Globalised strategy

Globalisation measures the flow of goods, services, capital and labour between countries resulting in the closer integration of the economies, cultures, and political interests of the countries and peoples of the world. Joseph Stiglitz, economist and winner of the Nobel Prize, defined globalisation (in Globalisation and its Discontents) as:

“The closer integration of the countries and peoples of the world …brought about by the enormous reduction of costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, services, capital, knowledge, and people across borders.”

Globalisation and strategy are two of the six concepts underpinning the new Business Management programme.  The pace of globalisation is one of the factors that influences the strategic options of multinational firms, or those organisations hoping to enter overseas markets. In addition, there are links to cultural influences, where firms decide to increase their focus on foreign markets.

Until 2008 and the global financial crisis, it appeared that the forward march of globalisation was unstoppable. Trade was growing twice as fast as GDP, foreign direct investment (FDI) was booming, and information and people were increasingly mobile. Borders and distance seemed increasingly irrelevant. However, the financial crisis slowed trade and capital flows, and now it seems that globalisation may have stalled or even gone into reverse.

One measure of globalisation is the DHL Global Connectedness Index (GCI). This records cross-border flows of trade, capital, information and people on three dimensions:

• Depth: how much of a country’s economic activity takes place across national borders (as opposed to within the countries)
• Breadth: how globally a country’s international flows are distributed (whether, for example, they involve just neighbouring countries)
• Directionality: the proportion of inward to outward flows for any country

The index includes 99% of the world’s GDP and 95% of the world’s population. It tracks international flows of trade, capital (FDI and shares bought on foreign stock markets), information (internet traffic, phone calls, and printed publications) and people (immigrants, students and tourists).

Highlights of 2014 GCI:

• The world’s economic centre of gravity has shifted eastward with emerging economies seeing bigger connectedness gains than advanced economies
• Flows of trade, capital, information and people have stretched out over more distant geographies, documenting a decline in regionalisation
• Europe remains the most globally connected region, with Netherlands again ranking number one

Globalised commerce did increase slightly in 2013, but not uniformly around the world. Global connectedness is correlated with economic growth. All but one of the top 10 most globalised countries in the world are located in Europe, with Singapore as the one major exception. North America is the second most globally connected region with the United States ranked 23rd place out of the 140 countries measured by the GCI. The largest average increases in global connectedness from 2011 to 2013 were observed in countries in South and Central America and the Caribbean. Middle East and North Africa was the only region to experience a significant decline in connectedness. The world’s most globally connected countries, such as the Netherlands, Singapore and Switzerland, are many times more connected than the least, such as Myanmar, Botswana and Paraguay

The GCI shows that not all flows of trade, capital, information, and people are alike; the trends vary by activity. For example, the depth of international information flows has risen every year since 2005, powered by expanding bandwidth. International capital and people flows grew between 2012 and 2013, but trade depth has been declining since 2011; a smaller proportion of the goods that are produced each year are exported. The latest forecasts imply a continuation of these patterns.

The breadth of globalisation has reduced. In 2005, the majority of the international interactions were from one advanced economy to another, but from 2010, the majority involved an emerging economy on one, or both sides, of the transaction. In short, the world’s economic centre of gravity is shifting eastward to emerging markets. For example, German exports to emerging economies have not grown as fast as those economies’ imports from other countries. Although Germany exported over greater distances in 2013 than in 2005, it still sent 70% of its exports to markets within Europe.

Directionality, the third GCI dimension, is essential to country-level analysis. A firm considering investment in South Korea, for example, may know that South Korea has large international capital flows, but not that capital flows disproportionately outward. Foreign firms are still relatively small participants in South Korea’s domestic economy, meaning that South Korea may not the best place to invest.

When firms develop their global strategy, they must consider the specific aspects of connectedness that matter most to their own success. For example, those firms looking to manufacture offshore should consider the country’s depth and breadth of trade, whereas those looking to establish a presence in a country’s media sector should consider the degree and direction of its capital and information flows. Distance, both geographic and cultural, also matters. The relative ease with which the firm can operate in foreign countries depends, not only on their economic connectedness, but also on how familiar or unfamiliar the firm is with their culture and political and economic institutions.

IB Style Questions

1. Define the following terms:

• capital flows
• emerging markets

2. Explain, with examples, the potential impact of culture on the promotional strategies of firms planning to enter overseas markets.

3. Analyse the links between the pace of globalisation and the setting of corporate strategy.

4. Discuss the reasons for the growth of multinational companies.