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Is globalization on the retreat?

September 19, 2016

In the Financial Times (September 7th), Martin Wolf commented that globalization ‘has stalled … and it might reverse’. He cited the unexpected consequences that have flowed from the globalization of markets, such as mass migration and growing inequality, which are reducing public and political support. This is reflected in ‘stagnation of world trade’, even when the world economy is growing, and a reduction in cross-border financial assets and foreign direct investment.

Some reductions are inevitable. For example, there are not infinite business processes or manufacturing activities to outsource and the great wave of this activity is therefore in the past. Geopolitical instability has been accompanied by increased protectionism and trade liberalization has stalled.

At IACCM, we observe some additional factors that may be influencing corporate behavior. Back in the 1990’s, networked technologies suddenly started to enable new – and more remote – trading relationships. This challenged long-established supply chains, eroding old loyalties. Lower prices became the mantra of every Procurement department and existing suppliers were either discarded or forced to move production to low-cost economies. But while purchasing savings might have soared, other business costs often increased. Dealing remotely, across cultures, brings many additional transaction costs, as well as a host of additional business risks – reputation, reliability, regulatory compliance to name but a few.  While globalization certainly brought benefits, it also brought increased complexity.

Now, some 15 years after the great wave of ‘low-cost sourcing’, businesses are more hesitant about their off-shore relationships and, in many cases, more conscious of the true costs. They appreciate the challenges of good communication, of effective audit, of reliability of supply. In a recent IACCM survey, more than 70% of respondents believe that to be effective, negotiations must be face-to-face. So our virtual world continues to have limitations and as with all great waves of change, initial enthusiasm is followed by a period of reflection.

 

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