Ghemawat: Globalization… way less than they made us believe

Posted: July 18, 2012 by jennroig in English, Interviews
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(This is the unedited English version of my interview to Pankaj Ghemawat, originally published in AmericaEconomia on November 2011).

Pankaj Ghemawat has been the youngest professor ever appointed at the Harvard Business School. In his book World 3.0: Global Prosperity and how to achieve it, he supports the notion that Globalization is not as extended as the popular rhetoric leads to believe. As expert on Global Strategy, currently a scholar at the  IESE Business School, he also points out that the 90% of the B-Schools around the world are not being seriously looked at, because they do not appear on the rankings, despite the fact that B-Schools have an important role to play in society.

Your book strongly contests Friedman’s notions regarding the scale and depth of the globalization process. Could you briefly explain your main arguments?

Tom Friedman’s perspectives refer to the idea of  ‘borders don’t matter, and the world is completely integrated’. Well, I’m not exactly so much contesting Friedman as simply channeling all the research in international economics. So, it’s interesting that academics who look at this have found my argument entirely non-controversial.

In fact, some of my colleagues, particularly my ex-colleagues at Harvard, asked me “why did you bother writing this book? We already know that the big mystery is why levels of integration are as limited as they are, rather than whether levels of integration are complete.”

So, to me, this is a good example of a situation where we know some stuffs but somehow it stays entirely outside the popular discussion, which has been driven by a hyper exaggeration unsupported by any data. And what I present in my book is a very simplified set of data. I’ve written many academic articles on this using more sophisticated techniques, but simply relying on looking at what various things that could happen within or across national borders and pointing out that when you look at the cross-border component of, for instance, all the voice calling minutes in the world, you end up with a number suggesting very limited integration, rather than complete or close to complete integration.

So, it is really quite remarkable that this idea of the death of this stands… the idea of the death of the Nation-State, borders don’t matter, has diffused so broadly because it’s entirely in variance with what for instance, international economists who actually studied this tend to focus on…

Would you argue that this kind of assessment is based on politics or economy? I mean, at the economic level, it is said “You can find Nokias in Chile, and Nikes in Tombuctu”…

I think that’s one of the fallacies… partly because of how vividness affects. We are so used to a local world that when we see an instance of cross-border penetration like Nokias or Nikes in Chile we say: “look, Globalization”.

I certainly believe cross-border interactions are important or I wouldn’t be a professor in Global Strategy. But I rebel against the idea, entirely misguided to my mind, that Globalization is close to complete.

I find it empirically unrealistic and I find it logically incoherent, because if the world were completely integrated, we wouldn’t see huge differences in percapita income across different regions. So, it’s a little bit of a mystery to me, and I do have some hypothesis about why people believe this stuff, but nevertheless it’s a little bit of a mystery to me how people can, in a world where governments are clearly important, in a world where it takes longer to go through airports than it used to, how people can believe this stuff. I think it reflects some deep seated psychological appeal of the notion of the world being one rather than any kind of data.

How do the BRIC countries fit in the picture?

First of all, BRIC countries like most large countries, are significantly less integrated with the world economy than very small countries. Notice that if you believe in a flat world, there would be no variation across countries, and it’s only when you leave the possibility open that borders still matter that you can start to talk about which countries are more integrated with the world, and which contries are less integrated with the world.

So, in fact, one of the exercises that I’m involved in right now is that I’m preparing a global connectedness ranking, that it’s going to be rolled out at the APEC (Asia Pacific Economic Cooperation) Summit in Honolulu next month (November 2011). And one of the things that obviously stands out is that large markets like the BRICs tend to be less integrated with the world economy than relatively small countries like Singapur or Malta or Luxembourg.

Could you provide some example to illustrate how are these countries more or less integrated? A common notion argues that a country like Brazil, which is huge, it’s growing. So we all want to go to Brazil, because it is more important wordwide now than it used to be. And the rhetoric argues “they will host the Olympics, the World Cup…” How can we make sense of all these arguments and your statements together?

I think part of the problem of Globalization is… One of these things that we all have some kind of experience of… And therefore we feel qualified to hold thoughts about without looking at the data.

When I turn to results from conducted research concerning the overall rankings of global connectedness, out of a 125 countries, Brazil ranks number 68. Bottom half, barely. But still bottom half. In fact, the reason it ranks as high as it does is that Brazil exports, like Chile, a lot of natural resources, so in this new index we are preparing we weight not just the intensity of internationalization but the extent of internationalization. So, Brazil actually ranks very low in the intensity of internationalization, but gets some credit for selling a lot of stuffs to China, the way Chile does. The only reason Brazil isn’t in the bottom quartile in terms of internationalization is that this new index looks at both depth (intensity) and breath.

Where does Brazil falls in terms of depth? Brazil ranks 115 out of 125 countries in our sample, in terms of intensity of international interactions. What pulls it up a bit is that it does have, particularly on the merchandise exports side, a worldwide interaction.

What if we compare Brasil with India? India, on depth, ranks 110 out of 125. China ranks 104. Let’s look for Russia, it ranks the 80th because Russia has so much in the way of oil exports. But still, that’s the bottom third roughly.

You know, it’s a good illustration to me while I’m scanning manually on why some of the popular intuitions are best… It makes my point in these matters. It’s useful to look at data and the reason why Brazilian data are so surprising is Brazil is finely running a trade surplus after decades of running trade deficits. And we say: Brazil, great exports powerhouse, but certainly compared to the size of the Brazilian economy, or the size of the GDP, Brazil is mostly a domestic story, as are all the BRICs.

Brazil’s bilateral trade

That would be one aspect of the BRICs. They range from 80th to 115th out of 125.

An exception is Hong Kong, if you count it as country. Otherwise Singapore. And that is a little bit because these countries get credit for some of the re-exports that they engage in. If you look at exports to GDP, Singapur’s exports to GDP ratio is close to 200%, which is because they import a lot of stuffs and ship it out again. So GDP adjusts from value added, the nominal exports figures don’t.

The other thing I should explain is that this is looking across different kinds of flows. It looks at flows of trade, it looks at flows of capital, it looks at flows of people in terms of tourists, students, immigrants, workers, and it looks at flows of information, in terms of Internet bandwidth, phone calls and publications. So its not just a trade only figure. If you just look at trade, Brazil would rank very low…

Another common characteristic of the BRICs is… When we look at a map of the world, we see the national borders, and within national borders everything is colored the same way, which creates the sense of perfect integration. But BRICs are all very large countries with relatively poor internal infrastrutures and lots of internal barriers. As I see it, the challenge for the BRICs is not just more external integration, it is also internal integration. China is particularly problematic in that regard, because while China’s level of integration with the world economy has increased, the intensity of internal integration is actually going down. In Brazil at least both has headed in the same direction. India we don’t have data. A big concern for the Chinese leadership is that the country is being literally pulled apart. The coastal regions are very integrated with the world, the interiors being left behind. Some municipalities in the interior are being run directly from Beijing as part of a very conscious attempt by the Chinese government to open up internally and to move development to the interior, rather than just having this coastal focus on exports.

The BRICs, all of them, are reducing internal distances, politically, geographically, and culturally because there are huge variations -the kind of variation that you find comparing Sao Paulo with the North East side of Brazil… even the laws are interpreted differently. At least they have the same language, in India there are more than 20 languages.

The former chairman of Suzuki once told me, because he was frustrated with the supply chain in India, “what India needs is not an external free-trade agreement, it needs an internal free-trade agreement”. All this is much at variance with the idea of a perfectly integrated world. Even countries, large countries, aren’t perfectly integrated.

Germany, for instance… German länder tends to trade three times as much intensely within themselves as across the borders between the länders.

You describe administration strategies: Adaptation; aggregation; arbitrage strategies. Could you briefly describe them?

The first part of my argument draws on differences across countries still matter. But to leave it there it is sort of saying that there’s a lot of variety. It is not especially helpful to business people to be told “every country is different”.

What the business focus component of my work does, is focused on “how do you deal with differences?” Adaptation is a strategy of adjusting to differences. Aggregation is the idea that sometimes, particularly by grouping things the right way, you can overcome differences. The regional strategies that many multinationals follow are good example, while all countries are different, there are arguably more commonalities across Latin American countries than across two countries picked at random from around the world. A lot of multinationals manage their Latin American operations, if you think of the auto manufacturers, etc., on a regional bases. That’s the aggregation strategy of overcoming differences.

And finally, arbitrage is the idea, very much illustrated by Chilean exports that sometimes differences aren’t just an obstacle to be adjusted and overcome, they can sometimes be significant sources of value creation. Chile has higher intensity of copper than other parts of the world. Much of what I think about Chilean exports strategy are relatively simple arbitrage strategies. I think that raises some questions for Chile….

In a review of your book, it is argued that its most important point is the recognition that “there continue to exist very important country differences that corporations ignore at their peril”. Question: what kind of perils?

The oldest mistake in international business, and this is not something original from me, is… Think of what happens when a company goes international? Usually a company goes international particularly in terms of foreign direct investment, when it’s out of room to grow in the domestic market.

In other words, when it has been relatively successful at home. The usual bias in situations like that is to think that if this worked at home, in a really tough market, it’s going to work overseas. The most common danger is associated with ignoring differences. It’s simply clonning your strategy when you go overseas, and that doesn’t fit at all. Marketing messages fall flat. There’s general evidence that companies tend to underadapt when they export and they first grow overseas.

The second thing is that some kinds of differences tend to be less visible, even for companies that try see through these things. The relatively obvious differences are the economic ones, what tends to be less obvious partly because of the hypster of people like Friedman are the cultural and administrative differences. I actually teach a case on Endesa de Chile going to Peru. At one level, Peru had basically copied the Chilean regulatory system. But thinkig that Peru is a stable country, which is a critical issue in electricity generation because you put money in and hope to get it back in 20, 30 or 40 years… Peru is very different and Endesa to its credit, recognized this, and thought very hard on how to create a local Peruvian face to our operation, had we manage the political interfase with the Fujimori government, how do we deal with the fact that a lot of Peruvians are still resentful about that war 140 years ago when they lost a big chunk of territory… and these are all political-administrative issues that exists even though the administrative structure or the regulatory framework was explicitly copied directly from Chile’s pioneer experiments of privatization.

About CAGE -cultural, administrative, geographic, and economic – four dimensions that a business must take into account before expanding its ventures elsewhere. What has to change, how the brain of a Latin American manager who wants to go and invest overseas, or beyond national borders, must transform?

This is not just Latin American managers, but managers from most countries… Right now there’s a huge interest in China and India as markets. Many companies are thinking of going there. Many of them knock on my door asking for advice… and I ask them, why do you want to go there? Usually the answer draws on they figuring out that there are a lot of Chinese and Indians. Then my response is, well this is not exactly a proprietary insight, think hard about all the respects in which China or India are going to be different from your country of origin. And make sure you have strategies for fully addressing those differences.

There is a very robust sense on a lot of literature on international business that the process of foreign direct investment in particular, it often makes sense to start (and it varies by businesses, if you are an Indian software business you don’t want to go to Pakistan first. But having said that you at least focus on the US, where the income is high but at least you have the same language). Similarly, in general, there should be a bias in foreign direct investment, to go to countries that are relatively similar first because it’s really tough to deal with differences. The most striking evidence I can cite is that when you look at US companies, with just one foreign operation, 60% of the time that operation is in Canada.

Think of all the commonalities, common language, common colonizers so the legal systems are very similar, there’s NAFTA, as another kind of administrative glue, geographically 90% of Canadians live within 250km of the border with the US, and economically similar levels of percapita income serve to avoid thinking in making packages much cheaper for another country. Similarly, for Portuguese countries going overseas, Spain is often the first destination. The pattern tends to repeat. Meanwhile, lots of spanish companies got their really big international experience in Latin America, and then it’s a conjunction of cultural and administrative similarities. Spanish language helps, the colony-colonizer relationship created some commonalities and partly it was effect of timing. These companies went overseas to Latin America in the moment when Latin america was privatizing.

How would you explain a case like the success of BrightStar in Sub-Saharan Africa?

There are always exceptions. Probably, Bolivia is not particularly a well developed market and I suspect Bolivia is a somewhat chaotic market, these might be valuable expertise and preparation for competing in a Nigerian market. But life is wide and you can always find exceptions.

Another highlighted quote was: “The most important source of a nation’s progress is the quality of its management”. Would you care to explain this idea?

I don’t think I ever said that. I don’t know how you’d dicompose interrelated things. Management is important but national institutions are very important.

Though I do believe management is very important because especially if we define management broadly to include public and private organizations. How does productivity growth come about? How is economic value created? It doesn’t happen spontaneously. The institutions are very important, they set the framework, they lay the table as it were, but in terms of actually picking up stuffs of that table, it’s organizations that are responsible.

Chile’s exports

One of the things… I do take very seriously, although I wouldn’t go to sort of say this is THE factor, because I esentially have a multidimensional view of the world, is this notion that many countries, managerial and administrative capacity is a critical scarce resource that really needs to be built. Looking at countries in the OECD, where Chile is now, those countries with middle income in some respects, you look at India or China, where there are less than one business school per million inhabitants. The figures for the US are about five business schools per million inhabitants. There’s a lot of people trained or with experience in how to run organizations which is critical when you think organizations as the visible hand of value creation. I do think there’s a huge managerial shortfalls in the world, and the situation is even worse in Sub-Saharan Africa. There are virtually no schools, there are no ways except on the job trial and error for figuring the stuufs out.

So, one of the things I’m personally involved in is… there’re about 15000 institutions around the world that grant higher degrees in business. The usual rankings focus on the top 100, or top 1000, which is picking up on the top 7%. What I’m really interested to know is: what about the bottom 90-99%. How do we improve what gets taught in those schools. One of the things I’m doing is my course on Gobalization which has been endorsed by the AACSB, the biggest sort of accreditation body for business schools in the world, as the kind of course every business school should teach, it teaches students about globalization. Over the last few years I kept intellectual copyrights to these materials while basically putting them up for free in the web. Because when I think about the bottom 90-99% of my sector, they are not going to be able to afford Harvard business school case studies, or take students on study trips to foreign countries, but their students should still learn something about Globalization! So that’s my little social initiative.

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