Business, Marketing, Politics

Globalization: Interconnected Economies and Opportunities

Chris Morley / November 14, 2016

Introduction

VIZIO, founded in California by three people with $600,000 in 2002, is a manufacturer of affordable and high end TVs. The company announced in the last quarter of 2015 that it ranked number one in the United States by volume, according to a consensus of top US TV display analysts, while Samsung held on to the top overall flat-panel TV dollar volume.

The upstart American company entered into a crowded, established market with a disruptive business plan that undercut foreign companies on price, while introducing cutting-edge technology. Their recently announced P-series brings the latest panel technologies to market, and introduces a category-unique companion tablet dubbed the VIZIO Smartcast Tablet Remote with Google Cast built in. This is on top of their previously announced Reference series, a direct shot at the higher end offerings by respected players like Samsung and Sony. VIZIO’s disruptive business plan, bolstered by innovative products serving developed countries like the United States, has also put it on the map for increasing global market share. VIZIO is one of many examples of multinational enterprises that are leveraging globalization to its benefit as well as benefiting its home country. As far back as 2007 and 2008, it is estimated that this privately-held company (they have announced an IPO will happen in the near future)  more than doubled its revenue from $700 million to $2 billion dollars during that time period. They are providing hundreds of jobs to Americans and additional tax revenue to the federal government. While they source production of their TVs abroad, they are innovating and designing domestically. They are a good example of how domestic companies are adapting to foreign firms entering or entrenched in the market.

In discussing globalization, one should always remember the business component. That’s why it’s important to look at globalization as Global Business, an integrative term that looks at both domestic and foreign businesses and their activities from a global environment perspective.

Global Business is an integrative term that encompasses all aspects of globalization.

The Global Economy: By the numbers

Data extracted from (1) United Nations, 2011, World Investment Report 2011, New York and Geneva: UN; (2) World Bank, 2012, World Development Indicators database, Washington: World Bank. All data refers to 2011.

Here are a few numbers for points of reference: developed countries/economies (of which there are 33 according to the IMF) comprise of 20% of the world’s population, yet account for over 80% of the foreign direct investment outflows. And those developed countries contribute over 70% of global GDP pegged to nominal exchange rates, and about 55% when adjusted for purchasing power parity (think ‘adjusted for cost of living.’)

Adapted from (1) C. K. Prahalad & S. Hart, 2002, The fortune at the bottom of the pyramid, Strategy+Business, 26: 54–67; (2) S. Hart, 2005, Capitalism at the Crossroads (p. 111), Philadelphia: Wharton School Publishing.

In context of the global economic pyramid, the top of the pyramid, or “The Triad,” includes about one billion people whose per capita GDP/GNI is greater than $20K a year. By contrast, the base of the pyramid includes five billion people whose per capita GDP/GNI is less than $2K a year. Finally, the global economy at the beginning of the 21st century (global GDP calculated on nominal exchange rates) is estimated to be about $60 trillion dollars.

Those numbers just tell a small part of the story, yet form a basis for studying globalization and its effect on global business. Typically, discussions in the United States center around domestic multinational enterprises and their foreign direct investments – think Apple outsourcing manufacturing to Foxconn in Asia. But in context of global business, and not just globalization, there are domestic businesses in foreign markets, particularly developing economies, that engage in innovation that is adopted in their home country and then proliferated around the world. While most innovations are fostered in Triad-based developed countries, with the relatively richest of global customers in mind, their derivative products are typically simplified when entering foreign emerging or developing markets, which constitutes a top down innovation flow. (London, 2009, Making better investments at the base of the pyramid, Harvard Business Review)

Reverse Innovation: Emerging economies and what they can teach us

Reverse innovation, however, is a recent development, where emerging economies produce domestic products that better suit the needs and wants of their home country. (Govindarajan & Trimble, 2012, Reverse Innovation, Harvard Business Review) A good example would be Mahindra & Mahindra of India. Deere & Company, the iconic manufacturer of tractors and other farm equipment, based in the United States, was unsuccessful in producing a product for Indian farmers due to their price points. Mahindra & Mahindra developed their own, domestically designed and produced, affordable small-horsepower tractor that not only was a run-away hit in India, but became a global niche-success even in developed countries, including the United States. Today, Mahindra and Mahindra is the world’s largest tractor maker by units sold. In response, Deere abandoned its US tractor designs intended for export and instead “went native” in India, producing a very successful 35-horsepower tractor that was competitive both in India and the rest of the world. I would argue that reverse innovation can apply even to developed nations. What is US-based VIZIO doing other than taking a page out of the play book of Asian electronics companies that dominated American markets with low prices and other competitive advantages?

These examples of global business highlight one fundamental question: What is it that we do in global business and what determines the success and failure of firms around the globe?

Live or Die: Two Perspectives

There are two core perspectives in regards to a firm’s success: Institution and Resource-based. An institutional perspective would be global business constrained by “the rules of the game.” All countries have laws and values that formally and/or informally determine the behavior of a foreign firm entering the market. For instance, prior to 1991, India’s rules were tremendous hurdles for foreign firms. Deere & Company could not have even attempted its entrance into that market prior to 1991 with any hope of success. In fact, Coca-Cola pulled out of India in the 70’s due to the government demanding they hand over its formula for their secret syrup. That they were able to return in the 90’s speaks to how much the times have changed.

The second core perspective centers on resources. If we only looked at institutional factors as the sole determination for a firm’s success or failure in global business, we would be ignoring the internal resources and capabilities of a firm, which may find ways to adapt and succeed, even in an institutionally harsh environment. While the success of most firms is greatly influenced by institutional restraints, it would be naïve not to consider their resources and resourcefulness. (Cantwell, Dunning, & Lundan, 2010, An evolutionary approach to understanding international business, Journal of International Business Studies)

A good example of a market that has severe institutional constraints that have been overcome by the resources of foreign firms would be Brazil. For example, computers imported into the Brazilian market are subject to a 60% import tax. The majority of the components that make up the PC must be manufactured in Brazil. Given that PCs are a commodity product, this tax has historically prohibited foreign manufacturers like Dell or Asus from importing their products and has given way to leading domestic PC firms like Positivo and Megaware dominating the Brazilian market. In order to avoid this tax, foreign manufacturers have opened up their own SMT lines to locally produce motherboards, GPUs, etc, or partnered with domestic firms to manufacture their products under the foreign firm’s brand. This has led to Dell becoming the #1 manufacturer of PCs in Brazil in 2015.

Global Business is constrained by formal and informal institutional laws and values, as well as a company’s internal resources.

There is a lot of talk (bluster?) in the United States about globalization, and a lot of fear-mongering. While I don’t intend to write the definitive blog post that will settle the issue of whether or not globalization is bad, or even dive into the politics of globalization, I wanted to highlight that there are three views on globalization, and it all depends on your perspective.

The Controversy: Three Views on Globalization

If you just take a look at the surface, you might think that globalization is a recent phenomenon that is draining jobs and resources from the United States and other developing countries.

But there are two other views: one that says globalization is a long-running evolution of business since the dawn of recorded history, or that globalization is a pendulum, swinging from one extreme to the other. My personal view, based on some of the examples given in this post, is that globalization is indeed a pendulum, and it has been swinging for a long time.

Those who hold the view that globalization is a recent phenomenon typically think that it is a force that needs to be slowed down, if not downright stopped (BusinessWeek, 2006, Free trade can be too free, July 3.) With news dominated by sweat shops and Western technological innovations that are viewed by some to be exploiting and dominating the world via MNEs (multinational enterprises), opponents who hold onto this view focus on the environmental stress of globalization and social injustice, with few worked-out alternatives.

Alternatively, historians who believe that globalization dates back to the dawn of man are currently researching as far back as 8,000 years; the earliest traces of globalization have been discovered in Assyrian, Phoenician, and Roman times (Moore & Lewis, 2009, The Origins of Globalization.) To them, global business competition is not a new concept. The first known implementation of an import quota dates back to the first century CE; the Roman emperor Tiberius sought to stem the flow of low-cost Chinese silk imports. (Yergin & Stanislaw, 2002, The Commanding Heights) In fact, today’s MNEs don’t come even close to the global clout that the East India Company held during British colonial times.

For over 300 years, the East India Company, formed and supported by the British government and military, held a vice grip monopoly in international trade.

Lastly, globalization as a pendulum suggests that globalization is the “closer integration of the countries and peoples of the world which has been brought about by the enormous reduction of the costs of transportation and communication, and the breaking down of artificial barriers to the flows of goods, service, capital, knowledge, and (to a lesser extent) people across borders.” (Stiglitz, 2002 Globalization and Its Discontents)

Globalization’s Pendulum Swings

Globalization is neither recent nor one-directional. It’s a process, swinging back and forth like a pendulum.

The latter half of the 20th century shows that globalization, whatever your view on it, rapidly increased, especially with the participation of non-Communist developing countries like Brazil, India, and Mexico, as well as the “Four Tigers” (Hong Kong, South Korea, Singapore, and Taiwan – the only economies once recognized by the World Bank to be less developed, have since then transitioned into developed economies, and are now included in the list of 33 countries/economies referenced at the beginning of this post.) As a byproduct of this rapid expansion of globalization, pendulum swings became much more visible. Backlash in the 90’s and early 00’s to globalization in foreign nations led to local economic factions resisting change. As an American it’s easy to say we’re losing jobs abroad, but we often ignore our impact in foreign countries, and they’re not all happy with us, especially when we succeed. The protests in ’99 and the Twin Tower attacks notably affected globalization as international travel was curtailed, and investment flows and global trade slowed down. However, in the mid-00’s, worldwide GDP and cross-boarder trade soared to historically high levels.

But how could we forget the global recession of ‘08-‘09? It showed how interconnected the global economy truly is, and it affected even emerging economies. While recovery has been slow in more developed countries, some of the emerging economies that are bouncing back are bouncing back quickly. As we recover, we may see more protectionist measures, as government stimulus around the world focus on local job creation schemes and “buy national” programs. It is here that reverse innovation and the resource-based core perspective on globalization are important to understand and are used in evaluating the global market.

“Buy national” programs and initiatives have led multinational enterprises to rethink some of their global business strategies.

Another prime example of the pendulum swinging back would be foreign car manufacturers like Toyota and BMW opening up manufacturing facilities in the United States, providing thousands of domestic jobs. This offsets, to an extent, domestic firms outsourcing some or all manufacturing to countries like Mexico as we are adding manufacturing jobs even in a time where we may be losing them elsewhere.

While VIZIO may be a good example of how the pendulum may be swinging back towards equilibrium and beyond, there are other examples as well. My current employer, BOXX Technologies, a leading manufacturer of high performance workstations for the creative professional, resisted the manufacturing outsourcing prevalent during the turn of the century, which has paid off in superior product quality and agility in regards to responding to rapidly-changing market demands.

Semi-globalization or “Are we there yet?”

Total globalization may not be an inevitable state of global business; we may in fact see symbiotic and diverse approaches to global business for quite some time.

We have arguably not reached a state of total globalization. Think of the two extremes. Total isolation would mean coming up with 100 versions of a product for 100 different countries. Complete globalization would result in something like a “world car” or a “world phone.” Clearly, the latter examples are not yet possible. Even Apple was forced to create a cheaper version of its iPhone, the iPhone SE, for markets where it’s not competitive with its higher end devices engineered for developed countries with higher per capita GDP/GNI. Similarly, Samsung uses two different processors for nearly every revision of its Galaxy line of smart phones to align features with what local markets demand.

The Bottom Line

Engaging the phenomenon of globalization through the analytical lens of global business leads to an objective view of how the world’s economies are interconnected, dependent, and evolving.

The global economy is a complex beast, with wealth disparagement and per capita GDP/GNI gaps between emerging and developed countries driving a seemingly one-way flow of foreign direct investment. But the truth is that globalization is a pendulum, and history proves that. We can see that through two core perspectives, the success or failure of multinational enterprises is largely dependent on formal and informal institutional constraints, as well as internal resources and resourcefulness. As firms adapt to these changing environments and business models, we see fascinating examples of global business exchanges between developed and emerging economies.

As we go forward into the future, globalization should not be viewed as an enemy, nor should it be praised as the ultimate solution to world-wide problems. Instead, I believe, globalization is something that we should engage with vigorous academic study and objective reasoning, leaving our biases at the door.

What are your thoughts on globalization, global business, and how has your business been affected?

Additional references and graphs for this article were included from Western Governors University’s “Global Economics for Managers” by N. Gregory Mankiw, Harvard University Professor of Economics. 

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