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Strategic Truths for a Post-Truth World 

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playbook on trade and multilateral relations. 

Indeed, as Trump threatens to “build that wall” and pull out of international free trade agreements like NAFTA, some U.S. companies have announced they are scaling back their overseas operations and cancelling planned investments abroad in order to bring jobs back home. Is the global firm, “the biggest business idea of the past three decades,” in as “deep trouble” as The Economist has proclaimed? 

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STRATEGIC TRUTHS FOR A POST-TRUTH WORLD Globalization Fire: Leaders

How Respond? Should Under

Globalization That of multitrillion-dollar Larry was Fink, the is assessment CEO in retreat.” of the in- vestment firm BlackRock, earlier this year. In an open letter to fellow CEOs, he wrote that the “expectation for continued globalization (has) been upended,” citing everything from Brexit, to turmoil in the Middle East, to U.S. President Donald J. Trump’s tearing up of the For years, I have been arguing that much of the rhetoric around globalization – that the world was becoming “flat” – was hyperbolic, so the reactions we are now seeing need to be put into proper perspective.

EXECUTIVE SUMMARY

While anti-globalization anger has surged and opponents of globalization have won some major political victories, it is important for business leaders not to overreact. Before even thinking about reworking your company’s international When Britons find out that the proportion of immigrants in the U.K. is only 13 percent, their concern that there are too many of them drops by more than 40 percent. The total number of employees not just of the European Union but of all international organizations, including the United Nations and World Bank, adds up to less than 0.1 percent of the total number of people employed by governments around the world, even after excluding em- ployees of state-owned enterprises. Products made in China accounted for only 2.7 percent of U.S. personal consumption expenditures in 2010, and over half of that amount actually went to U.S. distributors and retailers. 

World, even after excluding em- ployees of state-owned enterprises. Products made in China accounted for only 2.7 percent of U.S. personal consumption expenditures in 2010, and over half of that amount actually went to U.S. distributors and retailers. 

When Britons find out that the proportion of immigrants in the U.K. is only 13 percent, their concern that there are too many of them drops by more than 40 percent. The total number of employees not just of the European Union but of all international organizations, including the United Nations and World Bank, adds up to less than 0.1 percent of the total number of people employed by governments around the world, even after excluding em- ployees of state-owned enterprises. Products made in China accounted for only 2.7 percent of U.S. personal consumption expenditures in 2010, and over half of that amount actually went to U.S. distributors and retailers. 

In survey after survey I have done over the years, executives consistently overestimate the true state of globalization. In my most recent (2017) survey of 1,000-plus manag- ers in six countries, they considered trade, 

In survey after survey I have done over the years, executives consistently overestimate the true state of globalization. In my most recent (2017) survey of 1,000-plus manag- ers in six countries, they considered trade, 

When Britons find out that the proportion of immigrants in the U.K. is only 13 percent, their concern that there are too many of them drops by more than 40 percent. The total number of employees not just of the European Union but of all international organizations, including the United Nations and World Bank, adds up to less than 0.1 percent of the total number of people employed by governments around the proper perspective. Before jumping on the bandwagon and pulling up the drawbridge, business leaders should make sure they have an accurate picture of what’s actually happening in the world today. 

This article provides a more levelheaded look at globalization – one that acknowledges the climate of anger that is out there, but that doesn’t overreact. It begins by debunking dangerous myths about globalization. Then, it turns to strategy, articulating a set of rec- ommendations grounded in two laws of glo- balization. Next, it covers nonmarket strategy considerations related to firms’ broader soci- etal engagement. Finally, it argues that firms should become more cosmopolitan and dis- cusses how to foster this kind of change. 

campaign famously summed up the zeitgeist when he said that people “have had enough of experts.” Over the past year, Trump and his surrogates have dubbed anything that doesn’t fit their worldview as “fake news” and prof- fered “alternative facts” instead. With trust in government and big business hitting all-time lows, objective reality is taking a back seat to personal feelings and perceptions. This is what is known as “post-truth,” which was Ox- ford Dictionaries’ word of the year for 2016. 

In many ways, the current backlash against globalization is symptomatic of “post-truth” thinking. For example, in three separate sur- veys, Britons estimated that first-generation immigrants comprised 24-31 percent of the U.K. population, and in the run-up to Brexit, leave campaigners constantly invoked the fear of the world being taken over by “un- elected bureaucrats.” Americans, meanwhile, are convinced that everything is now made in China, so they need to fight back and protect their businesses. A check of the data, however, shows that none of these convictions is true.

GLOBALIZATION HOW GROUNDED BACKLASH: TO STAY

Before even thinking about reworking your company’s multinational strategy, you first have to correct your own intuitions about globalization. If not, your strategies will be predicated on erroneous

perceptions. 

capital, information and people flows to be about globalization. If not, your international five times as internationalized as they actu- business strategies and policies will be predi- ally were. They believed that globalization cated on erroneous perceptions. Consequent- had increased steadily in recent years – when ly, you might end up ignoring the importance it had not. of local differences when operating abroad, Executives are off, not just on specific or play up the gains while downplaying the metrics, but on broad characterizations of difficulties, as my surveys reveal managers globalization and its enablers. A majority still frequently do. think “the world is flat” – what Thomas Fried- Don’t let the debate about globalization man described in his book of that title as “a turn into guesswork. Study the data. A good global, Web-enabled playing field that allows place to see how globalization is actually for collaboration on research and work in evolving is in the biennial DHL Global Con- real time, without regard to geography, dis- nectedness Index that Steven Altman and I tance or, in the near future, even language.” compile (see below). It tracks cross-border My research shows that geography, distance flows of trade, capital, information and peo- and language are precisely the kinds of factors  ple worldwide and profiles the international that constrain international activity and chal-  activity of 140 countries. What we find is that lenge multinational firms.  the sentiments have moved around more than Before even thinking about reworking  the actual numbers have. For business, con- your company’s multinational strategy, soci-  ditions aren’t as gloomy as the current public etal engagement or organizational leadership,  mood, political discourse or tone of media you first have to correct your own intuitions  coverage would lead us to believe. 
Study the Data 
There’s more to the story than people think.

According Global Connectedness to our latest DHL 
Index 2015 were inflated by a wave of overseas corporate inversions by 
GDP ratio six times that of the U.S., yet the Dutch still manage (www.dhl.com/gci), globalization U.S. companies, FDI flow depth in to preserve a more reasonable slowed in 2015 but did not go into 2016 unwound only a fraction of income distribution. reverse. And preliminary data for its prior year increase. What’s going on? I’d say that 2016 and part of 2017 indicate After looking at the data, it also domestic policy is the primary that globalization has still not seems odd to blame globalization driver of distributional outcomes suffered a reversal. for the high levels of inequality within countries. And even if Trade depth (intensity)  in the U.S. economy. Compare  globalization were to blame, it declined less in 2016 than in 2015  the U.S. with the Netherlands,  doesn’t follow that protectionism and the available data suggest it  the most globally connected  would be a better or less grew over the first half of 2017. 

Could boosting the U.K.’s trade diminished with the 52 access countries to the of the EU Common- be offset by wealth?

First, consider that the rest of the Commonwealth’s GDP (excluding the U.K.) is only 55 percent of the rest of the EU’s. When adjusted for distance effects, the U.K.’s market poten- tial in the Commonwealth relative to the EU is reduced to as little as 2 percent. (The light-colored inner circle represents a generous estimate while the dashed circle represents a conservative one.) The picture changes again when cultural and administrative factors are added to the mix: the U.K. shares English as well as colony-colonizer links with over 90 percent of the Com- monwealth, which boosts its potential as a market for the U.K., even by conservative estimates, but still does not bring it close to the EU’s. To identify which industries will be affected most by Brexit, look for markers of administrative sensitivity: how much regula- tion industries are subject to; whether they produce staples or entitlement goods or services; whether they are national champions or vital to national security; and whether they have large, irreversible, geographically specific investments. 

At the company level, firms that use London as their global or regional headquarters may need to move some functions else- where, especially if most of their business is outside the U.K. Meanwhile, some local companies may benefit from staving off regional competition, especially if the U.K. market is their exclusive focus. 

SOURCE: Ghemawat, P. “Figuring Out Which Companies and Industries Will Be Most Damaged by Brexit.” Harvard Business Review, March 29, 2017. 

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Globalization Under Fire: How Should Leaders Respond? 

Ground Strategies in the Laws of Globalization In a turbulent environment, smart strategists look for stable patterns upon which they can build enduring value. As Amazon CEO Jeff Bezos once put it: “It helps to base your strate- gy on things that won’t change. When I’m talk- ing with people outside the company, there’s a question that comes up very commonly: ‘What’s going to change in the next five to ten years?’ But I very rarely get asked ‘What’s not going to change in the next five to ten years?’ At Amazon we’re always trying to figure that out, because you can really spin up flywheels around those things.” 

In 2016, I published a book titled The Laws of Globalization and Business Applications, in which I argued that globalization is subject to two laws that will continue to apply well into the future. First, international interactions, while not negligible, are significantly less in- tense than domestic interactions (the law of semiglobalization). Second, international in- teractions are dampened by distance along cultural, administrative and geographic di- mensions and are often affected by economic distance as well (the law of distance). 

The laws of globalization can help busi- ness leaders think through the implications of shocks such as Brexit and potential changes to U.S. trade policy under Trump. The law of semiglobalization implies that even in the case of a hard Brexit or a failure in talks on rene- gotiating NAFTA, U.K. and U.S. international flows would still be large enough to require consideration in most firms’ strategies. And the law of distance helps clarify each coun- try’s natural markets. The EU will continue to be Britain’s most important market (see Exhibit 1). And even if NAFTA does experi- ence a disruption, Mexico’s top export desti- nation will almost definitely still be the U.S. (see Exhibit 2). As much as 65-75 percent of Mexican exports have gone north ever since Porfirio Díaz built the railroads. 

In a world where the laws of globaliza- tion continue to hold, firms can create value across borders and distance via three time- tested strategies: adaptation, aggregation and arbitrage. Companies can boost revenues and market share by adapting their products and services to local tastes and needs. They can achieve economies of scale and scope by 

GLOBALIZATION HOW GROUNDED BACKLASH: TO STAY 

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SOURCE: https://ghemawat.com/data-viz/area-map Globalization Under Fire: How Should Leaders Respond? 

Once production is moved abroad, it usually takes more than a restoration of the policy status quo ante to bring it back. Think about electronics manufacturing. A lot of this is not coming back to the U.S. 

Aggregating operations across regional or glob- al markets. And they can arbitrage differences between national and regional markets, lever- aging lower labor costs or better tax incentives in one country versus another. How compa- nies employ these three strategies may change somewhat, but not as much as you might think. For its part, BlackRock has opted to strengthen the adaptation component of its global strategy. As CEO Larry Fink explained in a memo to employees: “I have frequently talked about the need to be local in every market where we operate. The current envi- ronment makes that more urgent than ever. While we need to operate as One BlackRock across the globe, we also need to be German in Germany, Japanese in Japan and Mexican in Mexico. Even as we leverage the benefits of our global scale, we need to work to be more relevant to our clients in each market than any local player. The needs of investors in São Paulo differ from those in London, as those 

Map of Mexico’s Export Destinations in 2015 MORE THAN 80 PERCENT OF MEXICO’S EXPORTS GO TO THE UNITED STATES, SHOWING HOW MARKET SIZE AND PROXIMITY BOTH MATTER. 

EXHIBIT 2 

in Abu Dhabi differ from those in Hong Kong. The market dynamics are different. The cul- tures are different. The ways people save and invest are different. We need to understand those differences and deliver advice and solu- tions that meet the unique needs of clients in each market.” 

Pushing adaptation to the maximum, how- ever, is seldom the right strategy because sim- ply copying the locals wherever a company operates leaves no room for advantages over them. Firms still need to create distinctive value across countries through aggregation and/or arbitrage. 

If you need to sustain an aggregation ad- vantage while strengthening adaptation, it can help to adopt an organizational structure that manages the inherent tensions between these strategies. Some firms benefit from re- gion-based structures that take advantage of similarities between neighboring countries. Another option is to localize at the front end (close to the customer) while employing a centralized back end to support integration in R&D, production and support functions. 

If your globalization strategy has been based on arbitrage for lower costs, how should you react? What I tell U.S. clients who have a Mexican supply chain is if you’ve already made huge commitments in Mexico, now is not the time to start uprooting them. But I’d make sure I had my entire supply chain mapped – not just my immediate suppliers but my suppliers’ suppliers – so if things got disrupted, I’d know how I was going to make up the shortfall. 

On the other hand, for a U.S. company thinking of making a major commitment in Mexico right now, I’d suggest holding off until things become a bit clearer. You have to remember that once production is moved abroad, it usually takes more than a restora- tion of the policy status quo ante to bring it back. Think, for example, about electronics manufacturing. A lot of this is not coming 19 ISSUE 35 FOURTH QUARTER 2017. 

In all this talk about globalization strategies, it’s worth remembering that the debate over whether to come back home or go forth and globalize only applies to a very small minority of firms.

Back to the U.S. You would need to replant the whole ecology, and it is not in the interests of any one private-sector actor to try to set up the whole manufacturing commons for electron- ics in the U.S. again. And even for manufactur- ing that is being reshored, there is very heavy reliance on automation. Many of the jobs that will come back to the U.S. will be done by ro- bots. The per-hour cost of a robot, even allow- ing for maintenance, is now basically the same as the typical manufacturing hourly wage in China. 

In all this talk about globalization strate- gies, it’s worth remembering that the debate over whether to come back home or go forth and globalize only applies to a very small mi- nority of firms. To export and engage in hori- zontal foreign direct investment, you have to have above-average productivity. So, only about 1 percent of U.S. firms export and .01 percent engage in foreign direct investment. As such, focusing on the home market is still a valid strategy option for most firms. And it can be an especially attractive option for compa- nies in emerging economies, where they enjoy home court advantage and rapid growth. 

Whether or not to globalize is still a choice – not an imperative. And for firms that do de- cide to go abroad, the right strategy is often a mix of adaptation, aggregation and arbitrage. 

Pankaj Ghemawat is the Anselmo Rubiralta Professor of Global Strategy at IESE as well as Global Professor of Management and Strategy and Director of the Center for the Globalization of Education and Management at New York University’s Stern School of Business. 

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These kinds of decisions should reflect care- ful deliberation, taking into account a firm’s industry conditions, its competitive position and its capabilities for managing international operations. 

Pay Attention to Nonmarket Strategies So far, we’ve focused on what business lead- ers can do to adjust their market strategies in anticipation of a more protectionist environ- ment. But business leaders also have to engage with what is called the nonmarket environ- ment, involving governments, interest groups, the media and the general public. Historically, interactions with these actors have been an af- terthought in strategy setting. Now, they are essential, with NGOs and social media ampli- fying every move. 

For example, in the current sociopolitical climate, any attempt by a U.S. multinational to move production overseas has the potential to blow up into a crisis. Just ask Ford, which was planning to invest $1.6 billion in a new fac- tory in Mexico to shift some U.S. car produc- tion there. After getting lambasted by Trump, then-CEO Mark Fields canceled the deal, but not before Ford’s stock price fell and the board lost confidence in him. Fields was replaced by James Hackett in May. 

When you have a situation where a tweet can wipe billions off your market value and ABOUT THE AUTHOR 

get you fired, you have to ask yourself: why go picking fights? But this is not to say that you should fall in line with whatever the govern- ment wants, wherever a company operates. Multinational companies need to craft gov- ernmental and societal agendas that are both localized and linked across countries. Anti- globalization pressures require that multi- nationals deliver more local benefits – and communicate about them – in the countries where they operate. Such efforts must go well beyond compliance to include contributions 

20 FOURTH QUARTER 2017 ISSUE 35 

He is the author of numerous books, including World 3.0: Global Prosperity and How to Achieve It (2011), The Laws of Globalization and Business Applications (2016) and the forthcoming The New Global Road Map: Enduring Strategies for Turbulent Times (2018). 

Income inequality is real but closing borders does nothing to prepare a country to deal with automation and technological progress, which are the bigger threats to jobs than globalization. In such polarized times, where polariza- Business leaders also need to address the tion is being imported into companies, re- sometimes-legitimate anger that’s feeding fraining from internal discussion doesn’t anti-globalization sentiment. Rising income strike me as the best strategy. Most compa- inequality is real, and a large swath of the pop- nies and CEOs are still scratching their heads ulation in advanced economies fears getting about what to do about this stuff, and it’s not left behind. At the same time, corporate prof- going to go away anytime soon. Neither “lying its are running at historic highs. Clearly there low” nor simply “doing what the government are some distributional issues that need to be wants you to do” can suffice as the all-purpose fixed. This requires policy changes related to strategy in these trying times. government safety nets, the minimum wage, taxation and job retraining programs. Clos- Cultivate Corporate ing borders does nothing toprepare a country Cosmopolitanism to deal with automation and technological In today’s environment of rising nationalist progress, which are the bigger threats to jobs sentiment, companies should also strive to than globalization. My research suggests that make themselves more cosmopolitan. An inter- more international openness, connectedness national, cosmopolitan management team can and integration, coupled with domestic poli- help a firm bridge distances more effectively, cies that remedy the side effects, would lead to boost creativity, signal commitment, and at- more prosperity and well-being overall. tract and retain top talent in foreign markets. Today business leaders must learn to walk My research, however, reveals that very few a fine line. I know of one company in which multinational corporations are run by leader- there was a huge amount of internal dissent ship teams that are representative of the mar- when the chairman agreed to sit on one of kets in which they aim to compete. Among the Trump’s business advisory councils. From the 2013 Fortune Global 500, only 13 percent of perspective of the people at the top, the firm firms were run by a CEO who wasn’t from the had always had a policy of engaging with who- country where the firm was headquartered. ever was in power, irrespective of politics, and And just 15 percent of top management team trying to offer advice. However, a significant members (direct reports to CEOs) came from portion of this firm’s worker base didn’t see it abroad. By contrast, these companies earned that way. 46 percent of their revenue in international We’ve all heard the argument: “CEOs markets and most of them aimed to grow fast- should just stick to business and not wade into er abroad than at home. politics.” We heard it again this summer when The dearth of non-natives in senior roles is members of Trump’s business advisory coun- especially severe among multinationals based in cil began criticizing his response to the Char- emerging economies – only 2 percent were run lottesville attack. The problem with “busi- by non-native CEOs. The Chinese tech com- ness is business, so you should just keep your pany Lenovo is an exception: Lenovo has seven mouth shut, even if you feel strongly about nationalities represented among its top 12 exec- it, for the sake of your shareholders” is that utives. And it has undertaken systematic efforts, there are other parties that care, like employ- such as instituting a Chief Diversity Officer role, ees. Sometimes lying low is no longer a viable to help ensure that distinct voices are heard and option, given pressure on you from your own to move beyond the kinds of cross-cultural mis- customers or employees. understandings that tend to crop up. 

As people learn to appreciate the diversity that persists across countries, they can become less fearful about globalization and better positioned to realize its benefits for their companies and their countries.

Along with efforts to boost national di- versity at the top, firms should also strive to cultivate a cosmopolitan corporate culture that can serve as connective tissue across a far-flung corporation. Partly it’s about formal culture-building activities, but it’s also about how you recruit, assemble teams, manage di- versity internally, support specific initiatives and side projects, and encourage mobility (not just in terms of jobs, but traveling, living and working abroad). 

Finally, education is a lever for boost- ing cosmopolitanism both at the corporate and the societal levels. Multiple studies have shown that levels of nationalism and suspicion of outsiders are higher the lower the levels of education in a country. Given this, it makes sense to delve into educational content that can support a more cosmopolitan outlook. Dispelling the sort of globaloney covered in the first section is a good starting point. Then, as people learn to appreciate the diversity that 

? Ghemawat, P. The New Global persists across countries, and how interac- 

Road Map: Enduring Strategies tions are shaped by cultural, administrative/ 

for Turbulent Times. Harvard political, geographic and economic distances, 

Business Review Press, 2018. they can become less fearful about globaliza- tion and better positioned to realize its ben- efits for their companies and their countries. 

Don’t Panic but Don’t Be Complacent, Either For those tasked with leading multinational companies, I leave you with some good news. The last time a major trade war broke out, in the 1930s, the laws of globalization – pertaining to its depth and to the effects of multiple types of dis- tance – still held amid the turmoil. Trade flows collapsed but they did not dry up entirely, and the trading partners with which countries (or groups of countries) did most of their business before the crash remained largely unchanged af- terward. If global trade didn’t screech to a halt or get fundamentally redirected then, it’s reason- ably safe to say that it won’t now, either. 

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Globalization Under Fire: How Should Leaders Respond? 

That said, there’s no room for complacen- cy. It’s vital that business leaders make contin- gency plans about what they will do if we get a hard Brexit, or if the NAFTA renegotiations lead to a significant raising of barriers. No matter what happens, it would be silly to plan for a world of either total free trade or a totally trade-free world. Globalization, to a greater or lesser extent, is here to stay. 

 

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