Has globalization been exaggerated?
Most multi-national enterprises execute regionally and act locally

Few topics have gathered more ink in recent years than globalization. The end of the Cold War and the publicity of the Internet bubble have sparked the perception among many, that we are heading toward one world market.

It's hard to argue globalization rhetoric, especially in a trading nation like Canada, which exports close to 40% of its gross domestic product. But that's what Alan Rugman does in his new, somewhat mis-titled book "The End of Globalization."

"A paradox of globalization is that it has never really occurred," writes Rugman. "The vast majority of (multi-national enterprise) manufacturing and services is (and always has been) organized regionally, not globally."

According to Rugman, the world's 500 largest multi-national enterprises account for more than 80 per cent of the world's foreign direct investment, and half of world trade. Yet these companies are not really global. Instead they operate largely within a triad of regional markets consisting of Europe, North America and Japan. In other words there is far more intra-regional as opposed to inter-regional trade.

That means few companies pursue the worldwide low-cost or product-differentiation strategies, which would be increasingly evident if we were truly heading to a global economy.

"There is no world car," writes Rugman. Instead, "Well over 85 per cent of (the world's automobile) production and sales takes place in each of the three triad markets." The same thing applies to the pharmaceutical industry, where companies must tailor products to various regulatory bodies such as the FDA in the U.S. and Health Canada here. This makes it impossible for drug companies to centralize production and distribution facilities.

In fact the only products that are conducive to being truly global, are those with high value-added and low-weights, which make them conducive to cheap shipping, such as consumer electronics writes Rugman.

Despite all the globalization talk in Canada, more than 85% of our exports go to one market: the U.S. That means Rugman's thesis -- if correct -- presents a considerable challenge to strategists at many Canadian companies: What's the point of thinking, talking and acting globally, when the vast majority of production and sales are conducted within North America?

Important signals of the increasing power of regional/triad trade blocks are the poor progress on multi-lateral trade agreements such World Trade Organization initiatives, coupled with the success of or regional and bi-lateral agreements such as NAFTA.

In fact, if anything Rugman sees several warning signs on the horizon for world trade, notably the failure of the multilateral agreement on investment (MAI).

In addition, the three triad blocks are in some danger of becoming more protectionist, since they all adopt non-tariff barriers to trade and investment to limit internal market access to non-partners.

For example Rugman sees the European Union's 1992 single market initiative, and 1999 Euro introduction as signaling increased intra-regional integration rather than a move toward globalization. As proof he sites the continued use of anti-dumping legislation as well as protectionist measures against Canadian newsprint.

This may all seem like hairsplitting, but companies that think they are global, when in fact their operations are mostly regional, risk making significant strategic errors.

Rugman, has conducted extensive research on how multi-national enterprises operate, and has created quick synopses on how so-called global companies such as IKEA, Benetton and Unilever first built and then consolidated their regional triad bases, before moving on to other challenges, a strategy he recommends for most larger companies.

For small businesses the prescription is even more brutal. These should not leap into global markets which are far too risky, and should instead "think regional, act local and forget global."

Rugman is an academic who cut his teeth at several Canadian institutions including an 11-year stint at the University of Toronto, before moving on to Oxford, and then to the Kelly School of Business at the University of Indiana, where he now hangs his hat.

As a result, his work is a bit of a hard read for the layman. But his conclusions are original, compelling and very much contrarian in nature, so they are nevertheless worth a look.

 

The End of Globalization, by Alan Rugman, AMACOM, 237 pages

Diekmeyer can be reached at: peter@peterdiekmeyer.com

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