The great paradox

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Large companies often incur the wrath of anti-globalisation protesters. But these firms suffer most from the increased competition globalisation itself bring.

Business leaders applaud it, protesters demonstrate against it, Thomas Friedman writes a column about it and politicians tell us it is inevitable. As the World Trade Organisation celebrates it in the comparative peace of Qatar, it is time to ask what exactly we mean by globalisation.

People first started to use the term in the 1980s, when American business discovered the rest of the world. Of course, Ford and General Motors had owned foreign car plants for more than 50 years. But their overseas facilities manufactured dinky models for agoraphobic Europeans and were quite separate from the mainstream American operations. US consumers had always imported Burberrys and French perfumes but trade was and is a much lower percentage of national income in the US than it is in any European country.

There was a rude awakening. Ford and GM realised that Asian competitors could make cars that were not only cheaper but also better. (Their customers discovered it first.) Other US firms such as Gap and Compaq realised that an American brand and offshore manufacture made an unbeatable combination in textiles and computers. Jobs migrated from the US to the developing world.

Within a short time, every large US company had a director of international operations and every US business school a course in international strategy. Some chief executives even predicted that their successors might have worked overseas or might even not be American nationals. These fears mostly proved to be exaggerated. The Ford family is still in the saddle.

But globalisation received a further boost from the collapse of the Soviet Union. Where once there had been two great trading blocs in the world, now there was only one. Or perhaps there were now three. Americans responded to the growing influence of the European Union by establishing their own free trade area and the rapidly growing Asian economies came closer together.

The world trading system was also restructured in the multilateral reduction in trade barriers negotiated under the General Agreement on Tariffs and Trade. Gatt was the precursor of the WTO and, with hindsight, its boring name was a huge advantage. If you want to confer quietly and unmolested, it is unwise to call yourself the World Bank, the World Economic Forum or the International Monetary Fund.

But the liberalisation of capital movements was perhaps even more important, and certainly more rapid, than the liberalisation of trade in goods and services. In 1980, most developed economies imposed restrictions, often severe, on any overseas investments by their citizens. I then had an academic colleague whose specialism was the theory and practice of exchange control. Before long, he had only Sweden and South Africa to focus on. I expect he is now in the palaeontology department.

The consequent globalisation of industrial structure had different consequences for different industries. Boeing provided aircraft for everyone from a single plant in Seattle. Ford and General Motors made engines in one place, gearboxes in another, and put them together somewhere different still. Thus these companies were able to divorce completely the location of manufacture and the location of sale. McDonald’s, Hertz and PricewaterhouseCoopers, for whom production was necessarily local, brought to that production a global formula and a global brand.

Last, the term globalisation came to encompass measures of domestic deregulation and privatisation that had no direct relationship to internationalisation of the world economy. Once, privatisation was used as an umbrella term by opponents of market-oriented reforms. Today, globalisation has a similar interpretation. Globalisation is things that people hostile to the modern market economy dislike.

It is entirely possible to pick and choose from these many components of globalisation. You can dislike the increasing homogeneity of shopping centres worldwide but still support free trade in manufactured goods. You can favour deregulation of electricity markets but worry about the consequences of worldwide adoption of an Anglo-American model of capital markets. Few components of globalisation are inevitable if there is a genuine popular will to stop them. But mostly there is not.

Yet all these strands of globalisation have one common business consequence. That consequence is the substitution of industrial structures based on competitive advantage for those based on historic market position. If that seems almost a truism, it is one that has not been obvious to either the business supporters or the protesting opponents of globalisation. They have shared a common belief that globalisation favours the established firm over the new entrant and the large business over the small firm.

But globalisation has done harm, not good, to General Motors, which has lost market share to smaller competitors, such as Hyundai and BMW, which could not have prospered in their home market alone. Globalisation has done harm, not good, to established national telecommunications monopolies. These companies were huge monoliths with entrenched market power that was the result of statutory monopoly. They first saw their domestic positions eroded and were subsequently brought to their knees by the unsupportable costs of their international acquisitions. Globalisation has done harm, not good, to flag-carrying airlines, which have been outwitted in both the US and Europe by low-cost entrants.

The principal victims of globalisation are companies, activities and individuals in rich countries with strong historic positions but no competitive advantages: US car workers; Bethlehem Steel; Sabena.

Paradoxically, it is often precisely these organisations and institutions that anti-globalisation protesters believe they are demonstrating against.

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