www.henley.ac.uk1 1© Henley Business School www.henley.ac.ukWhere business comes to lifeWhere business comes to life
The unsustainability of globalization in
the face of economic nationalism
Rajneesh Narula
1 © Henley Business School www.henley.ac.uk
Where business comes to life
Where business comes to life
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• Is globalization an unstoppable force? No! but it is not a buffet where you can
choose to benefits and ignore the costs.
• Freeing up trade and investment in goods and services has its costs, mainly to do
with creating imbalances and enhancing inequalities. Most significantly, it reduces
the power of the state to intervene in shaping the ‘domestic’ economy
• The good news: investing in knowledge infrastructure increases the odds of
coming out net positive. And Europe has a head start. Running complex
multinational firms and managing cross-border institutions is not easily mastered.
• The bad news: the state must provide the public goods that allow its human
capital to upgrade. Or allow free movement of people.
Slowing growth, falling tax revenues, immigration
pushback, Brexit, Donald Trump….
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• Increasing inequality within countries;
• Insecurity of employment, or pensions;
• Growing structural unemployment;
• No meaningful wages or work for wrongly skilled;
• The disappearing government/social safety net (education, roads,
health). States have privatized these.
• A dissatisfied public: Whose fault is it? Not mine! We did
what needed to do/ we want to dream of a better future
• Change is happening too fast! institutions are slow to adapt
Economic nationalism has simple roots. The
public want the benefits, but not the costs
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We have had 30 glorious years of increased
consumption, but now running out of juice
• Globalization stands on three
legs:
– Movement of goods and services
(trade)
– Movement of capital (FDI,
portfolio, loans)
– Movement of people
• Its about de facto economic
integration, in addition to de jure
integration
– EU states has benefitted from both
• Its not all about ICTs
– Bike rentals; Budget Flights;
Amazon; Netflix; Spotify, hotels,
insurance; internet banks
• Its also about:
– Software
– Logistics,
– Transportation,
– FDI in services
– Biotech
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Where has all this growth come from?
• Some (but not all) is about the
emerging economies
– China: from scratch
– End of the cold war
• Shift of developing countries to
openness
– Privatization
• Plus, dormant capital shifted from
black and grey to White
– Capitalising dormant assets
• New markets for
lending/investing
– New governance
mechanisms.
• WTO
• Regional integration
• Industry coordination and
standards
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• Transaction costs have fallen
– Transportation costs
– Coordination costs
– Enforcement costs
– Communication costs
• But not all costs have fallen , and not in all industries and
in all countries, or for all firms
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Where has all this growth come
from?
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the MNE has benefitted most
• Largest 300 account for 70% of FDI
• Its still dominated (70-80%) by the
same 20 countries
• Just 20 developing countries continue
to account for roughly 80% of total
FDI flows to all developing countries.
• Massive shift towards services
• Fine-slicing of value chains
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• Coordination is not only between parent and affiliate, but also with
suppliers in host, competitors, regulators, universities, etc.
• Multiply this X 2 X 40
• Collaborate with whom? Outsource from where?
– Yes, outsourcing cost resources! Collaboration also! Reintegration costs,
fixed costs of managing relationships.
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Coordination costs do not decline
continuously as the firm gets larger
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• Size still matters
• Local presence still matters
• Institutional and cultural differences still matter.
• Skills of coordinating and managing are not transferable between countries
• Finding the right kinds of skilled people is not easy! This is why firms are using
more expats than ever
• The network MNE is very, very difficult to manage!
• The larger the MNE, the more the complexity!
• Power struggles:
– Who owns what? Transfer prices?
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MNEs are not the solution: not easier
for firms to become multinational
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The alliance network of Texas
Instruments, micro-electronics
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• The cost of globalization is growing inequality, increased structural
unemployment.
– Gig economy;
– Poor quality of jobs – loss of lifetime employment.
– Fewer benefits
• People suffer from inertia: they do not like change, and they suffer from short
memories. Everybody expects to do better than their parents.
• The magic bullet – ‘education and basic infrastructure’ – is no longer what it used
to be.
• who pays? The state has no power to tax cross-border activity. The cost to
society has gone up – health, schools, knowledge infrastructure, pensions all cost
money.
‘Brexit’ is a typical example: too much
uncertainty
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– No
• Consumption based growth is not sustainable. Barring a new
technology wave, we (both the developing and the developed world) are coming
close to have squeezed out all we can, without even more global institutional changes.
• Neither rich nor poor want to tackle :
• Sovereignty
• Free movement of people
• Without handling sovereignty and cross-border regulation,
nothing will change.
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Can the emerging economies drive us forward
(again)?
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• Surpluses and shortages – structural unemployment at a global level
• How do governments deal with this? Who pays to retrain farmers?
Bicycle repairmen? IT specialists who only know Fortran?
– New educational systems needed, universities produce skills for a bygone
era.
– Who pays for education - what is the new ‘minimum’? Is education still a
public good? Who pays for your retirement if there are no permanent jobs?
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Employment is the coming big
battleground
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• Urban jobs versus rural jobs. By 2050, 70% of the world
will live in cities
• Global trade eliminates rural jobs, but workers cannot be
absorbed by the urban market, or by the urban
infrastructure. workers do not have the skills to survive,
and governments cannot afford the public goods needed
• Investment goes to urban areas, not to rural ones
– (not that different in Norway! Or Poland)
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In developing countries it is even
more complex
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• Rich countries have been receiving subsidised human capital
– Rich countries underinvesting in education as well!
• One of the negative consequences of globalization is the price of a
good education is now the same, because the market for the best
minds is global. And developing country public education systems
cannot afford what we in the UK cannot.
• Quality of education matters, and firms will go looking for the best
and pay top prices.
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Brain drain to the rich countries
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• Humans suffer from inertia – formal rules change faster than attitudes.
– Economic Nationalism is sure to rise, because globalization means you are
increasingly unable to control the ‘domestic’ economy (and meet the expectations of
the populace). How do you provide public goods and promote equality without
revenues?
– Creating global institutions that have the power to regulate (illegal transfer
pricing, tax avoidance, market-rigging, etc.) are needed, but unlikely to
happen.
• MNEs will have to play along by being more mindful of the sensitivity of societies
• Politics and religion (which are connected)
Globalization may have to go into
reverse, or at least stall
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Thank you!
Rajneesh NarulaProfessor of International Business Regulation
School of International Business & StrategyHenley Business School - University of ReadingE-mail: [email protected]