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Is it the end of Globalization as we know it? Globalization 2.0, Geopolitics, and a pop-rock band from the last century.

It’s the End of the World as We Know It (And I Feel Fine) is a song written and performed by the pop-rock band R.E.M. in the distant year of 1987. Because of the global coronavirus pandemic, suddenly this song became the voice of the world’s current mood towards the end of almost everything, including the movement we call Globalization, included.

Globalization, defined by the cross-border flows of people, trade, investment, information, ideas, data, technology, energy, money, food, and of course, viruses (both biological or software) is changing, most likely for good. However, the temptation to forecast the end of globalization is large and very premature. The decrease in the flow of people and goods around the world is clear, because of the pandemic and other forces, such as the trade war between the two largest global economies, the US and China (the US embraced the “America First” doctrine, shifting away from trade liberalization, and moving towards protectionism; the rise of nationalism (Brexit), and geopolitics (Cold War 2.0), which started US´ desire to rip up the supply chains that leave the United States dependent on China. However, globalization isn’t dead. We are entering a new phase that shows a reconfiguration of globalization, a phenomenon I prefer to call Globalization 2.0. For an interesting visualization of how globalization evolved over five centuries, check [1].

Globalization 2.0 has interesting characteristics. Generally speaking, COVID is causing a reduction of physical globalization and an increase in virtual globalization. Therefore, Globalization 2.0 is more digital and regionalized. Moreover, from a supply chain perspective, Globalization 2.0 leads to more resilient, risk-averse value chains. The next paragraphs present some explanations for my reasoning.

  1. Reconfiguration of the international supply chains: many firms will look to strike a more risk-averse balance between efficiency and resilience. Until very recently, supply chains focused only on effectiveness (low cost, high speed); but because of the disruption of production caused by COVID-19, we start to see a shift towards resilience (capability to recover quickly from a difficult situation). China’s reputation for reliability was severely reduced and multinational companies are diversifying their global value chains. As Jörg Wuttke, chairman of the European Union Chamber of Commerce in China expressed: “The globalization of putting everything where production is the most efficient—that is over.” [2]
  2. Automation in Supply Chains: The development of automation and robotics — another existing trend that was accelerated by the pandemic — permits multinational companies to bring outsourced manufacturing work home, a phenomenon called
  3. National Security: Countries perceived the vulnerability of the over-dependence of global value chains. Sectors such as energy generation, telecommunications, and pharmaceuticals deserve a different treatment. Geopolitics plays a hand here again. For instance, at the beginning of the COVID-19, several countries perceived that their suppliers of protective masks were based in China, the original location of the pandemics.
  4. The myth of self-sufficiency, both at country and company levels: countries are still dependent on each other. Globalization faces forces that change its shape, not logic. Rich countries are rich because they trade more, not less, and China is a textbook example of the benefits of global integration. Similarly, large companies go to foreign countries to find new markets. However, only truly multinationals go to other countries to access new sources of knowledge to transplant it to the entire network of subsidiaries.
  5. The global nature of the problems in the 21st Some problems can only be attacked with a global perspective. Climate change, terrorism, the pandemic itself, and cybercrimes have little respect for borders, and they can best, and maybe only, be solved via international cooperation”. Deglobalization will not suddenly make international challenges disappear.

What about the businesses? Are they fit a Globalization 2.0 world?

In an article written before the pandemic, Dambisa Moyo [3] discusses that global companies are not structured to compete in a Globalization 2.0 world, because this siloed world directly impacts three key pillars of global corporations: technology, global recruiting, and the finance function.

Technology changes due to Globalization 2.0

  • The emerging “splinternet”: an increasingly fragmented internet with competing China-led and U.S.-led platforms will fragment global supply chains, which will reduce the ability of global corporations to gain competitive edges by selecting the most cost-effective solution at each stage of the production process.

Global recruiting: A war for talent

  • Recruitment: the shift in the political mood in the U.S. and Europe toward more stringent immigration intensifies the war for global talent. In the specific case of the United States (the country and its businesses), immigrants have been the foundation of the country’s economic, political, scientific, and cultural success. The risk of further restrictions on immigration and travels threatens the corporations’ ability to hire across borders and limits companies´ ability to navigate across different cultures. A fragmented world means fewer opportunities to share and transfer the best managerial.

More Complicated Corporate Finances and Regulatory Regimes

  • Finance: A more fragmented world also makes managing corporate finances globally more complicated and adds considerable costs to corporations because many global companies derive enormous benefits from a centralized finance function. Such firms raise capital relatively cheaply in financial hubs, such as New York or London, and distribute the proceeds as investment across their global operations. In most cases, this more centralized model means corporations can borrow at a lower cost than they would if their regional and national subsidiaries had to confine themselves to local currency markets, which tend to carry greater risk and volatility. A more siloed world means corporations will struggle to extract their investment capital and return profits to shareholders. [3]

Conclusion

Globalization is not dead, but it has morphed into a new phase, called Globalization 2.0. The new phase is more regional and more digital (COVID-19 is causing a reduction of physical globalization and an increase in virtual globalization). Moreover, the global value chains under Globalization 2.0 will be more regionalized and resilient [4], with more manufacturing activities taking place in the home country of the multinational countries. Trade war decreases imports, which can cause inflation, reduce consumer choice, and slow the pace of innovation. Blocking ideas reduces creativity and blocking people diminishes the entrepreneurship and diffusion of talent.

Many multinational companies are not structured to compete in the new world due to the impact of Globalization 2.0 on three key pillars of global corporations: technology, global recruiting, and the finance function. Globalization is not a problem for governments to solve; it is a reality that companies need to manage. To embrace wholesale deglobalization is to choose a false cure – and one much worse than the disease. More than ever, successful multinational companies will need to learn to unlearn and quickly adapt to a new world.

References

[1] https://ourworldindata.org/grapher/globalization-over-5-centuries?time=earliest..2016

[2] https://www.bloomberg.com/news/videos/2019-09-24/european-companies-in-china-urge-soe-reforms-amid-weaker-economy-video

[3] https://hbr.org/2019/12/are-businesses-ready-for-deglobalization

[4] https://evodiokaltenecker.com/how-should-companies-emerge-in-a-post-covid-world/

Photos

Small globe in a green field: Photo by Guillaume de Germain on Unsplash

Empty Airport: Photo by Dyana Wing So on Unsplash

Codes: Photo by Markus Spiske on Unsplash

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