Resilience will come at a cost.
Even before the Covid-19 pandemic hit, the trend toward freer movement of goods, capital and people known as globalization was facing severe headwinds in the form of trade wars, refugee crises and Brexit. Now, as the world struggles to recover from a plague that has reemphasized the significance of borders and national interests, global corporations must confront a difficult question: How best to do business in an increasingly fractured economic and geopolitical landscape?
One answer, to put it bluntly, is to become less global. This has advantages, but also entails costs.
Wherever one looks, globalization is in retreat. Multi-national supply chains buckled amid the coronavirus crisis, as transportation links broke and governments hoarded goods deemed strategic. International trade, which had decelerated in the decade leading up to the coronavirus crisis, isn’t expected to return to the robust growth of the 1990s and 2000s. Foreign direct investment has declined by more than half since 2016, and capital controls are back in vogue.
Policies that hinder migration, such as the executive orders of the Trump administration, are making it harder for companies to attract foreign talent — and to move executives around the globe to gather experience and spread values and know-how. Even the virtual world is breaking apart, as evidenced by concerns about the “splinternet” — the prospect that the internet could be divided between competing Chinese and U.S.-led technological spheres.
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Institutions such as the World Trade Organization are giving way to regional and bilateral deals, such as the Trans-Pacific Partnership and the agreements that the U.K., having left the European Union, must now negotiate. The International Monetary Fund and the World Bank are facing heightened competition from rivals such as the China-led Regional Comprehensive Economic Partnership, Belt and Road, and New Development Bank initiatives.
Certainly, companies should use what political influence they have to preserve the positive aspects of globalization. That said, their boards must also ensure that they mitigate risks. But how?
- Make supply chains more resilient. The uncertain geopolitical environment makes it harder to predict what will happen with barriers such as tariffs and quotas. So companies need to have better contingency plans, and to source more raw materials, labor and manufacturing domestically or in friendly countries.
- Raise capital locally. Global corporations have long benefited from a sort of “carry trade,” in which they borrow funds at low interest rates in New York or London, then invest it in a range of emerging markets that generate higher risk-adjusted returns. But in a world less amenable to cross-border capital flows, they might do well to raise more money in the same markets where they invest.
- Develop local talent. Companies can no longer be sure that they’ll be able to shift talent across borders as needed. So they’ll have to invest in building human capital in the places where they operate – particularly given the enhanced skills that increasing automation will require.
- Decentralize decision-making. Managing the competing demands of different governments will require more independent local operations. This means endowing staff with more authority to engage with local governments and make decisions. At the extreme, it could also mean setting up country-based subsidiaries with their own boards and stock-exchange listings.
All of these changes will involve costs, which will flow through to the prices of goods and services. But they’ll also enhance consistency, by mitigating the risk of disruptions to operations and profitability. In any case, in a deglobalized world they’re necessary: To succeed, companies must alter their business models to mirror the new reality.