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Archive for March, 2008

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.

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