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1.4 The Globaliza on Debate

LEARNING OBJECTIVES

1. Understand the fla ening world perspec ve in the globaliza on debate.

In today’s global economy, everyone is accustomed to buying goods from other countries—electronics
from Taiwan, vegetables from Mexico, clothing from China, cars from Korea, and skirts from India.
Most modern shoppers take the “Made in [a foreign country]” stickers on their products for granted.
Long-distance commerce wasn’t always this common, although foreign trade—the movement of goods
from one geographic region to another—has been a key factor in human affairs since prehistoric
times. Thousands of years ago, merchants transported only the most precious items—silk, gold and
other precious metals and jewels, spices, porcelains, and medicines—via ancient, extended land and
sea trade routes, including the famed Silk Road through central Asia. Moving goods great distances
was simply too hard and costly to waste the effort on ordinary products, although people often carted
grain and other foods over shorter distances from farms to market towns.William J. Bernstein, A
Splendid Exchange: How Trade Shaped the World (New York: Atlantic Monthly Press, 2008).

What is the globalization debate? Well, it’s not so much a debate as it is a stark difference of opinion
on how the internationalization of businesses is affecting countries’ cultural, consumer, and national
identities—and whether these changes are desirable. For instance, the ubiquity of such food purveyors
as Coca-Cola and McDonald’s in practically every country reflects the fact that some consumer tastes
are converging, though at the likely expense of local beverages and foods. Remember, globalization
refers to the shift toward a more interdependent and integrated global economy. This shift is fueled
largely by (1) declining trade and investment barriers and (2) new technologies, such as the Internet.
The globalization debate surrounds whether and how fast markets are actually merging together.

We Live in a Flat World

The flat-world view is largely credited to Thomas Friedman and his 2005 best seller, The World Is

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Flat. Although the next section provides you with an alternative way of thinking about the world (a
multidomestic view), it is nonetheless important to understand the flat-world perspective.
Friedman covers the world for the New York Times, and his access to important local authorities,
corporate executives, local Times bureaus and researchers, the Internet, and a voice recorder enabled
him to compile a huge amount of information. Many people consider globalization a modern
phenomenon, but according to Friedman, this is its third stage. The first stage of global development,
what Friedman calls “Globalization 1.0,” started with Columbus’s discovery of the New World and ran
from 1492 to about 1800. Driven by nationalism and religion, this lengthy stage was characterized by
how much industrial power countries could produce and apply.

“Globalization 2.0,” from about 1800 to 2000, was disrupted by the Great Depression and both World
Wars and was largely shaped by the emerging power of huge, multinational corporations.
Globalization 2.0 grew with the European mercantile stock companies as they expanded in search of
new markets, cheap labor, and raw materials. It continued with subsequent advances in sea and rail
transportation. This period saw the introduction of modern communications and cheaper shipping
costs. “Globalization 3.0” began around 2000, with advances in global electronic interconnectivity
that allowed individuals to communicate as never before.

In Globalization 1.0, nations dominated global expansion. Globalization 2.0 was driven by the
ascension of multinational companies, which pushed global development. In Globalization 3.0, major
software advances have allowed an unprecedented number of people worldwide to work together with
unlimited potential.

The Mumbai Taxman

What shape will globalization take in the third phase? Friedman asks us to consider the friendly local
accountants who do your taxes. They can easily outsource your work via a server to a tax team in
Mumbai, India. This increasingly popular outsourcing trend has its benefits. As Friedman notes, in
2003, about 25,000 US tax returns were done in India.Thomas L. Friedman, The World Is Flat (New
York: Farrar, Straus and Giroux, 2005). By 2004, it was some 100,000 returns, with 400,000
anticipated in 2005. A software program specifically designed to let midsized US tax firms outsource
their files enabled this development, giving better job prospects to the 70,000 accounting students
who graduate annually in India. At a starting salary of $100 per month, these accountants are
completing US returns and competing with US tax preparers.

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Chris C. Got It Wrong?

In 1492, Christopher Columbus set sail for India, going west. He had the Niña, the Pinta, and the
Santa María. He never did find India, but he called the people he met “Indians” and came home
and reported to his king and queen: “The world is round.” I set off for India 512 years later. I knew
just which direction I was going in—I went east. I was in Lufthansa business class, and I came
home and reported only to my wife and only in a whisper: “The world is flat.”

And therein lies a tale of technology and geoeconomics that is fundamentally reshaping our
lives—much, much more quickly than many people realize. It all happened while we were
sleeping, or rather while we were focused on 9/11, the dot-com bust, and Enron—which even
prompted some to wonder whether globalization was over. Actually, just the opposite was true,
which is why it’s time to wake up and prepare ourselves for this flat world, because others already
are, and there is no time to waste.Thomas L. Friedman, “It’s a Flat World, After All,” New York
Times Magazine, April 3, 2005, accessed June 2, 2010, http://www.nytimes.com/2005/04
/03/magazine/03DOMINANCE.html.

This job competition is not restricted to accountants. Companies can outsource any service or
business that can be broken down to its key components and converted to computerized operations.
This includes everything from making restaurant reservations to reporting corporate earnings to
reading x-rays. And it doesn’t stop at basic services. With the “globalization of innovation,”
multinationals in India are filing increasing numbers of US patent applications, ranging from aircraft-
engine designs to transportation systems and microprocessor chips. Japanese-speaking Chinese
nationals in Dailian, China, now answer call-center questions from Japanese consumers. Due to
Dailian’s location near Japan and Korea, as well as its numerous universities, hospitals, and golf
courses, some 2,800 Japanese companies outsource operations there. While many companies are
outsourcing to other countries, some are using “home sourcing”—allowing people to work at home.
JetBlue uses home sourcing for reservation clerks. Today, about 16 percent of the US workforce works
from home. In many ways, outsourcing and home sourcing are related; both allow people to work
from anywhere.

How the World Got Flat

Friedman identifies ten major events that helped reshape the modern world and make it flat:Thomas

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L. Friedman, The World Is Flat (New York: Farrar, Straus and Giroux, 2005), 48–159.

1. 11/9/89: When the walls came down and the windows went up. The fall of the Berlin
Wall ended old-style communism and planned economies. Capitalism ascended.
2. 8/9/95: When Netscape went public. Internet browsing and e-mail helped propel the
Internet by making it commercially viable and user friendly.
3. Work-flow software: Let’s do lunch. Have your application talk to my application.
With more powerful, easier-to-use software and improved connectivity, more people can share
work. Thus, complex projects with more interdependent parts can be worked on collaboratively
from anywhere.
4. Open-sourcing: Self-organizing, collaborative communities. Providing basic software
online for free gives everyone source code, thus accelerating collaboration and software
development.
5. Outsourcing: Y2K. The Internet lets firms use employees worldwide and send specific work to
the most qualified, cheapest labor, wherever it is. Enter India, with educated and talented people
who work at a fraction of US or European wages. Indian technicians and software experts built an
international reputation during the Y2K millennium event. The feared computer-system
breakdown never happened, but the Indian IT industry began handling e-commerce and related
businesses worldwide.
6. Offshoring: Running with gazelles, eating with lions. When it comes to jobs leaving and
factories being built in cheaper places, people think of China, Malaysia, Thailand, Mexico,
Ireland, Brazil, and Vietnam. But going offshore isn’t just moving part of a manufacturing or
service process. It means creating a new business model to make more goods for non-US sale,
thus increasing US exports.
7. Supply-chaining: Eating sushi in Arkansas. Walmart demonstrates that improved
acquisition and distribution can lower costs and make suppliers boost quality.
8. Insourcing: What the guys in funny brown shorts are really doing. This kind of service
collaboration happens when firms devise new service combinations to improve service. Take
United Parcel Service (UPS). The “brown” company delivers packages globally, but it also repairs
Toshiba computers and organizes delivery routes for Papa John’s pizza. With insourcing, UPS
uses its logistics expertise to help clients create new businesses.
9. Informing: Google, Yahoo!, MSN Web Search. Google revolutionized information
searching. Its users conduct some one billion searches annually. This search methodology and the
wide access to knowledge on the Internet transforms information into a commodity people can
use to spawn entirely new businesses.
10. The steroids: Digital, mobile, personal, and virtual. Technological advances range from
wireless communication to processing, resulting in extremely powerful computing capability and

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transmission. One new Intel chip processes some 11 million instructions per second (MIPS),
compared to 60,000 MIPS in 1971.

These ten factors had powerful roles in making the world smaller, but each worked in isolation until,
Freidman writes, the convergence of three more powerful forces: (1) new software and increased
public familiarity with the Internet, (2) the incorporation of that knowledge into business and
personal communication, and (3) the market influx of billions of people from Asia and the former
Soviet Union who want to become more prosperous—fast. Converging, these factors generated their
own critical mass. The benefits of each event became greater as it merged with another event.
Increased global collaboration by talented people without regard to geographic boundaries, language,
or time zones created opportunity for billions of people.

Political allegiances are also shifting. While critics say outsourcing costs US jobs, it can also work the
other way. When the state of Indiana bid for a new contract to overhaul its employment claims
processing system, a computer firm in India won. The company’s bid would have saved Indiana $8
million, but local political forces made the state cancel the contract. In such situations, the line
between the exploited and the exploiter becomes blurred.

Corporate nationality is also blurring. Hewlett-Packard (HP) is based in California, but it has
employees in 178 countries. HP manufactures parts wherever it’s cheapest to do so. Multinationals
like HP do what’s best for them, not what’s best for their home countries. This leads to critical issues
about job loss versus the benefits of globalization.

Since the world’s flattening can’t be stopped, new workers and those facing dislocation should refine
their skills and capitalize on new opportunities. One key is to become an expert in a job that can’t be
delegated offshore. This ranges from local barbers and plumbers to professionals such as surgeons
and specialized lawyers.

We Live in a Mul domes c World, Not a Flat One!

International business professor Pankaj Ghemawat takes strong issue with the view that the world is
flat and instead espouses a world he characterizes as “semiglobalized” and “multidomestic.” If the
world were flat, international business and global strategy would be easy. According to Ghemawat, it
would be domestic strategy applied to a bigger market. In the semiglobalized world, however, global
strategy begins with noticing national differences.Pankaj Ghemawat, “Distance Still Matters,”
Harvard Business Review 79, no. 8 (2001): 137–47.

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Ghemawat’s research suggests that to study “barriers to cross-border economic activity” you will use a
“CAGE” analysis. The CAGE framework covers these four factors:Pankaj Ghemawat, “Distance Still
Matters,” Harvard Business Review 79, no. 8 (2001): 137–47.

1. Culture. Generally, cultural differences between two countries reduce their economic
exchange. Culture refers to a people’s norms, common beliefs, and practices. Cultural distance
refers to differences based in language, norms, national or ethnic identity, levels of trust,
tolerance, respect for entrepreneurship and social networks, or other country-specific qualities.
Some products have a strong national identification, such as the Molson beer company in Canada
(see Molson’s “I am Canadian” ad campaign).“I Am Canadian,” YouTube video, posted by “vinko,”
May 22, 2006, accessed May 4, 2011, http://www.youtube.com/watch?v=BRI-A3vakVg.
Conversely, genetically modified foods (GMOs) are commonly accepted in North America but
highly disdained in Western Europe. Such cultural distance for GMOs would make it easier to sell
GMO corn in the United States but impossible to sell in Germany. Some differences are
surprisingly specific (such as the Chinese dislike of dark beverages, which Coca-Cola marketers
discovered too late).
2. Administration. Bilateral trade flows show that administratively similar countries trade
much more with each other. Administrative distance refers to historical governmental ties, such
as those between India and the United Kingdom. This makes sense; they have the same sorts of
laws, regulations, institutions, and policies. Membership in the same trading block is also a key
similarity. Conversely, the greater the administrative differences between nations, the more
difficult the trading relationship—whether at the national or corporate level. It can also refer
simply to the level and nature of government involvement in one industry versus another.
Farming, for instance, is subsidized in many countries, and this creates similar conditions.
3. Geography. This is perhaps the most obvious difference between countries. You can see that
the market for a product in Los Angeles is separated from the market for that same product in
Singapore by thousands of miles. Generally, as distance goes up, trade goes down, since distance
usually increases the cost of transportation. Geographic differences also include time zones,
access to ocean ports, shared borders, topography, and climate. You may recall from the opening
case that even Google was affected by geographic distance when it felt the speed of the Internet
connection to Google.com was slowed down because the Chinese were accessing server farms in
other countries, as none were set up in China (prior to the setup of Google.cn).
4. Economics. Economic distance refers to differences in demographic and socioeconomic
conditions. The most obvious economic difference between countries is size (as compared by
gross domestic product, or GDP). Another is per capita income. This distance is likely to have the
greatest effect when (1) the nature of demand varies with income level, (2) economies of scale are

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limited, (3) cost differences are significant, (4) the distribution or business systems are different,
or (5) organizations have to be highly responsive to their customers’ concerns. Disassembling a
company’s economy reveals other differences, such as labor costs, capital costs, human capital
(e.g., education or skills), land value, cheap natural resources, transportation networks,
communication infrastructure, and access to capital.

Each of these CAGE dimensions shares the common notion of distance. CAGE differences are likely to
matter most when the CAGE distance is great. That is, when CAGE differences are small, there will
likely be a greater opportunity to see business being conducted across borders. A CAGE analysis also
requires examining an organization’s particular industry and products in each of these areas. When
looking at culture, consider how culturally sensitive the products are. When looking at
administration, consider whether other countries coddle certain industries or support “national
champions.” When looking at geography, consider whether products will survive in a different
climate. When looking at economics, consider such issues as the effect of per capita income on
demand.

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An Amusing Anecdote

Pankaj Ghemawat provides this anecdote in partial support of his multidomestic (or anti-flat-
world) view. “It takes an aroused man to make a chicken affectionate” is probably not the best
marketing slogan ever devised. But that’s the one Perdue Chicken used to market its fryers in
Mexico. Mexicans were nonplussed, to say the least, and probably wondered what was going on in
founder Frank Perdue’s henhouse. How did the slogan get approved? Simple: it’s a literal
translation of Perdue’s more appetizing North American slogan “It takes a tough man to make a
tender chicken.” As Perdue discovered, at least through his experience with the literal translation
of his company motto into Spanish, cultural and economic globalization have yet to arrive.
Consider the market for capital. Some say capital “knows no boundaries.” Recent data, however,
suggests capital knows its geography quite well and is sticking close to home. For every dollar of
capital investment globally, only a dime comes from firms investing “outside their home
countries.” For every $100 US investors put in the stock market, they spend $15 on international
stocks. For every one hundred students in Organisation for Economic Co-operation (OECD)
universities, perhaps five are foreigners. These and other key measures of internationalization
show that the world isn’t flat. It’s 90 percent round, like a rugby ball.Pankaj Ghemawat,
Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter
(Boston: Harvard Business School Press, 2007), 42.

While the world may not be flat, it is probably safe to say that it is flattening. We will use the CAGE
framework throughout this book to better understand this evolving dynamic.

K E Y TA K E AWAY S

The globaliza on debate pits the opinions of Thomas Friedman against those of Pankaj Ghemawat.
Their differing views help you be er understand the context of interna onal business. Through
exposure to Friedman’s ideas, you gain a be er perspec ve on the forces, or “fla eners,” that are
making cross-border business more prominent.
Ghemawat portrays a world that is “semiglobalized” and “mul domes c,” where global strategy
begins with no cing na onal differences.
Ghemawat’s CAGE framework covers four factors—culture, administra on, geography, and
economics.

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EXERCISES

(AACSB: Reflec ve Thinking, Analy cal Skills)

1. What are the basic tenets of the flat-world perspec ve?

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