Globalization Optimism and Political Pessimism

More than two-thirds of corporate CEOs are optimistic about globalization, believing that cross-border mergers, acquisitions, and business in general will keep on increasing through 2009. Imminent recession in the advanced industrial economies may even increase their spread abroad. Consider these growth projections made by IMF. In 2008 and 2009, the US economy will grow at most by 0.6 percent. China and India will register 9.5 and 8 percent respectively. If you wanted profits and growth, where would you rather be?

Thus we have CEO optimism about globalization despite slowdown in the US. The problem is that politically there are reasons to be cautious. The past few months I have been highlighting what I consider the single biggest gathering risk to doing business across borders: political action. This has several aspects.

First of all, voters in the West have become  cautious about globalization and free markets. The 2007 Pew Global Attitudes Survey (PGAS), involving 45,000 people across 47 countries, reports that people have begun to take a more cautious approach to free markets, compared to 2002. US electoral rhetoric is adding fuel to their fear.

Support for globalization and capitalism have also been decreasing outside the West. The 2007 Globescan survey (see figure on the right) reports a downward trend in 10 of the 18 countries monitored regularly. And this survey was done before the current credit crisis hit the markets to further dampen mood.

Moreover, people in every country surveyed in PGAS (2007) felt a strong need to protect their cultures from foreign influences. This means that globalization will become  expensive, for foreign companies have to strive more, including greater product and service variation, to become accepted locally. My February post, “Enter a market (and be accepted)“ talks more about this.

Their fear is heightened by inequality, both real and perceived, which has been increasing across emerging markets. In places like India, mass voters have openly reviled conspicuous consumption by the elite. And foreign influence is seen as agents of this inequality. The global food crisis is compounding matters, and hunger-induced riots are threatening even pro-investment authoritarian governments.

Not only are people becoming wary of foreign investors and traders, but they are expecting more politically from business firms. This expectation will only intensify through the Olympic Games and in the coming years. After criticism of China by the French government, the French supermarket chain Carrefour has been passing tense times, having unwittingly provoked both Chinese nationalists and European human rights activists. The norms of corporate governance are in a period of significant transition, as corporate political responsibility is being added on top of corporate social responsibility. Whether CEOs like it or not, business firms are political actors too, and ignoring this transition will heighten political risk.

So business calculations that go into cross-border strategy need to expand far beyond the traditional financial and legal focus. They will  have to become politically sophisticated, requiring careful analysis and political variables, and informed to a greater degree by local political realities. This coming recession will  likely thrust a demand for greater political action on the part of globally expanding businesses.

Globalization and the Curry Crisis

Britain is at risk of losing its curry talent, which can affect 10,000 chicken tikka palaces in the country and jolt its food industry to the bone.

I sat up straight as I read a fascinating report in the Financial Times. Curious indeed is the way that countries manage the ‘people’ risks of globalization. Britain’s curry houses employ over 80,000 people and are among its biggest industries by sales. 10 to 12 percent of them will likely close in the next few years.

Why? A new immigration system will make it difficult to hire skilled curry chefs from South Asia, mainly Bangladesh. “It will count for naught that a would-be immigrant can mix a mean masala. He will need fluent English and a high-level cooking certificate too.”

But the government has exempted East Europeans from having to produce such qualifications to get hired. So it’s asking restaurateurs to hire them. And restaurant owners say that you can’t just get someone from Bucharest and expect palatable curry! Even the look of the dish changes. As one owner pointed out flatly: “We had an east European sous chef, but his chapattis were wiggly at the edges, like maps of Russia.”

FT summarizes the situation with pointed eloquence: “South Asian restaurants could hire chefs weaned on curry who had come from Commonwealth countries whose soldiers fought for Britain in two world wars. Now they must recruit cooks specialising in dumplings and pickled cabbage from the former Soviet bloc. That is idiotic. But that is the European Union.”

We hear global CEOs point out that attracting and retaining talent is the biggest challenge that their companies will face in an increasingly competitive world market. HR professionals, in the same vein, are investing more on the management of a workforce spread worldwide and on means to keep them happy.

Against this business trend collides a political one: the management of immigration by governments. Countries like Ireland bring out advertisements promoting the innovative talent available for foreign investors. But next door, in Britain, the food industry is about to lose its curry chefs.

Now a small-footprint local restaurant is not exactly a multinational giant. If it were, it would be better off, for it could offset the risks from talent squeeze in one country by sourcing from another. Not only are the assets of a curry house tied to its location, but the service it provides is also location-specific. So it can’t really manuever much.

On top of that, the curry house is facing another risk. Food prices are increasingly rapidly in the world economy, preventing the restaurants from managing prices to make up for talent shortfall. Under such business constraints, talent management becomes critical, with support from the government.

Governments should forecast risks more systematically before embarking on a major policy change. The ‘people’ factors in globalization have always been challenging — economically, politically, culturally. So integrating people and capabilities adequately in global risk management is critical, not just for companies but also for governments.

Globalization and Risk: A Self-Fulfilling Prophecy?

There’s been a lot of talk recently about impending risks in the global economy. The fear began with rising oil prices in 2007. Then there was the subprime crisis and the housing market blues. And now, there’s panic about a secular rise in global food prices, which would affect more people around the world directly than either oil or housing would. There is fear that the food price hike (or agflation) will spread rapidly into raising inflation even in the Western countries, thanks to an integrated global economy.

Since this has happened at a crossroads in the US presidential race, candidates have swiftly added to the fear by criticizing free trade, NAFTA, and more broadly, globalization. From the candidates’ perspective this makes political sense, since they’re campaigning at big blue-collar states like Ohio which are wary of losing more jobs abroad.

What goes unnoticed is the self-fulfilling prophecy inherent in blaming globalization.

Yes, blaming globalization gets good political currency in the West, but the benefits of globalization are accepted increasingly in the fastest growing markets in the world, which are non-Western. And that trend will likely increase as the economic influence of those countries expands.

So as the competitive landscape begins to change, we’ll find that the major threat to globalization or doing business across borders will come from the same countries that have traditionally urged for free trade, namely, the West. In that charged atmosphere, and with recession looming, protectionism of some form is not unlikely in the United States. But savvy US businesses will expect recession and protectionism, and will therefore accelerate risk diversification by shifting greater attention–both assets and market presence–abroad.

And in this, we may have a curious self-fulfilling prophecy: perceived threats from globalization may lead to protectionist policies which may actually hasten further shift of business abroad.

The situation is complicated by both overstatements and understatements. Steven Pearlman wrote recently in the Washington Post: “I have no doubt that Americans overstate the degree to which globalization is responsible for this economic malaise, just as I have no doubt that economists and business executives understate it.”

What this implies is that businesses need to develop a core globalization strategy that takes into account forecasts about the global economy, assesses their exposure to not just risky markets (expressed in numbers) but risky politics (understood qualitatively), puts into perspecive their major drivers (cost, revenue, market share, competition), takes into account their organizational capability to manage cross-border operations, understands local cultural risk, incorporates legal and infrastructural variables, and then spreads across borders prudently and strategically.

A tall order? Yes. But the strategic preparation and execution will definitely be worth the massive costs associated with protectionism.