World 3.0: Not as globalised as we think

For many years we have been hearing that the world is flat and that countries are becoming increasingly integrated with one another. The rapid rise of the internet, easy travel and cheap telecommunications make it easy to believe that we live in a completely globalised world.

But Pankaj Ghemawat, Professor of Global Strategy at IESE Business School in Barcelona, begs to differ from this dominant worldview. In his 2011 book, World 3.0: Global Prosperity and How to Achieve It, he looks at the hard evidence and argues the world is not as globalised as we think it is. At best, he says, it is semi-globalised, while distance – in the geographical, cultural and other senses, remains highly relevant and will continue to do so.

In fact, he says, it is important to challenge widely-held but distorted views over the actual extent of globalisation if we are to realise the world’s full growth potential for the benefit of everyone.

“If we can recognise that the levels of globalisation aren’t what we think they are and make the move for more integration, there is so much more to gain,” he said in a talk at NUS Business School.

It’s not too much of an exaggeration to say that much of the debate about globalisation occurs in a data-free zone

Pankaj Ghemawat

 

Rather than a tendency to see a choice between two options – globalisation and integration on the one hand, versus increased regulation and protectionism on the other – Ghemawat argues for a third view, a world in which both regulation and integration coexist and complement one another.

One of the key thrusts of his argument is that there is a big disconnect between people’s beliefs about globalisation and reality. When Ghemawat asks his audiences what percentage of all voice calling minutes are international, he says people often respond with large figures, like 40, 50 or 60 percent. In fact only two per cent of all telephone calls made are cross-border calls.

On a range of other measures of globalisation, such as the rates of Foreign Direct Investment as a proportion of total global investment activity, again there is a widely distorted general view of how integrated the world is.

ThinkAloud7Ghemawat says he regularly comes across estimates in the 20-40 per cent range, when the actual answer over the past few years has beem about 10 per cent and has never reached as high as 20 per cent.

“One of the things that did surprise me was the level of overestimation that people have of these quantities,” he told NUS Business School. “I usually try to tell people what the world isn’t and why this vision of a totally integrated world is delusional before I get onto talking about what the world really is”.

Why the misperceptions?

According to Ghemawat, it is rare to find such a large degree of inaccuracy in people’s view of the world. But he says there are explanations for why so many people across different demographics and different continents believe that the world is much more integrated than it is.

A matter of facts

border280Borders still matterGhemawat says that people think that they are experts on globalisation from their own personal experiences and largely disregard or do not bother examining the facts. “We feel very comfortable holding forth, without looking at the data,” he said, adding: “It’s not too much of an exaggeration to say that much of the debate about globalisation occurs in a data-free zone.”

Supporting that belief, he says, society has bought into the concept that technology has the power to obliterate cultural and political differences. In Ghemawat’s view, “this exaggerated discussion about the transformative effects of technology make it very easy to sell oneself a view of the world in which borders don’t matter.”

There is also a psychological dimension to our misperceptions, Ghemawat says, arguing that people want to believe in globalisation because it is an exciting idea: “If you’re a young MBA student soldiering through classes, what could be more seductive than to be told, ‘once you’ve mastered these cases, you’ll be fully equipped to tackle business problems all around the world’?”

Ghemawat’s book attempts to undo some of what he says are these misconceptions about globalisation and give a more accurate representation of how the world really works. He argues that while the world has indeed become increasingly integrated, the barriers between countries remain significant and need to be taken into account.

pankajtalk280Businesses, he says, must also pay due attention to what he calls the “Law of Distance”, that is “the notion that not only are cross border interactions limited, but the lion’s share of the cross border interactions that do occur, occur between countries that are relatively close to each other not just geographically but culturally and politically.”

Ghemawat points out, for example, that the majority of cross border interactions from the US take place with its direct northern neighbour, Canada. Indeed, Canada remains America’s largest bilateral trading partner, a primary source of imported oil and by far the top destination for outbound US telephone traffic.

These facts about globalisation have important implications for businesses, Ghemawat says, arguing that business people are equally subject to problems in their assessment of actual levels of integration as the rest of the population. “The first step for business is to understand that borders do matter,” he says.

He also recommends that when companies are deciding where they should expand, they should think about where they are coming from. Companies should expand to countries that relate to their own cultural and political values. This implies that the future of business lies in more regional interaction.

Finally, as businesses venture further afield, “they have to not just recognise the differences, but they have to think creatively about strategies for dealing with those differences.”

The financial crisis of 2008 brought to the fore the limitations of globalisation. As businesses and policy makers think forward about policies regarding regulation and integration, Ghemawat believes that there is a clear action agenda to follow to create a prosperous future. However, he argues that everything begins with an accurate understanding of the world we are really living in.

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