How Businesses Can Navigate Deglobalization And The Looming Recession: A Four-Step Framework

A simple Google search of worldwide trends reveals commentaries about the end of globalization, the imminent surge of regionalism, and the implosion of the global supply chain. Without the tools to separate the reality from the rhetoric, the noise of buzzwords such as “deglobalization” and “diminishing interdependence” can drive investors into fear-induced figurative paralysis.

With this four-step framework, the body politic can assess how deglobalization and the looming recession will affect certain industries and regions, helping companies make nuanced decisions about whether and how to expand globally and maximize reward of existing investments.

Step 1: Understand de-globalization and how will it affect the looming recession

The headlines that focus on “widespread deglobalization”suggest that all (or most) stakeholders to the global business community and international political institutions are in the process of retreat from the global economy. However, while some governments, companies, and NGOs are in retreat, many others are not. According to Chatham House (a London-based think tank), “It is better to understand the question as one of balance between globalizing and deglobalizing forces.”

Some experts have explored the ways in which the looming recession in the United States will interact with the deglobalization process. While some commentators suggest that deglobalization forces will mitigate the spread of a recession, the reality is that many major international institutions and the connections between businesses and governments remain intact. Unfortunately, the increased support for global retreat will not have a sizable impact on the scope and trajectory of the looming recession.

Step 2: Identify the different forms of globalization

Knowing how forms of globalization differ will help investors understand the ways in which it may affect their business. There are three primary forms:

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Economic globalization refers to the ways in which the growth of cross-border trade and the free flow of capital contribute to making world economies more interdependent.

Political globalization refers to the number of embassies, UN participation, or membership in international organizations—to determine the degree of political cooperation.

Cultural globalization comprises free flows of ideas, values, and cultures cross national borders.

Step 3: Understand how the different forms of globalization impact their business model

Investors must take the time to understand how each of these forms of globalization will affect their company. Here is an example using a global advertising firm:

Scenario:

Company X, a US-based marketing firm that focuses on multicultural advertising campaigns, is concerned about deglobalization and realizes that it need to shut down its operations in Asia or Latin America, . The firm’s business model relies on tax breaks for services rendered that are included in free trade agreements. The company works for companies that target clients from myriad ethnicities and nationalities. The following considers how the free flow of trade, governmental cooperation, and ideas benefits their business.

Economic globalization: The number and type of international connections among businesses triggers high demand for Company X’s marketing services.

Political globalization: Political ties between countries maximize the number of free trade agreements between Company X’s home and host countries.

Cultural globalization: The free flow of customs and intermingling of cultural norms create more diversity of ideas and demand for Company X’s multicultural marketing services.

Step 4: Recognize how differences between investment climates in two regions impact their decision

Assessing the investment climates as it relates to the three types of globalization in an investor’s host and home host country is the final step.

Economic globalization: Trade flows as a percentage of GDP-which is the primary variable for measuring economic globalization- are declining faster in Asia than Latin America. Therefore, economic de-globalization is more prominent in Asia.

Cultural globalization: The type of government has a significant impact on the free flows of ideas between and among countries. While both countries comprise a significant number of populist countries, Latin America has many left-wing populists governments while Asia has more right-wing populist governments. Whereas right-wing populist countries manifest their nationalist ideals by obstructing inbound migrants and ideas, left-wing populists do not fear the inward flows of immigrants and new ideas. As a result, the data suggests that Latin America has a freer flow of ideas..

Final Decision

Because the relevant de-globalization forces are stronger in Asia than Latin America, Company X should choose to stay in the former and withdraw from the latter.

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