How global, really, are “global” companies? Pankaj Ghemawat, who taught at Harvard Business School for 25 years before moving to Spain to become a professor of global strategy at Barcelona’s IESE Business School, contends in his newest book, World 3.0: Global Prosperity and How to Achieve It (Harvard Business Review Press), that globalization is, at the least, vastly overhyped. “Most companies are only semiglobalized,” he says. “Like the rest of us, they tend to stay focused on familiar environments.” Indeed, Ghemawat, who earned his Ph.D. at HBS at 21 and later became the school’s youngest-ever full professor, reckons that globalization is only a “10 to 20 percent reality.” Here he speaks with Contributor Janice Fioravante about why the world is not so flat after all—and what that implies.
Institutional Investor: Why the term “World 3.0”?
Pankaj Ghemawat: It’s an analogy to Web 1.0, et cetera. World 1.0 is nationally focused and neglects cross-border interactions, while World 2.0 lurches to the opposite extreme and assumes that national borders don’t impede interactions at all. World 3.0 recognizes that cross-border integration matters but is limited and is heavily influenced by context: The lion’s share of cross-border activity is still concentrated among countries that share borders as well as cultural and historical ties.
But isn’t the world economy growing more unified?
The pattern of changes is actually rather mixed. The percentage of the world’s population composed of immigrants, for example, is the same now as it was in 1910. Some precrisis measures of cross-border capital flows/stocks are actually comparable to peaks more than 100 years ago — and thanks to the crisis are now lower. And while trade intensity has been setting new records, the big drop-off in 2009 is a reminder that monotonic increases [those that extend the existing order] are not a given.
Do you see threats to further global integration?
The number of independent countries has tripled in the past 100 years, and we see a resurgence of protectionism and xenophobia in many of them. Uncertainty about exchange rates and even the status of the dollar as the world’s reserve currency, as well as the possible consequences of multipolarity in international relations — all this increasing fragmentation may be a more plausible diagnosis than increasing integration. Of course, what happens depends on what governments, businesses and individuals actually do.
As you point out, most trade takes place between neighbors, such as the U.S. and Canada. But isn’t finance more truly global?
Finance displays some of the same patterns. The U.K. is where U.S. banks have the most loan exposure. In contrast, the troubled PIIGS — Portugal, Ireland, Italy, Greece and Spain — account for less than 5 percent of British banks’ total loans. To which country does Portugal owe the most bank debt? It’s Spain — more than to France and Germany combined.
But do you see gains from further global integration?
Indeed. My major reason for highlighting a 10 to 20 percent globalization figure is to call attention to the potential for additional integration and the gains that can thereby be unlocked. A second reason is to reduce fears about globalization that would make sense only if one believed that globalization was already complete. For instance, the potential for reducing risks through international diversification depends on integration not being complete. World 3.0 discusses how realistic assessments of current levels of globalization can alleviate and even eliminate fears about job losses, concentration of business in the hands of a few giant companies and the loss of political independence, to name just a few hot-button issues.
