We're not nearly as globalized as we think we are, says Pankaj Ghemawat, a professor of global strategy at Spain's IESE Business School and author of the new book World 3.0 (Harvard Business Review Press). In fact, says Ghemawat, who was a professor at Harvard Business School for 25 years, cross-border trade accounts for only a quarter of worldwide economic activity. And that number appears to be shrinking: In the wake of the recent economic crisis, many countries are retrenching and attempting to isolate themselves from foreign economic problems.
That's not to say there aren't opportunities abroad. By recognizing that borders still matter, says Ghemawat, companies can better calibrate which markets and trading partners offer the best chance for truly global gains. Inc. contributor Ryan Underwood spoke with Ghemawat about how businesses should approach a global strategy.
What makes you think that popular views about globalization are incorrect?
There's widespread belief that we're living in a fully globalized world—or one that soon will be. But we're not even close. For example, only about 17 to 18 percent of all Internet traffic is routed across borders. People aren't really moving across borders, either. First-generation immigrants account for only 3 percent of the world's population; students studying overseas account for just 2 percent of all university students; and 90 percent of the world's population never leave the country in which they were born.
But surely the world's economies are much more integrated, right? Not exactly. Trade intensity, which is measured by products and services exported from one country to another as a percentage of gross domestic product, peaked at 29 percent in 2008. But then the economic crisis drove it down to 23 percent in 2009, which shows how fragile global integration can be.
What does that mean for American small businesses?
There's something particularly interesting and important here for smaller firms. If we think about the Obama administration's plan to increase exports, where is this additional volume going to come from? Given many of the measures adopted, small and medium-size businesses are expected to account disproportionately for this growth. But these companies are likely to hit some really jarring bumps along the way.
In the book, I write about Ganong Brothers, Canada's oldest candymaker, which is located about a mile from Maine. Company chairman David Ganong can literally see the U.S. border from his office window. In an era of borderless commerce, it should be easy for Ganong Brothers to sell to the U.S. market. But it's not so simple. Take packaging, for instance. In Canada, nutritional labels read 5 mg, with a space between the number and the unit of measure. Yet Ganong's jellybeans can't get into America unless the label reads 5mg, without the space. That difference—as well as variations in the countries' nutritional guidelines—means that Ganong has to produce and pack its U.S. products separately, reducing its efficiency. Even subtle differences like these can have a large effect on cross-border trade, which helps explain why there's less trade between Canada and the U.S. than one would expect.
But hasn't technology moved us any closer to a borderless world?
Many people assume that the Internet has ushered in this era of globalization. In some situations, technology really does knock out borders or at least certain kinds of distance. But other things can still stand in the way.
When I was at Harvard, we hosted a Cyber Symposium every year. Just after the tech crash in 2001, executives from eBay, E-Trade, Amazon, and Yahoo spoke at the event. In the 1990s, they said, they all thought they could put up a website and call themselves global. But for E-Trade, the regulatory hurdles were so large that it had to redesign its interface every time it entered a new country, which was a killer. eBay realized that people around the world do not necessarily share the U.S. penchant for collectibles, so it would need to offer other items to drive the model. In Yahoo's case, its classified ads weren't working in developing markets. And Amazon discovered that it had to build up a distribution system in Europe, which made globalization way more costly and time-consuming than it had expected. Technology does not, in a monolithic way, make you global.
What advice do you have for companies that are thinking about global expansion?
Things such as culture, language, and the industry you're in all matter a great deal. Managers sometimes focus very heavily on geographic distance and may not give much weight to cultural dimensions.
Companies also need to perform a market analysis that goes beyond market size. Let's suppose you're selling dairy products, and you think, OK, how about China? Turns out, a lot of Chinese are lactose intolerant. Actually, if you look at dairy consumption, the European Union accounts for a staggering fraction because of its fondness for cheese and milk. The size of a market is obviously a relevant factor, but companies need to look beyond just what's an attractive market.