Most of modern global strategy focuses on minimizing differences between countries. Most multinationals see globalization as a matter of replication—spreading a single business model as widely as possible to maximize economies of scale. From this perspective, the key strategic challenge is choosing how much of the model to keep standard and how much to grudgingly adapt to local tastes. But focusing exclusively on that choice is a mistake, for it blinds companies to the very real opportunities they can still gain from arbitrage—from exploiting differences as opposed to similarities.
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Globalization is a catchall term used to explain much of contemporary economic and social developments, from the prevalence of outsourcing to the popularity of fusion cuisine.
But economist and professor Pankaj Ghemawat argues that a dive into different data reveals that much of the world is not as connected as it is portrayed to be. He makes that argument in his book, World 3. The percentages, he pointed out, usually turn out to be lower than what people expect. Prior to that, he was a professor at Harvard Business School for 25 years, having become the youngest person to become a full professor at Harvard.
The Arabic edition of his previous book Redefining Global Strategy has been released. Arabic Knowledge Wharton: One of the main points you make in World 3. Can you explain? Pankaj Ghemawat: We are far short of full integration. There are interesting things happening across borders. But the point is people have been talking about the world becoming one since Karl Marx and the Communist Manifesto.
Even if Americans formed their friendships on Facebook randomly, given the U. An iPod component shipped from Japan to China and then shipped to the U. So nobody really knows how bad the problem is. If you look at people flows, they tend to be very localized as well. One of the things we talk about a lot in business school is the globalization of students. Those are the kind of data I tend to rely on to make the point that world is more semi-globalized. That would be my presumption absent any information about how globalized things are.
When students from business school graduate, what worldview do they leave Harvard or Wharton? Both from the business and social perspective, this seems really counterproductive. Arabic Knowledge Wharton: You talk about some of the advantages of making the world more globalized in World 3. Can you tell us about those? Ghemawat: [The Qatari capital of] Doha would add 0. It would just be simpler to decouple and go our separate ways. One notion is the idea not to have complete liberalization.
If we had complete liberalization of merchandized trade, the models that get churned out are around 0. If you look at the basic structure of most of the academic papers in that vein, trade economists were stuck where business strategists were back in the s and s, focused on volume. I have a much more expanded conception of sources regarding value creation. I focus on value and I think about value a little more broadly than what these models implicitly tend to do, which is a fixed amount of resources and production and reshuffle it across countries to minimize costs.
That picks up on some of the potential volume gains in globalization. It picks up on the notion of absolute cost differences.
Economies of scale are almost entirely absent from these models. That is one source of value creation that tends to get overlooked in those models.
The notion that globalization can Improve industry structure. At a WTO conference, I remember a Mexican competition commissioner coming up to me and saying for a country like Mexico with their domestic monopolies and oligopolies, the biggest benefit of globalization is to reduce the likes of [billionaire investor] Carlos Slim.
Similarly, an economist model might miss out on risk reduction. They miss out on knowledge creation. Fortunately, we have a whole set of studies that look at this piecemeal. We have one study that looks at economy of scale, and another one that looks at industry structure.
So what I do in this particular chapter in World 3. Then there are flows other than products and services. There are flows of capital, flows of people, flows of information.
People flows are really the big numbers. Of course, that seems a bit optimistic given where we are. Around immigration, the gains are just huge as all the studies suggest.
Then there are the non-economic estimates. Not like two waves colliding when one wave takes over another. And at the margins, you get some interesting new phenomenon happening. There are complementarities. You can imagine most of the linkages across these different categories are positive. Policy makers are desperately scrabbling around for growth.
And that is ignoring the fact that some people think this is controversial. Plug that into the model and the thing just blows up. We really need to do it right away. Arabic Knowledge Wharton: In World 3. Why is it so hard for countries or corporations to grasp the idea of stylizing an approach specifically to a country? Ghemawat: Some of it is just intellectual laziness.
Some of it is the belief in the hype of the exaggerated levels of integration. In effect, a completely integrated market means you believe things are the same everywhere. So there are two reasons to combat what I describe as "globaloney. The other reason to avoid globaloney is that at the business level, it does tend to push you to the "one size fits all" strategy. And then you can see natural managerial biases. Companies usually go overseas when they run out of room to grow in their own market.
This is the oldest mistake highlighted by international businessmen. With all the hype around the "flat world," it seems that people need periodic reminding that you need to think hard about what the differences are. Right now, I get lots of companies coming to talk to me about strategy for emerging markets, especially but not just India. You really have to think about what differences matter the most in my sector.
The framework I have in my book is called the CAGE model, which is widely used in most business schools in some fashion in their globalization courses. It is just a way to give students who are naturally inclined to focus on the economic and maybe the geographical differences between countries. China is a low-level labor cost country. CAGE is a little way to give people a broader sense of what the differences are.
The scholars of cross-cultural management only believe that culture matters. The institutionalists only believe that only institutions or administrative factors matter. The geographers believe only geography matters. CAGE is a way to think of a laundry list, to think of what differences matter in your business, and to think of strategies for dealing with that.
In addition to consciousness-raising function, for trade, we have some estimates down at the industry level; which industries are particularly prone to which kind of differences and to what extent. Phone calls are ten times more intense between countries that share a common language.
Has Wal-Mart learned its lesson on how to achieve semi-globalization by partnering or purchasing with a similar corporation in a local economy?
The deal was very, very contentious. It nearly got blocked. They did manage to revive it. That company is still flailing around looking for the next big growth vehicle. So they do have an interest in emerging markets. Personally I think if they can find some way to get around the regulatory barriers, [they can accomplish a] longstanding desire to extend into domestic financial services, which might be a bigger deal than international stores.
If you think of the typical Wal-Mart market base, lower income and lots of immigrants from Mexico who will send money back. Western Union grossly overprices their stuff. Arabic Knowledge Wharton: With the recent unrest in Arab countries, many citizens protested about the lack of economic opportunities and the frustration while their government leaders enjoyed immense wealth. What are some of the recommendations you have for new governments forming in Tunisia?
Ghemawat: This is both a historic opportunity and a huge challenge. If you look at demographics in that part of the world, there is an enormous youthful population looking for jobs. Otherwise the demographic dividend turns into a disaster.
I think the policy changes are required. There is an obvious explanation for this because this is the region that it has a significant number of oil producers and the oil gets shipped overseas. It does raise some broader questions about what the future regional integration is going to be.
If most people think the model is to simply ship commodities to Western markets or Eastern markets, at this point like China, the basic point is the developed parts of the world typically tend to have more intercontinental or interregional connectedness than the Middle East does.
If one was serious about building up different levels of integration, then this will have implications for what kind of trade flows might occur within the Middle East and North Africa. This is a point at about high regionalization. Ghemawat: They seem unable to get growth and productivity. They focus on growth.
Not That Flat: Pankaj Ghemawat Challenges Globalization’s Adherents
Globalization is a catchall term used to explain much of contemporary economic and social developments, from the prevalence of outsourcing to the popularity of fusion cuisine. But economist and professor Pankaj Ghemawat argues that a dive into different data reveals that much of the world is not as connected as it is portrayed to be. He makes that argument in his book, World 3. The percentages, he pointed out, usually turn out to be lower than what people expect.
CAGE Distance Framework
The CAGE Distance Framework identifies Cultural, Administrative, Geographic and Economic differences or distances between countries that companies should address when crafting international strategies. The impacts of CAGE distances and differences have been demonstrated quantitatively via gravity models. Such models "resemble Newton's law of gravitation in linking interactions between countries to the product of their sizes usually their gross domestic products divided by some composite measure of distance. The table   shown below provides more detail on each of the CAGE categories, and how they can manifest themselves depending on whether one is comparing a pair of countries or looking at one in isolation. One of the distinctions between the CAGE Framework and other country analysis frameworks is its inclusion of bilateral as well as unilateral factors. Ghemawat offers some advice on how the CAGE Framework can help managers considering international strategies:.
The Forgotten Strategy