Adjust your global compass

By Kenneth Mikkelsen, journalist
6 January 2012

Many of our assumptions of globalisation are formed by personal bias and public opinions that are expressed without substantiated data. As a result, executives lean towards dangerously flawed decision-making too often and pursue global one-size-fits-all strategies. In an interview with Pankaj Ghemawat, one of the world’s most accomplished business professors and global strategists, journalist Kenneth Mikkelsen investigates the current state of globalisation and the implications for executives who have to navigate through the heavy fog of misinformation.

One early morning in 1971, John Lennon sat down at his Steinway piano in the bedroom at Tittenhurst Park, his estate in Ascot, England. Many people would later characterise the outcome of his work that morning as his greatest musical gift to the world. From later interviews it is clear that Lennon already knew that he was writing something special, as the lyrics found their way onto a piece of paper:

“You may say I’m a dreamer but I’m not the only one. I hope someday you’ll join us and the world will be as one”

The song Lennon composed was off course “Imagine” – an ode to a united world without countries or religions. Looking at the predominant debate that has taken place over the past ten years, one might actually think that we are close to fulfilling Lennon’s vision of an inter-connected world. Globalisation is no longer a hot trend but rather a fact of life that is happening at a fast pace. At least that is the central premise of Thomas Friedman’s 2006 book The World is Flat – a bestseller that became a reference point for several prominent leaders, from Colin Powell to Tony Blair, during the first decade of the twenty-first century.

The overall message is that the earth is flat and that companies and countries have been closely linked through the Internet and technological advances. It is a comprehensible take on the ways of the world – a convenient simplification of a complex matter.

However, nothing could be farther from the truth, if you ask Pankaj Ghemawat.

The reality of globalisation

Indian-born Pankaj Ghemawat is a professor of global strategy at the Anselmo Rubiralta Center for Globalization and Strategy at IESE Business School in Barcelona, Spain. He belongs to a new generation of management gurus in the business world. In 2011 he published his latest book World 3.0: Global Prosperity and How to Achieve It, which was recently awarded the Thinkers50 Award as the best management book of 2011.

Just like the child in The Emperor’s New Clothes, Pankaj Ghemawat raises a concerned voice and points out that the debate about globalisation is somewhat “naked” and that economic data simply don’t support the view that we live in a flat, connected world, even if we are technologically connected with everyone, everywhere, all the time. We live, he says, in a semi-globalised world at best. To prove his point, Ghemawat headlines several data-based indicators in his book:

DATA-BASED INDICATORS FROM PANKAJ GHEMAWAT

Only 2% of all telephone calling minutes are international

Only 2% of students attend universities outside their home countries

Only 3% of people live outside their country of birth

Only 7% of the world’s production of rice is traded across borders

Between 2006 and 2008, only an estimated 17-18% of all Internet traffic transcended national borders

Only 7% of directors of S&P 500 companies are foreigners

The percentage of the world’s population that is composed of immigrants is the same as it was in 1910

Less than 1% of all American companies have foreign operations

Numbers suggest that global export accounts for only 20% of the total value produced in the world (GDP)

Foreign direct investment has averaged about 10% over the last few years – suggesting that 90% of all fixed investments in the world is still domestic

People get 95% of their news from domestic sources, and those sources focus most of their coverage on domestic news. 21% of U.S. news coverage is international, and of that, half deals with U.S. foreign affairs. In European countries about 38% of news is international, but almost half relates to stories involving other countries in Europe

This is the reality of what Ghemawat calls “World 3.0”. It is a rejection of two existing paradigms: that the world is neither a set of distinct and isolated nation-states (World 1.0), nor the stateless ideal (World 2.0) where markets are fully integrated, which seems implicit in the strategies of so many companies.

Get your calibration right

The last couple of years Ghemawat has encountered several incidents where his data-driven advocacy of globalisation has clashed with the widespread Friedmanology. One of the incidents relates to an article in the prestigious magazine Foreign Policy back in 2007 when Ghemawat talks about why we tend to exaggerate the impact and the extent of globalisation.

“When I wrote an article about the topic in Foreign Policy, one of the people who contacted me in very irate words was Thomas Friedman and his point was that my data was narrow. This prompted me to go back and look through The World is Flat page-by-page, and I realised that this was a 450-page book without a single table, figure, reference, chart or footnote. So, if that is where people are getting their intuition about globalisation from, then I think it is not too much of an exaggeration to say that the debate is largely data-free and far from reality. My point is that you might not like my data, but go and look at any data before you form your views.

“You might not like my data, but go and look at any data before you form your views”

 

Secondly, a large proportion of the people that are engaged in the debate live more globalised lives than people in general. When I ask my students what percentage of cross-border phone calls are international, I get very high responses. But since 80% of the students at IESE Business School are non-Spanish nationals, their personal phone bills are more internationalised than the intuition they express about the world in general. My point is that we should be cautious not to make the mistake of thinking that the rest of the world is like us; otherwise we are going to be very surprised along multiple dimensions.

A third reason is that we tend to believe whatever we most desire or fear, as the French writer of fables, Jean de la Fontaine, observed. It is a psychological element or predisposition. For businesspeople, there is the big draw of unbounded profits in a borderless world. And for many others, there are deep-seated fears that globalisation might be exploitative, harmful to our cherished cultures and dangerous for the natural environment.

Fourthly, there is a social pressure that we need to be global to be on the beat. It is fashionable to say that the world is flat, borders don’t matter, countries are irrelevant or distance is dead. It is almost like a badge of maternity. And if you don’t believe it, you are treated as a dinosaur that has no idea about what has been happening over the last few decades. But perhaps the most powerful reason why most people buy into apocalyptic notions of globalisation has to do with our almost religious worship of technology. I like to call this techotrance and it has to do with an exaggerated faith in technology as a means of obliterating cultural differences,” says Ghemawat.

Why is it important not to get carried away with the perception of a fully globalised world?
“I think there are two broad reasons. If we believe that the world is close to being fully integrated, we inevitably miss out on the large potential gains from additional integration because we assume that we are already there. Secondly, if we assume a 100% integration, this ends up stoking people’s fears of globalisation as a destructive force that takes over their lives, leaves them with no independence and obliterates cultures. In reality, both of these perspectives are misguided. Increasing cross-border integration offers the potential for huge economic and other gains, but not through the development of stateless corporations that sell the same things to everyone, everywhere. And most of the prevalent fears about globalisation are also overblown, or otherwise amenable to mitigation. That is why it is important to get people’s calibration right,” he emphasises.

Take distance into consideration

In most countries in the world today, only 10-15% of economic activity crosses borders. The Netherlands are the world’s most globalised country where exports account for 30-40% of the GDP. To organise thinking around how distance affects the relationship and trade patterns between countries, Ghemawat features a framework in his book named CAGE. It refers to a range of barriers or distances that matter in setting a business strategy.

He operates with four basic types of distance:

  • Cultural
  • Administrative
  • Geographic
  • Economic

 

As distances increase, cross-border interactions tend to decrease. It is possible to have a global strategy and a global organisation in such a world. However, Ghemawat stresses that they must be based, not on the elimination of differences and distances among people, cultures and places, but on an understanding of them. The mind-set, strategy, organisation and employees of these firms will not be orientated towards the global citizenship model implicit in corporate rhetoric. Instead, they will start with a strong grasp of one’s roots and what is distinctive about them, recognise relative similarities and differences and flag the differences that are particularly worth watching out for. In his book, Ghemawat also argues that two otherwise identical countries will engage in 42% more trade if they share a common language than if they do not, 47% more if both belong to a trading block, 114% more if they have a common currency and 188% more if they have a common colonial past.

What should companies do to succeed in a World 3.0?
“Too many executives believe in a world without borders, and thus access to revenue and earnings. Instead, they face a world where there are big differences in each market. They must concentrate on what I call The Cosmopolitan Corporation. It is those companies that understand and respect the differences between countries. The biggest challenge is the composition of top management in global business. GE, for instance, produces about half of their revenue outside the U.S., yet 80 per cent of their top 200 managers are Americans. It is not only a question of getting more officers into top jobs abroad – there is still a tendency to search for colleagues of their own nationality. The fact remains that the bigger the cultural community, the more contact you have with each other,” Ghemawat tells.

Is there such a thing as a perfect global strategy?
“In my previous book, Redefining Global Strategy, I described three fundamental ways that companies can create value across borders: the ‘AAA strategies’ of adaptation, aggregation and arbitrage. Adaptation strategies try to adjust to differences between countries and respond to local needs. Aggregation strategies attempt to overcome differences to achieve economies of scale and scope across national borders. Arbitrage strategies seek to exploit differences – by, say, buying low in one country and selling high in another. I advise managers to tailor a combination of these strategies to their company’s industry, position, capabilities and intent,” says Ghemawat.

He argues that the oldest mistake in international business is to assume that if you have a strategy that works at home that is exactly how you should compete overseas. More often, a ”the-world-is-flat” view would be congenial to such mistake and beliefs about how much a global strategy can simply be transplanted without modification.

It is a widespread perception that we need to become citizens of the world to survive in the future. But is the notion of a “global mind-set” even realistic?
“It is not nourishing to talk about buzzwords like a global mind-set because it is a content-free statement. The notion that somebody is perfectly at ease everywhere to me suggests that one is not at ease anywhere. The expression “Glocal” does have a way of suggesting a linear combination of a perfectly flat world (World 2.0) and a perfectly national world (World 1.0). Rather than dichotomising between national and global, I prefer the term “rooted cosmopolitan”, because it suggests that deep connections to particular people and places are necessary for the cultivation of an individual’s capacity to live a cosmopolitan life,” Ghemawat underlines.

If you could mould a person into a suited survivor in tomorrow’s world – which areas would you concentrate on?
“Anyone should have a fundamental respect of differences and an understanding of one’s own roots and how those affect where one would likely be relevant and competent. Also, I propose that every global manager should have a minimum body of globalisation-related knowledge. Companies can help their employees develop cosmopolitan attitudes by pulling on four key levers,” he says.

The four levers that Ghemawat refers to are:
Conceptual frameworks
Bring order to the mass of facts about foreign countries and help fine-tune executives’ perceptions
Longer and deeper immersion
Is necessary to develop a true appreciation of how the culture, politics and history of a region affect business there. This tends to require months – not weeks or days
Projects and networks
That cross international borders soften the ethnocentrism of the executives that participate in them
Assessment tools
Can help companies get a read on managers’ global skills and knowledge, and target areas for improvement

 

How do you advise executives to deal with the extreme complexity they face today?
“It is difficult to get rid of complexity. Still, there are things that can be done to simplify the challenge. Recently I worked with a company who has operations in more than a hundred countries. Here, the top ten countries account for more than 95% of their sales and profits. One way for companies to reduce complexity is to down weight, if not eliminate, operations in countries that don’t matter very much from the organisational architecture,” says Ghemawat.

Pointing to data on flows of trade, capital, information and people, Ghemawat shows that actual levels of globalisation are surprisingly lower than many of us think and that this implies that we have tremendous potential to expand prosperity by increasing integration. By and large Ghemawat believes that the process of gradual global political and economic integration is irreversible. However, to avoid structural collapse along the way, he argues, that resetting out worldviews to World 3.0 is urgent because we desperately need more prosperity and security. In reality we have no choice but to encourage cross-border integration through better and wiser global strategies – especially to create global growth that can bring us out of the current financial deadlock.

About Pankaj Ghemawat

Pankaj Ghemawat is a professor of global strategy at the Anselmo Rubiralta Center for Globalization and Strategy at IESE Business School in Barcelona, Spain. From 1983 and 2008, he was on the faculty at Harvard Business School where, in 1991, he became the youngest person in the school’s history to be appointed full professor. Ghemawat was also the youngest “guru” included in the guide to the greatest management thinkers of all time as published in 2008 by The Economist. Ghemawat’s books include Commitment, Games Businesses Play, Strategy and the Business Landscape and Redefining Global Strategy.

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