The End of Globalization? Part 2

How executives should respond

Published: Monday, December 19, 2016 - 14:14

Editor’s note: This is part two of a two-part series. Read part one here.

While globalization has benefited humanity in many ways, its continued progress is in serious doubt. As I wrote previously, the two leading political science theories, liberalism and realism, both predict that globalization as we have known it over the past two decades may well recede or disappear.

What does this mean for your business? First, to the extent liberalism as a theory is correct and globalization is under threat because of its adverse impact on parts of the population, re-embedding economic freedom would be a wise choice if globalization were seen as worth preserving. As mentioned in my previous piece, this may require giving up some extent of economic freedom to reduce its adverse impact so that at least the bulk of that freedom can be preserved. Part of this work has actually been done: International financial flows have never recovered from the 2008 financial crisis. This is at least partially the result of restrictions put in place to stabilize Western banking systems, but it has also had the helpful effect of reducing the flow of “hot” (short-term) investments, whose sudden withdrawal may cause financial crises.

Further restrictions and supporting programs may be necessary and desirable. Offshoring of production, and with it jobs, may need to be limited, or at least be done in ways that do not lead workers into permanent redundancies. Social security programs need to be beefed up to buffer workers against the economic consequences of job losses and to help retrain workers. Firms should consider supporting these efforts.

Similarly, firms and senior executives need to be seen to be contributing their fair financial share. For instance, while it is understood that executives have a fiduciary duty to explore legal possibilities of limiting corporate tax payments, doing so is politically unwise. Among others, it undermines the positive case for globalization by creating a perception that firms skirt their responsibilities to local stakeholders. Firms should consider supporting efforts that prevent them from shifting taxes between different jurisdictions. This may hurt in the short term, but in the longer term, it will help maintain global strategies.

Economic blocks

But what if realism, which posits that waves of globalization mirror the rise and fall of global hegemons, is correct and the world splits into two economic blocks? The measures listed above are unlikely to prevent this, but they can help preserve economic openness within blocks. So these efforts are not wasted.

At the same time, international business in the realist prediction will become a good deal more complex. Firms will still need a global strategy, but they will probably not be able to have a single, unified strategy across the globe. Processes that currently are globalized may need restructuring. For instance, integration of Asian countries into Western international value chains may become much harder if these countries become part of a Chinese block. Manufacturing activity may accordingly relocate from Asia to South America or parts of Africa—not impossible feats, but probably harder to pull off operationally than what we presently see in Asia. In the end, some firms will no doubt conclude that operating in two different economic blocks with two sets of rules is too much hassle and retrench their operations to their home region. 

It may well be premature to make these and other adjustments immediately. But longer-term investment plans should probably involve scenario planning that examines the viability of specific projects and, more generally, the firm’s global strategy in case two regions with fundamentally different rules emerge.

This article is republished courtesy of INSEAD. © INSEAD 2016

About The Author

Michael A. Witt

Michael A. Witt, Ph.D., teaches and researches international business at INSEAD, one of the world’s largest graduate business schools. Witt also directs the senior executive program on doing business successfully in Asia. Witt’s research explores how business and management vary by society and how firms handle these differences. Accordingly, this teaching focuses on how companies can go international successfully. A published author of four books and research papers, Witt serves as general editor of the academic journal, Asian Business & Management, and as senior editor of the Management and Organization Review.