mergers that combine firms with similar core competencies are especially likely to occur.
- New Forms of Competition and Cooperation. Firms that enter foreign markets will be subject to new forms of competition. Other companies operating in those markets may be unknown and may pose serious challenges. The major packaged- goods companies, for example, have found that counterfeiting is rife in China. As much as half of the goods sold in China under the brand names of major global firms are actually counterfeit goods produced in China and competing with the genuine articles. Companies also need to enhance their market knowledge if they are to engineer successful mergers or acquisitions. But companies will also cooperate with other companies in new ways, becoming mutually interdependent even though they may simultaneously compete.
- New Cultural Sensibilities. Going global means enhancing efficiency and profitability by taking advantage of the best available talent drawn from everywhere in the world. Companies now appoint senior management regardless of the countries from which they come. To do that most effectively, however, means that companies have to drop the biases and cultural sensibilities that arise naturally from their countries of origin. A new global culture arises within the firm itself, a culture that executives from the original host countries often find difficult to adopt.
- “Virtual” Hierarchies. As companies spread their operations geographically, managers increasingly have responsibility for staff in different countries. The managers are challenged to establish meaningful interpersonal relationship with their staffs, who often come from an entirely different culture. Worse, the managers need to establish such relationships with people with whom they are not in day-to-day, face-to-face contact. The telephone, email, teleconferencing, and, of course, increased air travel, are the new bases for establishing meaningful interpersonal relationships. This is a massive challenge to most all the parties in the relationship— staff as well as management.
- Best Practices. By acting as a single firm with a global, supranational culture, the excuses that justified preserving national practices disappear. Globalization means operating everywhere as a single firm and instituting similar best practices everywhere. That puts pressure on firms to learn of global best practices either through consulting firms oriented toward generating competitive intelligence or to firms, themselves, striving to learn what best practices are by studying their competitors.
- Alliances. Globalization allows for many new types of alliances. Shell, for example, has established alliances by working out exchange programs with chemical companies in Asia. In exchange for their supplying Shell’s Asian customers with output from their Asian plants, Shell supplies their North American customers from its plants in the US.
- Finance. Globalization reduces the primacy of any particular company location or its country of origin. As a result, capital in a global firm is allocated on the basis of expected risk-adjusted returns. Competition for the firm’s global budget is intensified, and better risk-return calculations must be performed in order to warrant a capital allocation. Established operations and headquarters location in a truly global firm offer no advantages in the intensified competition for capital.
- Speeding the Globalization of Suppliers. A firm’s decision to globalize will reverberate throughout its supply chain and affect all the firms that supply it with services. Global firms often look to suppliers and to service firms that can provide it with goods or services on a global basis. When Shell made the commitment to more fully globalize, for example, it consolidated all its advertising with J. Walter Thompson. As a result, Ogilvy & Mather lost Shell’s account in Houston. The rest of its Houston business was not sufficient to justify its Houston office, which Ogilvy closed. Relentlessly, globalization feeds on itself and drives more globalization in a mutually reinforcing process.
- Winners and Loser from Globalization. While globalization will provide immense aggregate benefits to producers and consumers alike, it will not provide those benefits equally. Globalization will produce very big winners; but it will also produce big losers. Ross Perot had it right. There has been a “great sucking sound” since Canada, the US, and Mexico implemented NAFTA, on January 1, 1994, as a vast number of low-paying jobs have moved south. The workers in those plants in the US and Canada have lost their jobs. Unless they succeed in moving up the skill ladder, they will remain unemployed. The challenge to every country in the age of globalization is not to resist this process but to educate its workforce, stimulate its institutions of education, facilitate the founding of new ventures, and create labor-market flexibility. That way, new jobs will be created in new industries and service businesses that will provide higher pay and more satisfactory work in better working conditions.
- Backlash to Globalization. The transition to globalization for countries will not be easy or smooth. Inevitably, a backlash against globalization will be generated that will organize and pressure the state to resist, if not reject, globalization. States that succumb will be the long-term losers. They may succeed in preserving the structure of their economies. They may become ever more quaint in the process and ever more desirable, as a result, as a place to visit. But you wouldn’t want to live there. Those countries will be poorer as a result.
Twelve Elements of the Internet and Globalization
The Internet has become the fastest growing technological innovation in the history of the world. Herewith, 12 consequences for globalization that will be driven by the Internet.
- Instantaneous Communications. The Internet is the greatest distance killer of them all. It offers virtually-free, virtually-instantaneous global communications, allowing coordination and management to occur anywhere, everywhere, all the time.
- Multishift Operations. For goods that can be digitally transformed, the Internet allows two- or three-shift operations per day. I am involved, for example, with a software firm, Distributed Software Development, which employs programmers in both Moscow and Chicago. The Russian programmers can spend a full day in Moscow writing code. At the end of their working day, the code is sent via the Internet to Chicago, where it arrives at the beginning of the same working day—given the nine-hour time difference between the two cities. After a full day of work in Chicago, the elaborated code is sent back to Moscow and arrives before the beginning of the next work day in Moscow. Two days of work are effectively compressed into each calendar day.
- Supply Chain Management. The recent spate of online buying portals, organized vertically by industry, suggests the possible efficiencies to be gained from global supply-chain management. New suppliers can enter the competition to supply raw material, parts, equipment, and services—whatever global firms buy—through the Internet. The consequence will be to drive prices down, eroding supplier margins.
Less-efficient suppliers will be driven out of business and suppliers across national boundaries will be stimulated to consolidate.
- The Flattened Hierarchy. The Internet and the global distribution of the corporation will combine to flatten organizational hierarchies. Power in firms will be diffused to local operations. Firms will be held together by common culture and brands and by people who have moved through various global operations and, in the process, established bonds of association.
- The Unbounded Corporation. Just as corporations become borderless, so will they become unbounded. The distinct boundaries of the past—where it was simple distinguishing who was in the corporation and who was not—will become blurred. More and more professional workers will relate to firms as consultants rather than employees. More workers will be part-time.
- The Disappearance of the Middle. Globalization generates firms of ever-larger geographic scale and ever-larger financial strength, a process facilitated by the Internet. Simultaneously, the Internet facilitates the entry of new players, especially new niche players. In the future, the global economy will be dominated by relatively few giant firms and a vast number of niche players and small, new entrants.
- Information Rules. Increasingly, the value of a firm will be seen as the value of its historical and contemporary human capital. Its accumulated knowledge from its history as embodied in its products and processes as well as the knowledge of its current workforce and their capacity to generate and accumulate new human capital as well as its knowledge of its suppliers and especially its customers are the bases for competitive advantage. The Internet is an ideal mechanism for retrieving information, generating information, processing information, analyzing information, and storing information. Companies that understand that the value of their products and services is the value of the information they embody will be relatively successful and relatively major users of the Internet.
- NGOs as Countervailing Powers. As businesses globalize, a major countervailing power has arisen—global NGOs. Powerful, global NGOs have arisen through the sophisticated use of the Internet. Their power has already been seen in Seattle, at the WTO debacle. These countervailing powers will be significant influences on the ability of business to supervise its own affairs. NGOs will bring massive pressure to bear on companies to “protect” the environment, adopt “fair” practices with their local labor forces, and to the people in the areas in which they operate. If reputation and brand are everything in global business, NGOs have become powerful challengers to the global reputations of business.
- The “Digital Divide.” A great deal of energy has been spent on the challenge of the “digital divide.” Conventionally the term refers to the consequences of the unequal distribution of access to the Internet. The poorest sectors of any population are likely to be least able to gain such access. If being connected and being Internet savvy is the hallmark of the involved citizen in the twenty-first century, and if being connected is a path to economic well-being, then the digital divide will reinforce existing inequalities. The term has less often been applied to countries. But the same phenomenon applies. Countries whose citizens by and large are not wired—or as is increasingly the case, not wireless—and whose companies do not use the Internet will invariably suffer lower rates of growth and be less a part of the accelerating globalization than connected countries and companies.
- New Entrants. But as surely as the “digital divide” threatens the well-being of whole countries, the Internet also offers solutions to the backwardness of many states. Countries not yet wired can skip the technological stages through which the more-developed countries passed. They now can skip copper entirely and move directly to wireless communication, at far less expense than laying copper cables would cost. But it is also the case that the Internet allows firms in developing countries to participate in commerce in a way simply impossible in the past. The Internet (and globalization) means that in a network there is no center and there is no periphery.
No one is outside the market. New businesses can be created in the developing countries to supply even the most sophisticated services to global firms, as India has shown. If it can be put on a screen, it can be produced in a developing country.
- Service: Not Just Production. As margins continue to be relentlessly driven down, manufacturers will bundle their products with services. That will provide extra values to consumers, higher margins for producers, and especially provide manufacturers of what will essentially become commodities with enhanced competitiveness.
- Forget the “Clash of Civilizations.” It’s the New “Clash of Connectivity.” As the Internet and businesses continue to tie ever-larger portions of the world’s peoples into networks of communications and economic interdependence and a new, global culture spreads, the chances for conflict between those peoples and between their states will diminish. Simultaneously, those parts of the world outside the network will not be connected, will not become more prosperous, and will not share in the development of the world culture. The conflicts in the future will occur among the not connected and between the connected and the not connected.
These twenty-four principles of globalization attempt to spell out the major attributes of this phenomenon—the great driver of business in the first decade of this century. Businesses will be changed, so will economies and peoples. Prosperity will be enhanced for those who participate. Conflicts will occur on the basis of connectivity, on the basis of globalization.
Reprinted from the International Political Economy, IPE, Volume 7, Number 6, March 20, 2000
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