I have been teaching courses on International Strategy for more than a decade now, and I often find myself in the unenviable position of trying to dispel common myths about globalization. I’ve found the task especially difficult in an era in which many students come to class having only been exposed to Thomas Friedman’s well written, but often misinformed, best seller on the subject – The World is Flat.

I was therefore pleasantly surprised when I opened my digital issue of The Economist last week to find the work of Pankaj Ghemewat highlighted (see The Case Against Globaloney). Ghemewat, one of the leading scholars in the area of International Strategy, has done some interesting fact-based work on the realities of globalization. As I have long tried to convince skeptical students, the realities are far more modest than Friedman, and many in the mainstream media, would like for us to believe.

According to the article:

…[E]verybody seems to agree that globalisation is a fait accompli: that the world is flat, if you are a (Tom) Friedmanite, or that the world is run by a handful of global corporations, if you are a (Naomi) Kleinian.

Pankaj Ghemawat of IESE Business School in Spain is one of the few who has kept his head on the subject. For more than a decade he has subjected the simplifiers and exaggerators to a barrage of statistics. He has now set out his case—that we live in an era of semi-globalisation at most—in a single volume, “World 3.0”, that should be read by anyone who wants to understand the most important economic development of our time.

Mr Ghemawat points out that many indicators of global integration are surprisingly low. Only 2% of students are at universities outside their home countries; and only 3% of people live outside their country of birth. Only 7% of rice is traded across borders. Only 7% of directors of S&P 500 companies are foreigners—and, according to a study a few years ago, less than 1% of all American companies have any foreign operations. Exports are equivalent to only 20% of global GDP…

What about the “new economy” of free-flowing capital and borderless information? Here Mr Ghemawat’s figures are even more striking. Foreign direct investment (FDI) accounts for only 9% of all fixed investment. Less than 20% of venture capital is deployed outside the fund’s home country. Only 20% of shares traded on stockmarkets are owned by foreign investors. Less than 20% of internet traffic crosses national borders.

And what about the direction rather than the extent of globalisation? Surely Mr Friedman (author of “The World is Flat”) and company are right about where we are headed even if they exaggerate how far we have got? In fact, today’s levels of emigration pale beside those of a century ago, when 14% of Irish-born people and 10% of native Norwegians had emigrated…

Mr Ghemawat also explodes the myth that the world is being taken over by a handful of giant companies. The level of concentration in many vital industries has fallen dramatically since 1950 and remained roughly constant since 1980: 60 years ago two car companies accounted for half of the world’s car production, compared with six companies today…

This sober view of globalisation deserves a wide audience. But whether it will get it is another matter. This is partly because “World 3.0” is a much less exciting title than “The World is Flat” or “Jihad vs. McWorld”. And it is partly because people seem to have a natural tendency to overestimate the distance-destroying quality of technology. Go back to the era of dictators and world wars and you can find exactly the same addiction to globaloney.

I’ve long been a fan of Pankaj’s work. I think it’s among some of the most provocative, carefully conducted work in the field (full disclosure: he is a frequent visitor to the Stern School). That notwithstanding, if you haven’t already, check out of the full Economist article (The Case Against Globaloney); and for those of you interested in the full monty, you can find his book here (see World 3.0) to judge for yourself.

Maybe, just maybe, this will finally make my job a little easier…

Interesting article in the New York Times about the dearth of strategic buyers in the M&A market (see Battling Headwinds).

It’s true that some blockbuster strategic deals have been announced recently, including AT&T’s $39 billion proposed acquisition of T-Mobile from Deutsche Telekom and Nasdaq’s $11.3 billion unsolicited bid for NYSE Euronext.

But these deals belie a strange fact: strategic bidders, or bidders that are operating companies, appear hesitant to re-enter the takeover market.

The article highlights some recent deals in which strategic bidders were conspicuously absent, and then attempts to explain the increasing reticence of strategic acquirers to participate in the M&A market as due to a changing mindset among executives.

Private equity firms have historically been at a disadvantage on how much they can offer. Strategic bidders can often realize greater cost savings and synergies by eliminating duplicative functions and combining and operating the acquired company more efficiently within their other operations.

This advantage was partly eclipsed in the cheap-money years before the financial crisis. But we are supposed to be back in more normal times, so why are strategic buyers hanging back?

The apparent reluctance may be the result of a fundamental reassessment of the value of takeovers, one that was occurring even before the financial crisis. Since then, chief executives and boards have been more concerned with running their businesses and surviving than with chasing expansion through takeovers. This is particularly true when the chance of success is far less certain, as in hostile takeover attempts.

The last 15 years have produced mergers that proved to be spectacular failures. AOL’s merger with Time Warner and Daimler’s acquisition of Chrysler are among the most notable. Together, these deals destroyed more than $150 billion in shareholder value.

During this time, studies have shown that while there are gains to be made, many M&A deals prove unsatisfactory for buyers. McKinsey & Company estimates that only a third of merger deals create value. In a separate study, Prof. Robert F. Bruner, dean of the Darden School of Business at the University of Virginia, found that almost half of deals failed, although these results were skewed by some spectacular miscues.

These studies illustrate that achieving a successful merger is hard work, requiring strategic vision and a focus on integrating the acquired company.

Although that’s a compelling explanation, I’m not sure I’m buying it.

Over the last 50 years or so, it’s been well documented that the overwhelming majority of strategic acquisitions fail to create value for shareholders (see also More Deals Gone Bad, Great Shareholder Ripoff, Why M&A Deals Go Bad, Dumbfounded by the Data, and The Complexity of Strategic Acquisitions). And despite the fact that we’ve known for about half a century that most acquisitions fail, deals consummated over the past 10-20 years haven’t performed appreciably better than those consummated in the 30 years prior (see Are You Paying Too Much for That Acquisition? and The Synergy Trap).

In short, there’s scant evidence that we’ve learned from past M&A mistakes. So what makes us think that anything has changed now?

For this reason, I’m less inclined to believe that the explanation for the dearth of strategic acquirers is that we have finally learned our lesson (…sounds reminiscent of the “This time it’s different” meme). Rather, the reason for the dearth of strategic acquirers (to the extent that there is one) likely has more to do with the residual effects of the financial crisis — an increased focus on core businesses, operating in capital preservation mode, a reticence to take on debt, and/or the lack of adequate capital — than any fundamental change in the mindset of executives towards M&A deals.

Fascinating read in the March 2011 issue of Wired magazine documenting an increasing trend among U.S. small businesses: They seem to be bringing manufacturing work that had been outsourced to China back stateside (see Small Businesses Buck Trend, ht Jon).

According to Wired:

For US firms, the decision to manufacture overseas has long seemed a no-brainer. Labor costs in China and other developing nations have been so cheap that as recently as two or three years ago, anyone who refused to offshore was viewed as a dinosaur, certain to go extinct as bolder companies built the future in Asia. But stamping out products in Guangdong Province is no longer the bargain it once was, and US manufacturing is no longer as expensive. As the labor equation has balanced out, companies—particularly the small to medium-size businesses that make up the innovative guts of America’s technology industry—are taking a long, hard look at the downsides of extending their supply chains to the other side of the planet.

“Companies are looking to base their decisions on more than just costs,” says Simon Ellis, head of supply-chain strategies practice at IDC Manufacturing Insights, a market research firm. “They’re looking to shorten lead times, to reduce the inventory they have to carry.” When accounting giant KPMG International recently asked 196 senior executives to list their top concerns for 2011 and 2012, labor costs ranked below product quality and fluctuations in shipping rates and currency values. And 19 percent of the companies that responded to an October survey by MFG.com, an online sourcing marketplace, said they had recently brought all or part of their manufacturing back to North America from overseas, up from 12 percent in the first quarter of 2010. This is one reason US factories managed to add 136,000 jobs last year—the first increase in manufacturing employment since 1997.

The US certainly isn’t on the verge of recapturing its past industrial glory, nor can every business benefit by fleeing China. But those that actually build tangible goods should no longer assume that “Made in the USA” is an unaffordable luxury. Unless a company is hell-bent on selling the cheapest goods possible, manufacturing at home makes more sense than it has in a generation.

This is not inconsistent with the anecdotal evidence that I have gathered from my interactions with managers. I have found that managers typically overestimate the benefits of offshore outsourcing (i.e., the ability to access cheap labor) and underestimate its costs (e.g., those born out of cultural, political, economic, and regulatory differences across countries). Unfortunately, many only learn the hard way – they commit to the outsourcing strategy before they discover the costly mistake.

The article continues:

Once they do [outsource], these businesses often realize something profound: China isn’t the great deal they expected. A January 2010 survey by the consulting firm Grant Thornton found that 44 percent of responders felt they got no benefit from going overseas, while another 7 percent believed that offshoring had actually caused them harm. One big reason for this growing dissatisfaction is quality…In addition to quality issues, subcontracting also exacerbates a second major problem with Chinese manufacturing: the lack of safeguards on intellectual property…Finally, sheer distance remains an intractable problem.

The Wired article provided a nice read, touched on some important points, and offered some interesting vignettes. I encourage you to take a look for yourself.

That said however, the issue is not all that new. It is reflective of a long-standing debate in the international business literature, and reminds me of a similar article written in the Harvard Business Review nearly 25 years ago (see Manufacturing Offshore is Bad Business).

Although I agree that there are compelling business reasons to consider offshore outsourcing, it is also important for managers to recognize that the practice is not without strategic consequences.

Wonderfully rich exposition of the economic competition between China and the U.S. from The Economist (see China Overtakes U.S.).

Constant worrying about exactly when the superpower will fall into second place is causing anxiety throughout American society…[but] in some important fields, China has already surpassed America.

Great stuff!

Cisco is often held up in Business School classrooms as an example of a company that has been able to successfully lever alliances and acquisitions for growth. Although I do often discuss Cisco in the classroom, that distinction has never quite sat well with me. At some point, incessant dealmaking spreads a firm’s resources thin (for background, see Is Cisco Becoming Too Big?).

The Economist picked up on this theme in a recent article (see Is Cisco Spreading Itself Thin?). According to The Economist:

[Cisco] is trying to make a business out of reinventing itself—so much so that investors wonder if the firm is stretching itself too thinly. Those criticisms are unlikely to go away after the quarterly results Cisco posted on February 9th. Earnings fell by 18% and revenues rose by an unexciting 6% year-on-year. To avoid getting stuck in a market for obsolete products, Cisco is not entering just a couple of big new markets, but more than 30, including “virtual health care”, “cloud computing” and “safety and security”.

Entering greater than 30 new markets?? Wow!

As I mentioned in my previous post (see Is Cisco Becoming Too Big?):

…one of the basic tenets of transaction cost economics…is that although acquisitions might make sense when there is market failure [and/or substantial operating synergies], at some point the benefits of bringing transactions within a firm (e.g., through acquisition) wear off. Size eventually yields inefficiency.

I fear that this is precisely what is happening to Cisco.

However, as The Economist notes, John Chambers (Cisco’s CEO) seems to be aware of the issue.

…he [Chambers] seems to have tapped on the brake. He no longer talks about increasing the number of new markets the firm enters to 50 and beyond. And no additional ones have been announced for some time.

Let’s hope that this represents a first step toward reevaluating their corporate strategy, …and righting the ship.

I appeared on the CBS Evening News this Saturday night discussing Wael Ghonim and Google. This builds on a story that originally appeared in the Wall Street Journal on a similar topic (see Google Tiptoes Around Hero).

The original discussion (both with the WSJ and CBS) centered on the responsibility of Google for the behavior of its employees in foreign countries. The basic question was: How should multinational firms behave in foreign countries?

I mentioned that this debate is really not all that new, and certainly not unique to Google. These issues have affected multinational firms for as long as they have existed – e.g., pollution of the local environment, treatment of host country workers.

The questioning then quickly turned to the possible repercussions for Google to having an activist like Wael Ghonim as an employee. This is where this specific case differs quite substantially from the “typical” problems faced by multinationals.

The interesting thing in this case is that every time we hear the name Wael Ghonim we generally also hear “Google Executive”, as if it meant something that he were an employee of Google.

In my opinion, this issue has very little to do with Google per se. Sure, Ghonim is an employee of Google, but he pursued his interests on his own time, …and those pursuits had very little to do with Google’s day-to-day. It’s not like he engaged in his activism as a representative of Google, or even on its behalf.

But that begs the question: Regardless, is it a good thing or a bad thing for Google that the media associates Ghonim with the company?

That’s more complex. To the extent that his actions jeopardize Google’s relationships in Egypt, throughout the Middle East, or in any other country that views Google as a potential threat to political stability, Ghonim’s celebrity could have some negative ramifications for Google. But conversely, there are some for whom the brand just became more valuable – e.g., those who, for whatever reason, make positive associations between Google and civil liberties/human rights. And for some (think disenfranchised youth yearning for a voice), Google just became a pretty cool place to work.

Anyhow, the entire CBS piece appears below…

…for those who cannot view the embedded video, you can view it on the website at http://www.cbsnews.com/video/watch/?id=7344453n

The Council on Foreign Relations recently posted an interesting graphic on the U.S. trade balance in the wake of the financial crisis (see It’s Almost All Good).

The basic idea: Since the financial crisis, the U.S. trade balance has improved with just about every country but China.

That the trade balance has improved vis-a-vis most trading partners is not surprising given the 15% (or so) drop in the value of the U.S. dollar since 2006. That it has worsened vis-a-vis China in spite of that stylized fact virtually assures that it will continue a hot-button issue among U.S. policymakers, and further threaten to escalate bilateral trade tensions (see also So Much for the Flexible Yuan and China Not a Currency Manipulator?).

As I mentioned last summer:

…don’t be surprised if the trade deficit and cries of unfair trade practices begin to occupy a more prominent place in political discourse.

We certainly live in interesting times…

As I’ve mentioned before, although the auto industry seems to have stabilized in the wake of the financial crisis (and I see that as a good thing), overcapacity continues to be the major, long-term problem facing automakers (see Auto Industry’s Big Little Problem).

An article in last week’s issue of the Economist reiterated that concern (see Danger Ahead).

According to the Economist:

THE mood at the Detroit motor show this year was very different from the dark days of 2009. Then, bosses of American car companies wondered if their firms would survive. Now, thanks to $60 billion of federal finance and the cold shower of bankruptcy to wash away their debts, General Motors (GM) and Chrysler are still alive, while Ford’s canny financial manoeuvring before the crisis allowed it to clean up its act and roar back to record profits.

Yet the industry’s problems are not behind it. The American rescues averted catastrophe, but they—along with continued European subsidies—have exacerbated the overcapacity that has dogged the sector for years. The car industry can produce 94m cars a year, against global demand of 64m. Unless that changes, it will never return to health.

I agree. Unless massive productive capacity is eliminated from the industry or demand explodes by 50% (not very likely), there will need to be another shake out in the industry.

The interesting thing about the article is that for many years we’ve been told by industry participants and observers that growth in China would help ameliorate the overcapacity concerns. However, as the Economist article astutely points out, it’s not clear that demand growth in China and/or other emerging markets will finally rid the industry of its overcapacity problems. This is because upstarts in those emerging markets continue to add capacity to the industry, and it’s unclear that demand growth in the emerging world will continue at its torrid pace.

Developments in China are likely to make things worse still for rich-world companies. China too has a surplus of car manufacturers, excess capacity and a problem with demand. Annual sales growth is forecast to fall from 30% to around 10%…

And the issues are not limited to the U.S., China, or India. Europe’s automakers face similar overcapacity and productivity problems.

…tough labour laws and government stakes in some firms—a German Land, Lower Saxony, owns 20% of VW, for instance, and the French government owns 15% of Renault—discourage them from shedding workers. As a result, despite the biggest crisis in living memory in the industry, firms are failing to rationalise.

The question then remains: What gives? Where will the much needed capacity rationalization come from??

This has all the makings of a multi-country “my industrial national champion is more important than your industrial national champion” kind of a spat.

BNET recently published a follow on to its Business Blunders of 2010 (to see last year’s list see Business Blunders of 2009). The list was amusing again this year. Some highlights:

Mistake #3: Cruise Visits Haiti Beach

Despite the chaos gripping nearby Port au Prince, Royal Caribbean Cruises forges ahead with plans to drop vacationers at its private beach in Haiti in the aftermath of the devastating earthquake that killed more than 200,000. An article in Advertising Age says the company’s brand could suffer “lasting damage from the visuals of mostly white vacationers frolicking in the sun … while only 60 miles away thousands of people are fighting over food and water.” A headline in the New York Post sums things up even more succinctly: “Ship of Ghouls.”

Mistake #5: Dell’s Customer Service

Documents from a lawsuit against Dell unsealed by a federal judge in November reveal that, after shipping nearly 12 million potentially defective computers equipped with faulty capacitors from 2003 to 2005, the company had provided its sales force with instructions that included pointers such as “Don’t bring this to customer’s attention proactively” and “Emphasize uncertainty.”

Mistake #20: Fraudclosure Gate

As officials from all 50 states investigate shortcuts taken by banks in repossessing hundreds of thousands of homes, it becomes clear that the workers handling the foreclosures were often less than qualified. Among other telling details, a Wells Fargo employee testifies that she was signing 300 to 500 foreclosure documents per day without bothering to read them; a firm hired to review documents for Citigroup and GMAC is found to have outsourced the work to companies in the Philippines and Guam; and at JPMorgan Chase, in-house hires were so wet behind the ears that they were referred to internally as “Burger King kids.”

Mistake #22: AT&T Touting its Network Coverage

AT&T sends out a “Special Message” to its wireless customers, thanking them for their business and highlighting the company’s $18 billion investment in its network. Unfortunately, the e-mail also contains a link to AT&T’s Facebook page, which its loyal customers visit in droves to, um, return the thanks. “AT&T is the worst feature of the iPhone and the reason I want to throw mine against the wall on a daily basis,” writes one fan. “I’m only sticking out my contract because I don’t have the money to pay a termination fee,” says another. “Service in Alabama sucks!” says a third, adding: “Seriously though, f### you!” Gushes yet another: “I hate ATT!!!!!!!!”

Mistake #27: Tony Hayward Handling the Gulf Crisis

Two months and roughly 3 million barrels of spilled crude into the Deepwater Horizon oil rig disaster—and fresh off criticism for saying “I’d like my life back” after the accident had cost 11 workers theirs—BP CEO Tony Hayward adds insult to injury by spending the day off the Isle of Wight aboard his $270,000 Farr 52 racing yacht. Stunned reactions to the sailing holiday from environmentalists, U.S. government officials, and Gulf Coast residents range from “insulting” to “the height of arrogance” to “man, that ain’t right.”

Mistake #28: Dow Jones Sustainability Index

In June, at the height of the Deepwater Horizon oil spill, BP is removed from the Dow Jones Sustainability Index, a measure that tracks the financial performance of firms hailed as “the leading sustainability-driven companies worldwide.” Three months later, after a “thorough analysis of corporate economic, environmental, and social performance,” BP’s replacement in the index is announced: Halliburton,the scandal plagued war contractor once run by global warming denier Dick Cheney. Halliburton had been responsible for cementing the seal of the well that had catastrophically blown out at the bottom of the Gulf of Mexico.

There are other good ones in there. To see the full list, click through to Business Blunders of 2010. Some funny stuff!

Interesting article in yesterday’s NY Times (see China’s Race for Patents) echoing my sentiment from several months ago about the dangers for developing countries of falling into a commodity trap (see Taiwan’s Lessons for China).

According to the NY Times article:

As a national strategy, China is trying to build an economy that relies on innovation rather than imitation. Clearly, its leaders recognize that being the world’s low-cost workshop for assembling the breakthrough products designed elsewhere — think iPads and a host of other high-tech goods — has its limits.

Absolutely. I’ve been arguing this for awhile. There’s only so much development that a model based on cheap labor and export-led growth can deliver. As I pointed out in my previous post drawing similarities between Taiwan and China:

Taiwan’s overall economic development over the past 50 years has been nothing short of spectacular. And there is no doubt in my mind that China is trying to emulate elements of Taiwan’s development strategy. However, a strategy centered almost exclusively around manufacturing (whether it be in high tech or other industrial goods) comes with some serious risks.

The problem with such a strategy is that it relegates developing country firms to junior partner status, dependent upon a system in which they manufacture (for export) the designs of others. In the extreme, this results in a commodity trap.

The key for countries like China is to transition, at some point, from an economy that simply manufactures the goods that are designed and developed elsewhere to one in which innovation, creativity, and high value-added services take root. Unfortunately, these transitions are difficult, and take an inordinate amount of time.

As the NY Times article emphasizes:

…can China become a prodigious inventor? The answer, in truth, will play out over decades — and go a long way toward determining not only China’s future, but also the shape of the global economy.

“The leadership in China knows that innovation is its future, the key to higher living standards and long-term growth,” Mr. [David] Kappos [Director of the USPTO] says.

Despite China’s inevitable rise, Mr. [John] Kao [an innovation consultant] said, the United States has a comparative advantage because it is the country most open to innovation. “American culture, more than any other, forgives failure, tolerates risk and embraces uncertainty,” Mr. Kao says.

Many innovative products and technologies, he says, will be made elsewhere. “But America’s future lies in being the orchestrator — the systems integrator — of the innovation process,” Mr. Kao said.

In many respects I agree with Mr. Kao. It will take a long time for developing countries like China that rely on manufacturing for export to close the innovation gap with the West. I have discussed these issues in various blog posts (see Emergence of Emerging Market Innovation, China Attracting High-Tech Research, China Alternative Energy, and Globalization Discontents).

At the very least, China’s leaders recognize, and openly acknowledge, the issue. And the first step in any solution lies in problem recognition.