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How does globalization relate to strategy, especially in large companies?

From a business perspective, globalization has two prime characteristics: first, it involves growing interdependency between countries and, second, it is multi-faceted with many different business aspects.

In spite of its growth, globalization is only one of many aspects in the development of international and global business strategy. For many organisations attempting to develop an international or global strategy, globalization is not the prime strategic focus.

Many will see this as a surprising conclusion, so it is important to examine this in more depth.

The growth of interdependence and globalization

There can be no doubt that both world trade and foreign direct investment have been growing over the last twenty years:

  • World trade exports amounted to US$ 4,261 billion in 1990, US$ 7,036 billion in year 2000 and US$ 12,461 billion in 2005
  • Foreign direct investment outflows were US$ 230 billion in 1992 and US$ 779 billion in 2005

Such data does not prove interdependency between countries but certainly supports greater cross-border activity.

World  imports and exportsBut if we look in more depth at the nature of world trade activity, we find that some countries are strong exporters of manufactured goods – specifically, Germany and China – while other countries are net importers – the USA and the UK. This suggests that there is a considerable imbalance in such trade and does not support interdependency at country level.

It should be said that this data is for manufactured goods and there is also considerable cross-border activity in services – especially financial services.

The evidence from the world’s financial services shows that there are a few global centres of finance – New York, London, Tokyo – with possibly also Frankfurt, Hong Kong and Shanghai. These centres are interlinked and therefore demonstrate the power of globalization. However, they are specialist centres of financial activity. They are largely irrelevant to the majority of the world’s leading companies when they are developing new international and global strategies: for example, trade barriers, global branding, variations for local customer tastes, recruitment of qualified international managers are all just as important and have little relationship to the world’s financial centres.

From this perspective, globalization as represented by financial interdependence is not the prime mover in the development of international and global strategy.

world GDPNow it might be argued that the growth in interdependency relates more to individuals than to countries. But, again, there are major differences between many of the countries of the world in terms of wealth per head of the population and many other characteristics.

For example, the chart on the left shows that the total wealth of China is close to the wealth of Japan. But because of the much larger population in China, the wealth per head of the population is much lower in that country than in Japan. In addition beyond this simple data, there are major differences between the two countries in terms of culture, history and political development.

While none of this disproves that there can be interdependence between countries, it does suggest that globalization remains in the early stages of development. Thus, from a business strategy perspective, interdependence is not a strong driver of international and global strategy at the present time.

The multifaceted nature of globalization

Globalization has many different facets, including such areas as political, economic, sociological, technology, culture, finance and production. But if we take each of these areas, it will be clear that there are still major differences between countries and their people:

Political: contrast the major democracies of some western countries with other forms of political activity in some other countries. This website makes no comment about the merits of different systems. Simply that globalization has not yet extended to such matters.

Economic: the country data above illustrates the significant differences here.

Sociological: the World Bank Annual Reports provide data that shows vast differences in family size, education, health and other matters between countries. There is little evidence that globalization has become a driving force here.

Technology: it is argued elsewhere in this website that changes in technology have been one of the driving forces for globalization – Google, Facebook, etc. But there are still major differences between countries around the world – hardly suggesting that what happens in one country will have a strong influence on what happens in other countries. Moreover, the wider spread of technology is arguably ab international rather than a global activity: for example, Facebook spread from the USA to other countries internationally but many of its networks remain within one nation.

Culture: the substantial differences in national cultures have been well-documented by many researchers, e.g. Hofstede. However, from a business strategy perspective, it is the organisational culture of an individual company, not the national culture of a country, that is particularly important in developing business strategy. Globalization plays a secondary, or even tertiary, role in such matters.

morgan stanleyFinance: there can be no doubt that international financial issues can have a major impact on the outcome of an organisation’s international and global activities. This is not just about currency fluctuations causing sales and profits to rise and fall. Some companies centralise international cash flow activities on a daily basis to maximise their profits.

Other companies will employ international bankers, like Morgan Stanley, to negotiate foreign purchases, joint ventures, cross-border loans and other financial activities. But all these matters are secondary to the more basic factors involved in international and global strategy – such as economies of scale and the local customization of international products.

ford logoProduction: Some car companies have been working for many years to interlink their production activities. For example, Ford produces diesel engines in the United Kingdom for installation in its cars across many of its Europeand and world car assembly plants. Such activities are a clear demonstration of the power of interlinked globalization. In this case, they demonstrate the contribution that globalization can make to global strategy. But they still remain only one aspect of such strategy.

 What about strategy networks and globalization?

Over the last twenty years, some strategists have laid particular emphasis on networks – the formal and informal links that exist both inside and outside the organisation – as being particularly important in the development of business strategy. Cooperation matters just as much as competition according to such an approach. Surely, almost by definition, such linking networks must have some relationship to the concept of interdependence and therefore globalization?

The problem with this approach is that interdependence means more than just a network link. Interdependence means that one happens in one organisation will have an influence on what happens in another organisation. Strategy networks do not necessarily have such a strong bond: there may be some link but it may only be weak.

International and global business strategy in large companies

While globalization may be one factor in developing strategy in large companies, it is not necessarily so important. For example:

  • Large markets may deliver economies of scale and scope but they do not need to be interdependent – just possess low barriers to trade, low labour costs, etc.
  • Common customer tastes are an important aspect of a truly global strategy. Globalization may be a useful factor in relation to this but globalization is not necessarily the main driving force. For example, McDonalds’ Big Mac relies on common customer tastes but its success has not been the result of increased globalization – though it has perhaps supported globalization.
  • Research and development in large companies like Sony and Volkswagen is often still located primarily in the home country of such companies. There is only limited interdependence across the many subsidiaries of such companies located around the world. Network and interdependent strategies certainly happen in some multinationals. But globalization is not the driving force for such activity.
  • Some major international companies – like pharmaceutical companies and aircraft manufacturing companies – need to sell their products worldwide in order to support the high levels of capital investment in the development of such products. But this does not mean that globalization is the main factor in driving such sales – low barriers to trade and other similar matters are far more important.

Set against such evidence, we have seen that the growing interlinks of globalization can be important for some financial aspects of international activity – for example, Morgan Stanley. Equally, we have seen its importance in some aspects of production activity – Ford, for example. But, as explored elsewhere in this website, there are many other aspects to international and global strategy.

Conclusions

Beyond making it easier to trade, globalization is only one of many drivers in international and global strategy development. It may be important but it is not necessarily the prime focus.

Nevertheless, globalization has been increasing as result of the increased use of the internet, mobile phones, satellite tracking technology and other factors that make it easier to communicate around the world. It is possible that globalization will become more important in the future.

Importantly and in spite of its use by some commentators and companies, ‘globalization’ is not the same as ‘global strategy’.

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