Oct 05 2020
As promised in my last newsletter, today I will launch a multi-episode series on globalization (for readers outside the US, please excuse American spelling!). This installment covers basics that will lay the foundation for future articles.
Globalization is Increasingly Divisive
In recent years, globalization has become an increasingly divisive issue and may be reaching a peak in many corners of the globe. The debate has revolved around a variety of concerns, notably job security and a loss of national sovereignty, with trade tensions often at the epicenter. Check your national news sources reaching back a half-dozen years or more.
Specific Examples Include …
America’s squabble with China and the on-again, off-again NAFTA (North American Free Trade Agreement) rift have captured headlines worldwide. Of course, America does not have exclusivity in the arena of trade frictions or general discord among major trading partners. Relations between Australia and China have become tenuous. In Europe, Brexit remains a thorny unresolved factor, plus, differences on a myriad of issues between EU member states are persistent. Moreover, China's Belt and Road Initiative has aroused the ire of neighboring Asian nations.
What Does Nationalism Have to Do with It?
All this, just citing a few examples, throws coals on the “globalization” fire and a growing trend toward nationalism in many parts of the world has stoked these flames.
In a recent article in the Harvard Business Review, Waldman and Javidan write, “In recent years, however, nationalist sentiments seem to be on the rise. During the current pandemic and economic downturn, political leaders might find it more expedient to search for solutions for their own citizenries, instead of combining efforts to find a global one. Before the crisis (COVID-19), protectionist, populist politicians were gaining favor in many parts of the world. And even in the corporate arena, one could see signs of a turn inward, with companies touting the jobs that they are creating at or bringing back home and encouraging consumers to buy domestically produced goods.”
Globalization is indeed a critical strategic matter. The pandemic has further exposed existing sores, while revealing a host of other challenges. Therein lies the objective of this series.
But before we jump into the deep end of the pool: What exactly is globalization?
What is Globalization?
It depends on your frame of reference. Personal views are governed by one’s experiences, from which perspectives are derived. Mine come from more than two decades of involvement in international business—a frame of reference that will become obvious from my observations. You needn’t agree with them all.
The definition of globalization according to Oxford Languages is: “The process by which businesses or other organizations develop international influence or start operating on an international scale.” A good start but a tad simplistic for our purposes.
In published literature, there are three interrelated dimensions to globalization: economic, political, and cultural. Although I’ll mainly focus on the economic aspect, the other two cannot be ignored. So, I’ll start with them.
This is often referred to as multilateralism. It involves the creation and proliferation of multilateral organizations such as:
- United Nations (UN)
- World Bank
- International Monetary Fund (IMF)
- World Trade Organization (WTO)
These institutions can act as watchdogs over the influence of member nations, or as evidenced in the mission statement of the World Bank, “to reduce poverty and improve living standards by promoting sustainable growth and investment in people.”
There is considerable controversy regarding the usefulness of these organizations regarding their contributions to world social welfare and whether these institutions’ power is waning or is threatening the sovereignty of nation-states.
I won’t throw my hat in the ring of this debate. Nonetheless, having an office nearby I vividly recall the massive protests at the annual World Bank/IMF meetings in Washington DC—more than twenty years ago! The point is simply that this is a longstanding controversy that continues to live on.
This refers to the transmission of ideas and values between countries. It is facilitated by international travel, media, and the internet. Historically, colonization was the pollinating agent.
The openness of a society, often restricted by national governments, defines the potential degree of cultural assimilation. The exchange of ideas can foster innovation, including technological change. As such, cultural globalization is directly linked with economic globalization. This is a double-edged sword as cultural clashes abound when immigration or the free movement of labor across national borders is allowed.
The pervasive cross-border flow of goods, services, capital, technology, and labor help define economic globalization. A main characteristic is increasing economic integration and interdependence of both regional and national economies. Although this form of globalization is often analyzed by studying bi- and multi-lateral trade flows and the agreements that govern these, there is much more to economic globalization than the movement of goods and services. Capital markets have long been globalized. Technology transfer is clearly a global issue. And labor markets have been increasingly regionalized in recent decades.
Although there is clear evidence that economic globalization has spurred economic growth and development in many corners of the globe, critics point to the equally obvious disruptions it has caused—there are countless examples of job losses owing to increased international competition. The World Bank/IMF protests I mentioned above are symptomatic.
I’ll dig deeper into these contrasting/competing economic forces in future installments.
Measures and Trends of Economic Globalization
According to the Organization for Economic Cooperation and Development (OECD), key measures of the degree of globalization are indicators of international trade and capital flows, particularly foreign direct investment (FDI). I’ll start with trade.
Check out Figure 1, charting total global merchandise trade as a percent of world GDP.
This clearly supports the notion that globalization has risen dramatically over the past fifty years as goods traded amounted to roughly 45% of world GDP in 2019, up from only 20% in 1970.
Figure 1: Fifty Years of Merchandise Trade Expansion (with Hiccups)
Obviously, during this period there were times of both economic stress and bouts of global trade tensions. Not surprisingly, these often coincided as challenging economic conditions translate to inward, nationalistic policies and increased protectionism.
I recall running a conference in 1985 with The Hongkong and Shanghai Banking Corporation (HSBC). A key topic was finding a resolution to numerous trade disputes at the time. No surprise given the lull in the share of global trade to world GDP from the early-1980s well into the 1990s evidenced in Figure 1.
Nonetheless, economic globalization marched on, despite setbacks during the Great Recession, and more recently, with an eroding, uncertain world economy the past few years and the shock of COVID-19. Incidentally, the WTO, IMF and World Bank are all projecting double-digit declines in world trade volume for 2020. The question remains, where will world trade go from here?
Foreign Direct Investment and Globalization Trends
Shifting gears, consider capital flows as a measure of the intensity and spread of economic globalization. Although I’ll entertain some of the nuances of several kinds of capital flows in future installments of this series, for now I’m focusing on FDI with the aim of investigating some historical globalization trends.
FDI is defined as an entity in one country acquiring a controlling ownership in an enterprise in another country. The investment may take the form of a direct purchase of an enterprise in another country or through the expansion of operations of an existing business in that country. This is a common process where many multinational companies secure a foothold in a promising overseas market or relocate production taking advantage of cheaper labor or other operational costs. (I’ll get to foreign portfolio investment, a different creature all together, in a subsequent newsletter.)
Figure 2 depicts the share of global FDI to world GDP (an analogue to figure 1). Although this share is much smaller than the trade counterpart, investment builds productive capacity over time, which in turn, can support the growth in trade. As such, this is a powerful indicator of economic globalization.
Figure 2: Global Direct Foreign Investment is a Driver to Trade Growth
DFI began to surge in the late 1990s and in 2000 as the world economy was heating up. The mild economic slowdown in 2001 and the 9/11 terrorist attacks in the US took the wind out of its sails. The euphoric economic frenzy of 2006 and 2007 was a hyped-up aberration and global DFI went through the roof. If you net out these two exceptional periods, the advance of the DFI/GDP ratio is linear.
With pervasive economic incertitude taking hold the past three years, DFI waned. And now, given the pandemic, DFI is expected to decline by 40% this year. The fate of FDI is unknown amid fluid investor expectations.
Finally, consider Figures 3 and 4 that display global merchandise trade and global DFI against world GDP growth from 2005 to 2019, respectively.
Figure 3: World Trade Flows Mirror Economic Growth
Figure 4: Global DFI Closely Tracks Economic Performance
Both figures illustrate the close ties between global trade and international capital flows with world economic conditions. Economic conditions that are currently unsettled…
In the ensuing episodes of this series, I’ll build on the fundamentals in this piece and discuss several key issues related to the future course of globalization, including a more detailed look at trade, technology transfer, capital flows and supply chain disruptions. Many scenarios are in play in this crazy environment.
See you soon and best regards,
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