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Pankaj Ghemawat and Geoffrey G. Jones
The Globalization of Firms in Historical Perspective
Semiglobalization—the incomplete integration of markets across national borders that was emphasized in the note on “The Globalization of Markets”—is also the state of the world that attaches importance to firms’ cross-border activities. Perfect cross-border integration of markets for products or inputs would limit the value of the bridges firms can build across borders. And perfectly separated national markets would dispense with the need for cross-border activities. It is between those extremes of complete separation and integration that the scope, complexity and profit-impact of firms’ crossborder activities are maximized. This note focuses on the role firms have played over time in promoting trade and investment. It takes a chronological perspective organized around a first wave of globalization that stopped after World War I and a second wave that started after World War II and is still unfolding (see Figure 1). The note on “The Globalization of Management” provides a snapshot of the state of globalization by business area in 2012 to complement the longitudinal perspective taken here.
1. The First Wave
In 1500 CE, the world’s export-to-GDP ratio is estimated to have been only about 0.1%, and international trade mostly occurred within geographic regions: the costs and hazards of interregional transportation by land, e.g., along the Silk Road between Europe and China, were extremely high. But improvements in seafaring technology in the 15th and subsequent centuries by West Europeans eased trade with India and China, each of which had an economy significantly larger than all of Europe’s at the time. Particularly critical was the discovery of a sea-route to the East, around the Cape of Good Hope, by the Portuguese navigator, Vasco da Gama, in 1497. The sea-route sparked a surge in the trade of luxuries between Europe and Asia, starting with trade in spices that could be sold for more than a hundred times as much in Europe as in their Asian countries of origin. The returns from trade were nonetheless limited by very high costs and risks: about half of the ships that set sail from Portugal for the East in the 16th and early 17th century never returned. A major development in the 17th century was the chartering of the first joint stock trading companies in Europe to trade with particular countries, most notably the English and Dutch East India Companies. These companies focused on pooling risks across investors as well as arbitraging differences in costs and willingness-to-pay between Asia and Europe (since they also purchased goods in Europe for sale in Asia). In so doing, they undertook hundreds of thousands of transactions every year.1 While not remotely comparable to the volumes of such flows in a large modern multinational, these requirements were sufficient to create the need for several hundred administrative personnel at the headquarters of the English East India Company and to force the replacement of owner-managers with salaried managers organized into hierarchies that included committees to control accounts, buying, private trade, presidencies, shipping, and treasure. The company began to experiment with contracts and incentives to motivate and control these managers. Eventually, it introduced a system of merit-based appointments that provided a model for the British and Indian civil service and—early in the 19th century—set up what may have been the world’s first corporate university, the East India College, to train officers going there. Thus, it actually set up many of the systems for modern management that are commonly supposed to have been pioneered by companies much later in the 19th century. But by then, the English East India Company itself had gone out of business, after a long political as well as commercial decline because of liberal sentiments in Britain, jealousy of its commercial rights and apprehensions about its security
Copyright © 2013 Pankaj Ghemawat and Geoffrey G. Jones. This material was developed for students in the GLOBE course at IESE Business School and should not be cited or circulated without the authors’ written permission.
British trading houses such as Jardine Matheson participated in the forced opening of the China market. led by Mitsubishi and Mitsui. That did not mark the end of all the original trading companies: Hudson’s Bay Company. aided by the shift from sail to steam and other improvements in transportation. grew to be about twice as large. usually on the back of FDI. although perishability meant that the trade was organized around large vertically integrated firms that coordinated flows from slaughter to sale. particularly Germany. Treasury bonds fell by 69% when the first transatlantic cable was introduced in 1866. Thus. incorporated by English royal charter in 1670. And others entered the fray. The 1840s. saw British interests floating a bank called the Oriental Bank Corporation in Bombay that quickly moved its head office to London and then constructed a branch network all over South Asia. It entered Japan in the 1860s. and Britain was situated right between those two growing regions. Significant trade emerged in minerals as well. including insurance. even though GDP itself was starting to grow much faster than population in parts of the world. trading companies handled 51% of Japanese exports and 64% of imports. In the 1990s.. and established workshops in St. However Britain was responsible for a growing global share of high value-added financial services. nine general trading companies. particularly textiles. while exports of manufactures from northwestern Europe. In the 1850s. Petersburg. several dozen trading companies modeled on Jardine Matheson and other British merchant houses were set up to ease the effects of more than 200 years of isolation. England to install and maintain products manufactured in Berlin. already a bit larger. price differentials between the London and New York markets for U. Telecommunications technology was important in enabling the increasing integration of many commodity markets during the first wave of globalization. was also wellpositioned geographically vis-à-vis global economic shifts. 2 . still operates as a retailer in Canada and the United States. It became the pacesetter at industrial transformation and specialization: a major shift from agriculture to industry and rapid urbanization turned the country into a big importer of grains and a big exporter of manufactures. although trade in manufactures. The world’s export-to-GDP ratio increased from 1% in 1820 to 5% by 1870 and 9% by 1913. Much of this increase was due to the expansion of trade beyond luxuries to agricultural and mineral commodities. and floated the Japanese government’s first ever foreign loans in the early 1870s before collapsing in 1884. Siemens Global cable systems were built and operated by giant utility firms. German traders such as Metallgesellshaft secured control of the global non-ferrous metal trade. grew to be significant as well.S. originally trading Indian opium for Chinese tea. higher-tech ones such as chemicals and electrical machinery. for example. Europe and the United States’ combined share of world GDP increased from 28%—or less than China’s—in 1820 to 53% by the end of the century. But British manufactured exports focused on traditional sectors such as textiles rather than new. By 1914. Jones apparatus and empire overseas. continued to handle over 40 per cent of Japanese exports and over 70 per cent of its imports. Russia and London.4 Britain.3 These developments and particularly the deployment of the first transatlantic cables forced significant price convergence of commodities for which a few reference prices served to summarize conditions in geographically separate product markets—and for widely-traded financial instruments. and Mitsui Bussan alone—part of the Mitsui diversified holding company—accounted for 20% of Japan's exports and imports. These and other commodities dominated international trade in the first wave of globalization. Meat followed foodgrains. the first country to experience the effects of the industrial revolution.2 When Japan reopened to the world with the Meiji Restoration in 1868.Globalization Note Series Pankaj Ghemawat and Geoffrey G. The Indian Mutiny/War of Independence of 1857 brought British possessions in India under the direct control of the British crown. World markets emerged for foodgrains after the mid-nineteenth century. Britain continued to dominate international capital flows to a much greater extent than international trade through to the end of the first wave of globalization. Subsequently. South Africa and Australia. Looking beyond trading companies. And after 1870. overall trade grew particularly explosively starting in the early 19th century—a few decades after modern economic growth began with the industrial revolution. as described below. especially the British-owned Globe Telegraph and Trust Company. it steadily lost ground to Continental Europe. Great Britain’s share of world exports of manufactures fell from 37% in the second half of the 1870s to 25% by 1914. Siemens and Halske pioneered the development of telegraph and cable equipment. Some of this took the form of bank intermediation: British banks started setting up large branch networks across the British Empire in the 1830s.
Most French (and German) manufacturing investments. and would typically operate in just one country. U. Geographically.7 In terms of sectors.e. exploited similarities).11 Its key challenges concerned not manufacturing but the marketing. agriculture and petroleum accounted for 54% of total investment—but manufacturing accounted for another 18%. The US had. and other utilities and services. owning a discrete foreign asset such as an Argentine railway. the third largest source overall. were located in Europe. after all. in the form of foreign portfolio investment. Unlike traditional vertical multinationals in agriculture and mining. mine or an Iranian oilfield that was managed locally by a British expatriate. Many of these innovations originated outside the U.K.10 As of 1914. Thus. By the early 1900s. although British firms did account for the bulk of investment in the British Empire outside Canada (where the U.S. many were clustered through various linkages. 72% of U. The colonial context was even more evident in FDI from France. which established new ventures and then did initial public offerings in London or other markets—not unlike modern-day business groups. typically debt obligations based on measurable revenue-generation potential (of governments. in developing countries: this was.5In addition to bank intermediation..S. large amounts of securities. per capita income at the time. in New York. Thus. Through the late 19th and early 20th century. it was the United States rather than Britain that overtook China as the largest single economy in the world based on GDP measured at purchasing power parity. however. But ultimately. profitable factory system he had developed .. And then there was the emergence.S. the U.S.. but investments to seek out new markets for manufactures—as opposed to resource-seeking investments aimed at arbitraging differences in costs and availability—focused on Canada. Although termed free-standing.S. railways. its textile yarn industry got off the ground when Samuel Slater.) were also invested in directly across borders. in 1890.S. of large volumes of foreign direct investment (FDI). Europe and Russia. historically been a technological follower. a typical firm of this sort would be organized as a standalone entity in London. the high point of the age of empire.9 An interesting contrast is presented by FDI from the United States. Singer.Pankaj Ghemawat and Geoffrey G. distribution and retailing of a consumer durable with a cost comparable to U. was an unusually successful early example. to reduce transactions costs. manufacturing multinationals were horizontal multinationals that replicated parts of their business models across the countries in which they operated to turn out broadly the same range of products (i. FDI continued to be dominated by the resource-based sector—mining. as project financing syndicates with delegated project management that transferred capital to foreign countries while taking advantage of cross-country differences in institutional infrastructure.. in effect. free-standing enterprises were “born global” They served.6 In addition to obtaining its source capital from the U. led by Canada and Mexico. exploited differences across countries). Jones Globalization Note Series British overseas banks like HSBC focused on a particular region.e.-based manufacturer of sewing machines. under British law. carried from the latter to the former not only Richard Arkwright’s spinning technology but also the highly disciplined. Such manufacturing FDI was spearheaded by large scale enterprises with significant administrative hierarchies unlike the freestanding firms that accounted for the bulk of British FDI—although this also meant that their domestic operations typically dominated their international activities in terms of size and how things were done. Two-thirds of British FDI was accounted for by what Mira Wilkins has called free-standing enterprises. and was the 3 . a U. of course. Britain was the dominant home country for FDI: its share of the worldwide stock of FDI amounted to 40-45% in 1913. about 85% of British FDI was concentrated in (and spread relatively evenly across) resource-based sectors. etc. which used outputs from some countries as inputs into their operations elsewhere (i.S. Singer’s innovations in response to this challenge included the development of hire purchase and then the invention of direct selling as door-to-door salesmen were both a way to collect money and expand the market where retail infrastructure was weak. especially in the closing decades of the 19th century and early in the 20th.8 The geographic scope of British FDI was broad. railways. particularly contract enforcement. led). Investment in foreign manufacturing was complemented by a network of branch offices that ultimately came to be overseen by three regional offices. data on listed companies suggest that before World War I. and were then transferred back. especially around trading companies. investment was concentrated in the Americas. Singer held 90% of its market despite not being the technological leader. known as the "Father of the American Industrial Revolution" in the United States and "Slater the Traitor" in Britain. London and Hamburg.
firms. but also signaled the end of the era when foreign companies could operate in most countries on more or less the same terms as domestic ones. Jones 7th largest firm in the world by sales. The Communist Revolution was the first case of large-scale expropriation of foreign FDI..g. 2. Also striking.S. not the U. The result was the creation of new subworlds based on the alternative currency areas that appeared after the collapse of the gold standard in the early 1930s. based on measures of market integration. was its largest single market (see Figure 2).S. which not only reduced the stock of German FDI to virtually zero. even by the standards of today’s multinationals: Russia. which governed 40% of world trade by the end of the 1930s. China and elsewhere to global capitalism. the Wall Street crash of 1929 and its global spread finally ended the first wave of globalization.Globalization Note Series Pankaj Ghemawat and Geoffrey G. Receptivity to foreign firms did not recover after the end of World War I. It sales profile was also unusually dispersed. 4 ..14 The infrastructure developed to trade commodities had to be elaborated to handle differentiated products that lacked well-defined reference prices.g. and were significant influences on international business and trade for several decades thereafter. Thus. The Great Reversal The first wave of globalization stalled and. The most obvious reason had to do with disruptions of the international political (and economic) order. which sold 85 per cent of lamps in the world) were extremely important actors in them.15 After the horrors and disruption of World War II. The Sterling Area. And France lost two-thirds of its entire foreign investment. major U. marketing and after-sales support. however.12 Distinct spheres of influence were also evident in the proliferation of international cartels. And capital market integration went intoreverse as the gold standard collapsed and the international monetary system disintegrated into regional currency areas. trade in differentiated manufacturers remains more sensitive to proximity and common language/colonial ties than trade in commodities. and then Eastern Europe.S. government was officially suspicious of international cartels. India engaged in large-scale state planning in order to promote industrial catch-up a la the Soviet Union—with which it also developed close trading and technological relationships. oil) and some other sectors critical to globalization (e. the British Empire accounted for 75 per cent of all non-oil British foreign investment. Less obviously. Such cartels persisted as major forces in Europe and Japan for decades and continued to be significant in some key commodities (e. Some have even argued that this shift was more important than the upheavals of the interwar era. To this day. went into reverse after World War I. Tariffs and exchange controls proliferated. Until political relations between Communist China and the Soviet Union deteriorated in the late 1950s. this Communist subworld covered a significant fraction of the world. The state-led model also attracted developing countries whose independence often intertwined with a backlash against Western capitalism. whether in oil or manufactured goods (GE dominated the world electric lamp cartel. resources and other industries.. Thus. Thus. in the U.. telecommunications. Immigration plummeted as governments introduced quotas and work visas. much of the world shut itself off from globalization. trade plummeted from 24% of GDP in 1920 to just 11% by the end of the decade—a level that would be maintained over the next 30 years—before the Smoot-Hawley Tariff Act of 1930 led directly to the Great Depression. Although the United States shifted from being the world’s largest debtor nation to being a net creditor over the course of the war. growing nationalism resulted in major restrictions on foreign ownership in shipping. These regimes instead attempted their own non-capitalist globalization: post-war Communist rulers encouraged their countries to specialize in particular sectors and trade with one another.13 While the U. While trade flows did recover during the 1920s. for example. international shipping and air transport). Singer. and the Dollar Area shaped flows of capital and of trade during the 1930s. Communism closed Russia. could not be shipped in bulk. the Franc Area. British and other Allied governments during World War. the shift in output from agriculture to manufacturing and the decades it took most firms—unlike Singer—to figure out how to sell differentiated manufactures rather than commodities overseas played a role as well.. on the eve of World War II.S. lost its entire Russian business as a result of the Revolution in 1917. and often required substantial local adaptation. were the sequestrations of German-owned affiliates by U.S.
came under pressure as host governments objected to having their resources owned by foreigners—although large oil. Drivers included changes in governmental policy. And even countries classified as remaining closed (e. Thus. Countries like India. like a great share in the management of world affairs.16 During the second wave of globalization. China. to some extent. Brazil and Indonesia would. suggested significant increases in openness to trade since the 1960s. which purchased commodities from suppliers in developing countries that were now state-owned and sold them worldwide. and a number in West Europe) also experienced large declines in tariffs and other contrived trade barriers. Trade was the sole exception: governments such as those in the UK and the US relied on tariffs as the largest source of governmental revenue and after 1870. served as a platform for global negotiations that greatly reduced artificial barriers to trade. But there were almost no restrictions on foreign investments in the United States or elsewhere—they were not even monitored.. The Second Wave Globalization eventually did resume its onward march in the decades after World War II. and companies from them as new players on the global scene. For example. The Role of Government The General Agreement on Tariffs and Trade (GATT). The vertical integration of the natural resource companies.” black market premia for hard currency and state monopolization of major exports.S.18 Others pointed to the shifting distribution of power across countries rather than their number as a problem. the U. across borders.. to levels generally well below those prevailing in the early 20th century. 5 . emerging markets reemerged as an engine of world growth. The countries that remained open throughout this period (e. Regionally. the share of governmental expenditures in total GDP increased from about 10% in 1870 to 45% in 1996. governments continued to matter a great deal—and arguably even more so now than at the crest of the first wave of globalization. One reason had to do with the rapid expansion of the state sector: for a sample of industrialized countries.g. a classification of countries as closed or open based on trade barriers but also on whether they were “socialist. These two dynamics—the visible hand of government and the challenges of globalizing differentiated manufactures—continued to affect the development of multinationals in the decades that followed World War II. minerals and fruit companies and other vertical multinationals retained some of their importance through their downstream control of distribution. the increasing intensity of investments in intangible assets such as technology and marketing expertise subject to some crosborder economies of scale and advances in information technology in particular. access to markets and (limited) contractual protections. eventually replaced by the World Trade Organization. governments rarely intervened in international economic affairs. Jones Globalization Note Series 3. with trade surging starting in the 1960s and FDI in the 1980s (see Figure 1).g. such as Philipp Brothers and later Glencore. And a new generation of trading companies emerged.17 Another reason was provided by the breakup of empires in the course of the 20th century: the number of independent countries increased from an all-time low of about 60 at the beginning of the 20th century to nearly 200 by 2000. And in the last few decades. especially in the last two decades of the 20th century (see Figure 3). the outgoing head of the World Trade Organization. services. the United States led the world in raising tariffs in order to also facilitate import substitution in manufacturing. in addition to more globalization. quite rightly. were both a broader range of strategies than pure arbitrage and more elaborate attempts at coordination within and across organizational boundaries. India and Russia) did integrate more with the global economy. Pascal Lamy. invoked multipolarity as one of the key reasons for the failure to conclude the Doha round of trade talks despite more than a decade of negotiation: Power is shifting from West to East and shifting quickly. for example.19 In contrast. But those who have held power for many decades are ready to accept this only if the emerging countries also take a larger share of the burden. the European Common Market and other integration initiatives provided impetus for more trade. China. So did broader moves by countries to open up. What resulted.Pankaj Ghemawat and Geoffrey G. a key feature of the first global economy. during the first global economy. the expansion of globalization beyond commodities as companies figured out how to sell differentiated manufactures and.
28 6 .26 New analysis of trade in value added.22 In tandem. Financial market liberalization. As a result. Thus. During the 1950s consultants. illustrated by the fact that services account for roughly 70% of global GDP but only about 20% of global trade. even the most internationalized—arguably easier than at the peak of the first wave of globalization. administrative arbitrage—arbitraging between governments and their rules and regulations—achieved some prominence alongside more traditional economic arbitrage.20 And even the very few long-running exceptions to this rule seemed to have come under pressure recently: thus. where they were disconnected from “real world” activity such as foreign trade. however. ad agencies. and of dirty manufacturing in countries with weak environmental restrictions. tended to be one way. So they spurred the international expansion of horizontal multinationals despite large differences across national markets. The creation of the Euromarkets in the late 1950s by British overseas banks like the Bank of London and South America revolutionized the world financial system. between 1953 and 2005. intra-firm trade was very low.21 What did change—particularly about advanced economies—in the period after World War II was the shift of economic activity and particularly employment toward services. present some performance challenges. providing incentives. the growing pool of offshore capital increasingly impinged on the ability of governments to regulate financial systems. R&D-intensity and advertising-intensity are robust predictors of the incidence of horizontal MNEs in manufacturing. but it was often difficult to contract out their services. in the form of labor services. regulating. Intangible assets such as technological knowhow and marketing expertise tended to exhibit increasing returns to scale and (partial) fungibility across locations. for example. trade in the services sector continued to remain limited. as in clear roots in one country.23 The biggest changes in services were due to banks. it remained easy to assign nationalities. presumably because such expenditures serve as proxies for the underlying importance of intangible assets. To this day. World War I and the Great Depression were turning points. Jones Nor were there many restrictions on labor mobility.Globalization Note Series Pankaj Ghemawat and Geoffrey G. Among the top 50 law firms. service sector employment in the U. Sectoral Shifts Horizontal multinationals in manufacturing continued to struggle with the challenges of globalizing differentiated manufactures. and offshore centers such the Cayman Islands.. making trade in services only 10% as intense as trade in merchandise.25 Nonetheless.g. Western Europe and Japan rose from 44% of total employment to 78%. location of financial activities in loosely regulated offshore financial centers. to almost all firms. But it also reflected continued lags in building up the kinds of intangible assets that pioneers such as Singer had started to amass a century earlier. although by the early twentieth century the United States had begun to restrict Asian immigration. hotels and film distributors went global. From the mid-1980s through the end of the 1990s. Examples include global shipping and flags of convenience.24 Over the next two decades.S. indicates that accounting for services content embodied in manufacturing exports.—and this has remained the case. etc. accelerated in the 1970s and has been cited as a contributor to a resurgence of banking crises in that decade. a negative relationship persisted in 2010 between the percentage of overseas partners in the firm and its profit per equity partner. the traditional two-headed Anglo-Dutch structures at Unilever and Shell had finally been consolidated.27 And by 2010. But through to the 1960s there was little rationalized production in such companies. and the broad use of foreign affiliates to reduce tax burden—a focus of mounting public outrage and tough talk from many governments in 2013. The new unregulated financial markets were and remained clustered in places such as London. however. Governments were everywhere in the lives of multinationals after 1914—expropriating. perhaps doubles the “services” share of world exports. and almost entirely prohibited it after World War I. and when it did take place. after several decades of nearinvisibility in major economies. subsidiaries tended to operate on a standalone basis. roughly 2/3 of global FDI was in the service sector. service firms swelled the ranks of globalizers. But such international administrative arbitrage notwithstanding. e. The globalization of these firms’ footprints did. spreading management practices and lifestyles. from home to abroad. up from half in 1990. including the removal of controls on international capital flows. This was partly a legacy of the welter of exchange controls and tariffs of the interwar years. countries accounting for a quarter of the world’s GDP were routinely in crisis in any given year.
but also opened up new markets (e. massive increases in processing power. As a result. What is worth emphasizing here is that the significant improvements in the speed and richness with which information could be exchanged between places had profound implications for how global organizations connected themselves up internally as well as externally to suppliers. for perishables) and permitted the development of quick-response global supply chains. especially on the North Atlantic route that still dominated global interactions in the early decades of the second wave. while feasible.g. big data and the cloud—is a familiar story that will not be repeated here. now the move toward locally produced and consumed services—outweigh the impact of improving transportation and communications on globalization. the intensity of investments in intangible assets shot up .S. to a lesser extent. Policy restrictions continued to be particularly pronounced in transportation and professional services. Trade and particularly FDI in others. in which changes in the composition of economic activity—then the trend toward differentiated manufacturing. And the jet plane not only improved air transport costs and times. investment in information technology (IT) in the form of both hardware and software came to account for a significant chunk of total investment as well.” Intangible Asset/Information-Intensity What is clearer is that as the relative importance of commodities declined and the emphasis on selling differentiated manufactures and. and permitted more efficient multimode shipments in which maritime transport interfaced with rail or road.. required a sophisticated system of rules and regulation that not all World Trade Organization members were equipped to operate—nor politically willing to do so. the second wave of globalization saw more and more horizontal multinationals also wrestling with the tension between adaptation and aggregation as they sought to exploit at least some similarities across countries to tap economies of scale or scope while remaining locally relevant.Pankaj Ghemawat and Geoffrey G.29 Others asserted an analogy with the decades it took firms to figure out how to sell differentiated manufactures rather than commodities overseas: “We are currently in a period like that from 1920 to 1950. gross business investment in intangibles increased from slightly over 4% of nonfarm business output at the end of World War II to nearly 14% by 2007—with about one-half of the total being accounted for by investments in R&D and brand equity—while the rate of investment in tangible assets hovered between 10% and 12%. IT was the big technological story of the second wave of globalization.”32 The runaway success of Ford’s fully standardized “any color so long as it’s black” Model T in the early 1900s inspired the company to build a giant plant modeled on its River Rouge complex in the US in the UK. as illustrated by Ford’s attempts over nearly a century to develop “a world car. But this was often hard to get right. Jones Globalization Note Series Some services such as haircuts were. slashed handling costs and times. which led on this metric. buyers and others. It is likely to be a period in which economic globalization 30 declines in importance. The IT revolution—the development of transistors and microprocessors. the Internet revolution and the prospect of a new digital wave around social media. services across borders went up during the postwar period. But again. even though the market there was much smaller. Strategy and Organization In addition to the arbitrage strategies aimed at exploiting differences that vertical multinationals had traditionally pursued. But the advent of OPEC (state-sponsored cartels continued to be entirely legitimate in many commodities—if ineffective in most) and recurrent peaks in the price of oil slowed progress. intrinsically untradeable. analytics. fuel prices have flattened the cost trajectory recently and environmental concerns loom ever larger. Some analysts nonetheless concluded that services globalization represented a great opportunity. Utilization problems were 7 . air transportation is estimated to account for about 40% of world trade by value.. although not a simple one: that a given percentage cut in services barriers would produce greater gains than those from a comparable cut in merchandise trade barriers. Thus. especially in the last few decades (see Figure 4). as evidenced by the breakdown of the Doha round of trade talks. of course.31 In addition. The development of shipping containers facilitated “unitization” or the shipping of less-than-full shiploads (note the continuing response to the challenges of differentiated manufactures vs. mobility. in the U. commodities). Which is not to say that transportation technology didn’t experience significant improvements as well.
the mismatch between domestic and international structures prompted a search for alternatives ranging from global product divisions and geographic divisions to matrix structures involving more elaborate coordination across products or geographies that became more popular over the 1990s and 2000s. the diffusion of models for outsourcing. Thus. etc. tea.S.S. Multinationals typically started out by tying foreign ventures to the parent with loose organizational links because of their riskiness as well as the prohibitive costs of establishing an elaborate organization to administer them. when Communist China and state-planned India opted out of the global economy. came under fire for working conditions at Foxconn’s plants. use of powerful U. Later attempts did achieve more parts commonality.35 But cross-border geographical and functional integration had proven very difficult to achieve. however. according to rough estimates based on a range of data sources. and in the 2010s. Taiwan’s Foxconn assembled an estimated 40% of the world’s consumer electronics in 2011 for clients such as Apple. 20% by 1998. and the push in many lines of business to provide integrated solutions from participants across the entire value chain. including a spate of suicides.36 In addition to attempts to achieve greater coordination internally. alliances’ share of revenues for the top 1000 U. China and India became suppliers of primary commodities— cotton. engines while local preferences were shifting to smaller cars with lower operating costs) and rising trade barriers that stymied planned exports to France and Germany. but in the early 21st century. Amazon. rising to 19% by 2010 (nearly the same size as the US or the EU’s). They truly became peripheral only with the second wave of globalization. particularly China and India. It has since turned around. Jones compounded by insufficient adaptation to local demand (e.—so they continued to be important to the global economy. that figure had fallen to about 20% as their income levels stagnated.S. Overall. GM historically achieved stronger results in Europe by allowing its subsidiaries there to pursue strategies more tailored to local markets. public corporations increased from about 1% in 1980 to 6-7% by 1990. and the EU combined). Dell. By 1980. finance. Samsung. Ford was again pursuing its world car ambitions—but so far. By the end of the first wave of globalization. Apple and other Foxconn clients. however. but they captured little value from it. and is forecast to reach 30% by 2030 (nearly as much as the U. and Sony. As foreign operations became even more important. the original Model T is the only exception to the rule regarding the unworkability of complete standardization in autos. they typically established an international division to coordinate such functions as transfer pricing.Globalization Note Series Pankaj Ghemawat and Geoffrey G.38 Emerging Markets Foxconn also exemplified an even larger change in the world economy: the changing role of emerging countries. and perhaps 30% or even 40% by 2010. especially for companies where borders had previously been sharply drawn.g. starting in the 1950s. the regional integration of the European Union prompted Unilever’s top management to promote pan-European integration at Unilever as well. leading multinationals also paid more attention in the 1990s and 2000s to strategic alliances involving significant inter-organizational coordination—a change typically attributed to the development of the internet. however. improvements in IT combined with rising levels of globalization and deepening intangible asset-intensity to prompt many multinationals to expand the amount of cross-border coordination that they attempted well beyond the traditional emphasis on resource allocation across and monitoring of national operations by headquarters. Thus. 15% by 1995. 34 Increasing integration within multinational firms also involved transforming their subsidiaries in foreign countries--to the point where free-standing subsdiaries had been deemed an endangered species. the company was still struggling to integrate the production and marketing facilities of its European firms. The two had accounted for nearly one-half of world GDP between them in 1820.33 As foreign operations matured. and the distribution of exports among production units. illustrating some of the difficulties associated with managing such extended supply networks. with China becoming 8 . their share of world GDP had dropped to 4% (or 8% in purchasing power parity terms) versus 21% for the US and 28% for the EU27. Ford nonetheless continued to pursue its vision of a “world car” despite setbacks such as the 1981 Ford Escort which was planned as a “totally common vehicle” across the US and Europe but was launched with only a single common part across the regions—with even that part changed six months later.37 Value chains in the consumer electronics industry exemplified the new reliance on webs of external partners.
Industry-level patterns provided some support for this characterization: established multinationals tended to do better in the China and India in industries with higher differentiation potential—i.42 While going head-to-head with incumbent multinationals in their home markets in the advanced countries as well as in one’s own was one option for companies from emerging economies. Figure 5 summarizes these GDP shifts and Figure 6 lists emerging economies’ share of global totals for a broader range of variables in 2010. reaching a decent scale and developing their own capabilities. with a particular focus on China and India. fast-moving local companies. A new set of competitors was emerging on the global arena. Companies from advanced countries also had to deal with greater distances than. Jones Globalization Note Series the biggest single economy.40 Further support came from the macro observation that investment rates in intangible assets tended to be much lower in emerging economies.e. with high R&D and advertising intensity—and local companies in industries with lower differentiation potential. Once again. probably even more common option: for example. became regionallyfocused “MultiLatinas. which accounted for more than four-fifths of the 70+ Chinese companies on the Fortune Global 500 and one-half of the companies from other emerging economies (vs. The largest markets for most products had long been developed ones but now. Some Latin American. construction inputs). infrastructure and human resources. many Latin American companies that internationalized. their influence was increasing rapidly: in 2012. Price points were generally much lower. for example. had recently been by far the fastest growing component of world trade. Penetrating emerging markets posed particular challenges. in autos—a particularly large.43 Focusing by region or sub-region was another.S.Pankaj Ghemawat and Geoffrey G. the most competitive of them were intent on expanding abroad. China was a partial exception.” Other bases for expanding—e. been characterized as lower cost. perhaps because it seemed to be driven top-down by Chinese policymakers. technological knowhow and management systems.41 But this level was low relative to Chinese rates of investment in tangible assets and appeared not to be yielding commensurate increases in output. And they were joined as credible multinational challengers by Chinese private companies—although size-based rankings were still dominated by state-owned companies. 104 of the firms in the Fortune Global 500 hailed from emerging countries. versus only 11 in 1995. R&D and design. Such multinational challengers had. Shifts in world demand presumably combined with low levels of intangible assets and continued restrictions on foreign competitors in many sectors to make focusing on the home market a more attractive option for a company from an emerging economy than a company from an advanced one. say. focused on software. large-scale resource-seeking investments—although the resource being sought was often labor rather than some mineral or other commodity—appeared to precede large-scale market-seeking investments. multinationals from advanced economies (again) expanded their horizons to encompass such markets. even if they were rarely internationally competitive. by following the diaspora or colonial-era linkages—further multiplied the possibilities. multinational expanding into Europe along dimensions such as cultural values and the quality of institutions. emerging markets in general and China in particular often led. And for some products and services (consumer durables. it wasn’t the only one.g. as indicated in Figure 6. But even here. And they often also had to contend with low-cost. the shift was occurring at a very high velocity. telecommunications. Overall. for example. 4% of the companies from advanced economies). asset-intensive industry that one might think of as slow-moving—emerging markets’ share of unit sales increased from 17% in 2001 to 48% in 2011!39 In response to this shift. Burgeoning commercial links among emerging economies represented another possible focus: trade between emerging markets. faced by a U. Thus. the data in Figure 6 suggest a severing of the link between market size and income that had lasted most of the 20th century.. With the removal of many of these restrictions. with an intangible investment rate in 2010 of 10% of nonfarm business output (versus less than 3% in India). 9 . Asian and other firms—the Cemex’s and Tata’s—had grown substantially behind protective tariffs during the 1950s1980s. Emerging Competitors Large companies were actually one of the dimensions along which emerging economies’ share of the world total lagged. better adapted to their home market and often nimbler than established multinationals but lacking the latter’s marketing expertise.
.S. and the challenges of dealing with multipolarity in international relations. at a minimum. talk of currency wars and uncertainty about the future of the dollar as the world’s reserve currency. And by 2013. or might it end in a second great reversal? 10 . rising income inequality in many countries and the rise of xenophobia in quite a few. the death of the Doha trade round for the World Trade Organization and the withdrawal of the United States for UNESCO). motivated not only by increases in protectionism and corporate retrenchment but also broader concerns: regional crises. especially. Some: non-western business enterprises seemed to be emerging in the first global economy. the doubling of the number of independent countries in the previous half century. and some developed significant global footprints. Thus. more miscellaneous ailments (e. Many of the other earlier multinational challengers were also done in by interventionist governments as well as regulations from the interwar years until the 1980s. the obsolescence of existing multilateral institutions because of economic shifts as well as other. the multinational challengers from emerging economies were not entirely without precedent. most notably in the Eurozone. particularly the emergence of an increasingly assertive China.Globalization Note Series Pankaj Ghemawat and Geoffrey G. Jones From a historical perspective.g.44 These developments marked. the Patiño tin company from Bolivia acquired mines overseas. Would the second wave of globalization resume. The Global Financial Crisis and Aftermath In the immediate aftermath of the global financial crisis that struck in 2008. smelters in Britain and the U. and shipping and transport interests but was nationalized in 1952. global connectedness faltered because of declines in international trade and. continued large trade imbalances. capital flows: see Figure 7. 4. and general economic malaise. there started to be talk of fragmentation. a lull in the surging globalization that the world had seen in in the previous few decades. especially in developed countries.
HBS Case 9-804-00. Jones Figure 1: Exports and Outward FDI Stock (Percentage of World GDP. 1910 Source: Geoffrey Jones and David Kiron. 1820-2011) 35% 30% 25% 20% 15% 10% 5% 0% 1810 1860 1910 1960 Globalization Note Series Exports FDI 2010 Export Sources: 1820-1992: Angus Maddison. Figure 2: Singer Sales Distribution. 19932011: World Bank World Development Indicators and IMF World Economic Outlook. Note: Based on unit sales.Pankaj Ghemawat and Geoffrey G. HBS Case 9-804-00. Globalizing Consumer Durables: Singer Sewing Machines before 1914. OECD 1995. Geoffrey Jones and David Kiron. Globalizing Consumer Durables: Singer Sewing Machines before 1914. 1990-2011: World Investment Report 2012. FDI Sources: 1913-1985: World Investment Report 1994. not revenues 11 . Monitoring the World Economy 1820-1992.
” Figure 5: Shares of World GDP (PPP). 2008. p. 1980-2016: IMF World Economic Outlook Database. 22. 1820-2030F 45% 40% EU‐27 35% 30% 25% China 20% India 15% 10% 5% United States 0% 1820 1850 1880 1910 1940 1970 2000 2030 Sources: 1820-1945: Angus Maddison. No.” The World Bank Economic Review. 12 . p. Figure 4: Transport and Communications Costs Indexes. with Air Transport (average revenue per passenger kilometer) updated to 2009 based on ICAO. Human Development Report 1999. Vol.188. 1920-2009 100 90 80 70 60 50 40 30 20 10 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Sea Fright Air Transport Telephone Call Computers Source: Source: UNDP (1999). “Trade Liberalization and Growth: New Evidence. 30. 2017-2030: EIU Forecasts. “Regional Differences in International Airline Operating Economics: 2008 and 2009. 2. Jones Figure 3: Openness to Trade Source: Romain Wacziarg and Karen Horn Welch.Globalization Note Series Pankaj Ghemawat and Geoffrey G. Author Estimates.
13 . 2000 vs.Pankaj Ghemawat and Geoffrey G. International Copper Study Group. Sources: IMF World Economic Outlook April 2013. World Bank World Development Indicators (WDI). 2010 Note: Emerging market countries are those designated as Developing and Emerging by the IMF in the April 2013 edition of the IMF World Economic Outlook database. Jones Globalization Note Series Figure 6: Emerging Countries’ Share of World Totals. World Steel Association. Fortune Global 500 in Fortune Magazine. UNCTAD World Investment Report (2002 and 2012 editions). Euromonitor.
Multinationals: Theory and History (Aldershot. 2005-2011) 30% Merchandise Exports (% of GDP) 25% 20% 15% 10% 5% Services Exports (% of GDP) 0% 2005 2006 2007 2008 2009 2010 2011 FDI Outflows (% of Gross Fixed Capital Formation) Sources: World Bank World Development Indicators. Jones Figure 7: Exports and Outward FDI Flows (Percentages of World GDP and GFCF.. “Historical Statistics of the World Economy: 1-2008 AD.” HBS Case No. 20-23.. Ltd. 9 Mira Wilkins.B. 2012) 4 Kevin H. p. 401). 62. 19. The Growth of Multinationals. 1960) and exclusive of oil-related foreign investments. 14 1 . Carlos and Stephen Nicholas. “The German Metal Traders Before 1914. 27. 1986).net/maddison/Historical_Statistics/vertical-file_02-2010. Corley. UNCTAD World Investment Report 2012 Ann M. No. Vol. 2008) 12 Mira Wilkins. ed. R. (New York: Oxford University Press. 9-804-001 (Boston: Harvard Business School Press. 1994). Williamson. 398-419 (p. ed.” In The Multinational Traders. 1988).” HBS No. 13 Fear chapter in Jones and Zeitlin. 1991). the irrational fear that someone in China will take your job”. 6 Herbert Feis. Wiley. 1998) 3 Geoffrey Jones and Bjoern Von Siemens. Greenwald and Judd Kahn. Oxford Handbook of Business History (OUP 2008). 1999) . 220.” in PETER HERTNER and GEOFFREY JONES (eds. 7 Geoffrey Jones.xls 11 Geoffrey Jones and David Kiron. (Aldershot: Edward Elgar.. 1991) 10 Angus Maddison. 3 (Autumn. 9811-004 (Boston: Harvard Business School Publishing. 279. Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy (Cambridge: The MIT Press.pp. 8 T.ggdc. 163-167. 14 Globalization: n. edited by Geoffrey Jones (London: Routledge. The Growth of Multinationals. 1 edition (November 10.” http://www. p. “Globalizing Consumer Durables: Singer Sewing Machine before 1914. based on data from A.(Aldershot: Edward Elgar Publishing Ltd.” The Business History Review. pp. "Giants of an Earlier Capitalism": The Chartered Trading Companies as Modern Multinationals. 2 Susan Becker. Capital Imports into Sterling Countries (London. British Multinational Banking. 80. N. 5 Jones. O’Rourke and Jeffrey G. ed. p. The Making of Global Enterprise (London: Frank Cass & Co. Bruce C.).” in Geoffrey Jones.A.. p.Globalization Note Series Pankaj Ghemawat and Geoffrey G. Conan. 2008). “Defining a Firm: History and Theory. Merchants to Multinationals: British Trading Companies in the Nineteenth and Twentieth Century. “Werner von Siemens and the Electric Telegraph. 2000). “Britain's Overseas Investments in 1914 Revisited. MIRA WILKINS.
NBER Working Paper 14587. Wells. 1972. (Oxford: Oxford University Press. 34 The tension among these organizational forms was described in Louis T. 29 Yvan Decreux and Lionel Fontagné. 31 Carol A. on Warren Company.” Working Paper. Economic Analysis of the Multinational Enterprise.Pankaj Ghemawat and Geoffrey G. 1 edition (November 10. p. and Nick Scheele.” MIT Industrial Performance Center Working Paper.rug. 2007). 2000 (Table I. “Trade in Tasks and Global Value Chains: Stylized Facts and Implications. Jones Globalization Note Series Rauch. the irrational fear that someone in China will take your job”. these sources themselves rely on a range of others that they cite in more detail. 2012. See also UNCTAD." Journal of international Economics 48. January 28. 30 Globalization: n. 2000): 1276–1296. 2004. “European Integration and Corporate Restructuring. 26 Based on 2010 data reported in the World Bank’s World Development Indicators. Hulten. N. April 19. Schenk. 2000. 2007. Greenwald and Judd Kahn. Jossey-Bass. Cambridge University Press.” presentation at Gro Pro Conference. “Marc Rich and Global Commodity Trading. editors. 58/1 (2005):113-39. Wiley. Managing the multinational enterprise : organization of the firm and ownership of the subsidiaries. January 16. 19. 2013. 28 UNCTAD World Investment Report 2012. Collis. the incidence of the matrix form went up from 14% in late 1990s to 37% by 2007 while that of functional organizations. Caves. December 17. 27 Hubert Escaith.S. Jones. Pankaj Ghemawat and David J. “The Origins of the Eurodollar Market in London : 1955-1963. Multinational Enterprise and Economic Analysis.” Business Standard. "Networks versus markets in international trade. 29.” which was released only in its preliminary unedited version as of this writing. 22 Calculated based on Angus Maddison dataset contained in Groningen Growth and Development Centre (GGDC) 10-sector database. 2008. editors. Corrado and Charles R. 35 (1998): 221-238 25 Carmen M. These data include government as well as commercial services. “Economic Impact of Potential Outcome of the DDA. unpublished Globalization Survey. 2005). 2008). Rugman and Thomsas L.” Unpublished Harvard Business School working paper no. (Cambridge: Cambridge University Press. James E. p.” HBS No. Appendix Tables 24-27. 175.” in The Oxford Handbook of International Business. 2011. 37 Data through 1995 based on Cyrus Friedheim. 38 Charles Duhigg and Keith Bradsher. 06-052 (2005). 9-813-020 (Boston: Harvard Business School Press. lost out on iPhone work.1. Sturgeon and Richard Florida. p. 2012) 17 Vito Tanzi and Ludger Schuknecht. “Global Value Chains and Development: Investment and Value Added Trade in the Global Economy. Reinhart and Kenneth S. 35 Julian Birkinshaw.. John Quelch and Rohit Deshpande. 1996 for a more precise statement of the necessary conditions for horizontal MNEs and an overview of the empirical evidence on their incidence (pp. p. Brewer. 19 Nayanima Basu. “Strategy and Management in MNE Subsidiaries. in particular. 32 The material in this paragraph is drawn from: Geoffrey Jones. Rogoff. “It’s a Small World After All…or Is It?” in The Global Market: Developing a Strategy to Manage Across Borders. indicate that based on based on self-reports. (New York: Basic Books). declined. 16 Geoffrey Jones and Espen Storli. Economic History Review.” The New York Times. “TheiEconomy: How the U.” Explorations in Economic History. “How Do You Measure a “Technological Revolution”? Paper presented at the American Economic Association meetings in Atlanta. Multinationals and Global Capitalism. The Strategy of Unilever c1957c1990”. 36 Jones and Peter Miskell.” CEPII-CIREM. “If countries don’t want to negotiate and agree. 2013. Georgia. Chapter 3.” American Economic Review 90 (December 5.” presentation to WTO Trade Data Day. Caves. 6). Stopford and John M. and since then. (Oxford: Oxford University Press. February 2009. Timothy J.1 (1999): 7-35. p. 15 15 . 33 The discussion in this paragraph follows the richly detailed review of the literature in Richard E. “Nationality and Multinationals in Historical Perspective. 24 Catherine R. 2001). 20 Geoffrey G. “Economic Integration and Political Disintegration. 26-35 and 83-87). January 21. January 2010. Alan M. http://www. The Trillion Dollar Enterprise. “Banking Crises: An Equal Opportunity Menace. Public Spending in the 20th Century: A Global Perspective. Bruce C. a WTO head can’t do much: Pascal Lamy. 381.nl/research/ggdc/data/10-sector-database. Strategic Alliance Best Practice User Guide. 19. 2002. 21 See Richard E. November. 18 Alberto Alesina et al. “Globalization and Jobs in the Automotive Industry. 23 George Beaton “Mega Trends in Professional Services.
available from the authors) 41 The Conference Board. Jones Based on data reported by Wards Auto. 44 Pankaj Ghemawat and Steven A. November 2008. Hout. “Intangible investment in China has grown rapidly—but is it efficient?” China Center for Economics and Business: Chart of the Week. as all countries that were not classified as “high income” by the World Bank in 2012. for this analysis.” China Center for Economics and Business: Chart of the Week. September 17. 39 16 . 43 Emerging markets were defined. 2012. (Details in prepublication version.Globalization Note Series Pankaj Ghemawat and Geoffrey G.” Deutsche Post AG. August 24. “The DHL Global Connectedness Index 2012. “China—Increasing intangible investment not yielding commensurate increases in output. “Tomorrow’s Global Giants? Not the Usual Suspects.” Harvard Business Review. with countries emerging markets defined as all countries that were not classified as “high income” by the World Bank in 2012. 40 Pankaj Ghemawat and Thomas M. 42 The Conference Board. 2012. Trade data were drawn from the IMF Direction of Trade Statistics and the UN Comtrade databases. Altman.
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