Essay #1 - "Structures of Globalization (Part I)"

“Structures of Globalization (Part I)”

Bar Ranch Strategy Partners

July 20, 2024

Sorry for the delay, everyone - had a bit of flooding here, followed by a trip to Alaska - more on those events soon! Now, back to the content.

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Welcome to the first content essay from Bar Ranch Strategy Partners, based on Episode 2 of our New Pioneers podcast.

At Bar Ranch, our research and activities focus on the revitalization of the American Midwest, including areas such the Rust Belt and the Iron Range. These areas have been dramatically impacted by globalization, the offshoring of industrial manufacturing, and larger trends in the international economy.

In order to understand how post-industrial areas of the American Midwest might be revitalized, it is important to understand the factors that impact these areas.

To do so, we will begin discussing a relatively recent piece that appeared in the Journal of International Business Studies, and which has had an influential impact on modern globalization studies, particularly in the strategic management field, and a major effect on my own research.

Written by Olga Petricevic and David Teece in 2019, the paper is called “The structural reshaping of globalization: Implications for strategic sectors, profiting from innovation, and the multinational enterprise.”

In this essay, we will progress through the piece, highlighting important quotes, and providing commentary on what they might mean (at least for us). In the future, these insights can be utilized in our own Bar Ranch research on revitalization.

As always, we welcome your own comments and feedback, which you can provide as a comment on these essay, or by emailing through our website.

Now, to the piece -

Petricevic, O., & Teece, D. J. (2019). The structural reshaping of globalization: Implications for strategic sectors, profiting from innovation, and the multinational enterprise. Journal of International Business Studies. 50(9): 1487-1512.

In their discussion on changes in the modern global economy, the authors write that “the global economic system created in the post-World War II (WWII) era is now being disrupted and undergoing significant structural reshaping. While in need of improvement, the post-WWII system led to an extended epoch of peace and an unprecedented rise in prosperity” (Petricevic & Teece, 2019: 1487).

Despite having a generally positive perspective on the Bretton Woods institutions and the post-WWII setup, Petricevic & Teece note that the system is now undergoing significant strain, with dissent and rising alternatives becoming apparent. Accordingly, they write that “some are now suggesting that we have entered a period of ‘de-globalization’ undergirded by a technological ‘cold war’” (1488, original emphasis). This is a reference to the emergence of great powers and regional trading blocs in the modern global economy, primarily includes the US, Western Europe, China, Russia, India, and others.

Interestingly, the authors look back at commentary on globalization from the 1990s and early 2000s - which might be called the “utopian” or “triumphalist” era of globalization - and how many of these analysts turned out to be wrong about many of the benefits and costs of globalization.

“Until recently,” they write, “a popular (albeit flawed) view was that cross-border activities had become so common and growing so significant that the world was becoming ‘flat’” (1488).

This, of course, is a reference to Thomas Friedman and his book - The World is Flat - which positively highlighted the ongoing offshoring and outsourcing of industrial manufacturing from the United States and others, advocating for the enhanced development of vast cross-border supply chains designed for commercial efficiency.

As the authors acknowledge, this almost “utopian” view of globalization - of countries continually coming together, homogenizing, playing by the same rules - simply does not exist. It never really existed, and it will not in the foreseeable future.

Describing the idea of “techno-globalism,” Petricevic & Teece define the views of Friedman and others as an ideology “that assumed the continuation of an open or ‘liberal’ world economic order with low or no tariffs and investment controls, and respect for the rule-of-law in governance arrangements” (1488).

Conversely, in the reality that we are now witnessing, it is quite clear that modern globalization - as it exists today - is not guaranteed. Globalization is not necessarily a natural or irresistible phenomenon that simply arises from the contemporary state of the world. It has to be built, maintained, and enforced.

For context, there are two main drivers of globalization (Hill, 2021). The first is the technology that allows us to communicate around the world, to travel and build around the global, and to maintain vast cross-border supply chains and distribution networks that enable globalized commerce.

But in addition to that technology driver, there also has to be a policy element as well. The governments of the world - particularly the great powers and major economic centers - have to be pro-globalization as a concrete, existing policy. States must want to lower tariff and trade barriers between countries, they have to actively encourage multinational enterprises in foreign direct investment (FDI) through the easing of cross-border interactions, and to allow the global flow of capital, products, and (often) people. However, there is no guarantee that such policies will always be enacted, or that they will always be maintained.

Globalization is an active project that has to be maintained and enforced. And if it is not - or there are viable alternatives to it, or sufficient numbers of people reject it - then it may fall apart.   Contemporary globalization, therefore, can be a very fragile system.

Accordingly, Petricevic & Teece write that “all of the above perspectives are consistent with Ghemawat’s (2003) view that the world has only ever been semi-globalized and that nation states continue to play a critical role in shaping and re-shaping the competitive IB landscape” (Petricevic & Teece, 2019: 1488-89, original emphasis). This is a reference to Ghemawat (2003) and the concept of semi-globalization, which we will discuss in further detail in the future.

In a semi-globalized world, Western notions of globalization - or what is often called the Washington Consensus - certainly exist and have significant power, but have not completely taken over the world and fully won international “hearts and minds” to the extent envisioned by the “utopian globalists.” Trade policies enforcing free trade, extensive cross-border FDI and profit extraction, and vast international supply chains are increasingly facing resistance both at the nation-level and within countries themselves.

As such, the authors write that, “today, we face a new milieu of structural reshaping of the global economic system,” and that “neo techno-nationalism is creating a new, bifurcated world order” (1489).

Essentially, modern globalization and the contemporary international business environment signifies the existent of specific rules of the game that countries and multinational enterprises (MNEs) must abide by in order to be a part of the system. These rules, as they exist currently, were largely created by the United States and its allies. To a large extent, those who abide are rewarded, and those who resist are punished.

However, the rise of China and the BRICS nations, amongst others - along with the growing influence of populist movements within Western countries - threatens this established system. Challenges to the system arise in a number of ways, including geopolitical conflict, trade wars, pandemics, and financial crises, combining to produce significant pressure on the policy architecture of the global economic system.

Further, actions taken by major nations are further undermining the structures of globalization, in particular through what Petricevic & Teece call “techno-nationalism.” As opposed to a globalist perspective that emphasizes free trade in innovation and technology, we are now seeing great powers consciously pursuing policies aimed to ensuring their own place at the top of the global economy, to the exclusion of others.

Quite understandably, many nation-states today want to be the best in critical areas that are important for the long-term success of their countries. They do no want to be dependent on others - particularly their rivals, or other great powers - for necessary items that their people need. These items include food, agricultural commodities, energy, steel, medicine, defense technologies, semiconductor chips, and more. Increasingly, these areas are recognized as “strategic sectors.”

As seen during the Covid-19 pandemic - and its accompanying shortages of necessary consumer and industrial goods - there are strategic sectors within a modern national economy that are needed for the health and well-being of the people.

To be a modern sovereign nation-state, there are certain necessary sectors that are required. Countries require energy, steel, food, medicine, and computer technology (such as semiconductor chips), and if nations do not produce these strategic items themselves, they are vulnerable. They are in a position of weakness in comparison to those that do produce these items. Countries that are only consumers of necessary goods - and not producers - may not be considered fully autonomous, sovereign states.

The restructuring of the global economic system, the development of a bifurcated world order, is giving rise to VUCA conditions in the geopolitical and international business environment - circumstances that are volatile, uncertain, complex, and ambiguous. These conditions are amplified in strategic sectors that attract both firm-level and nation-level competition.

In the future, it will be interesting to revisit the early pronouncements of the “utopian globalists” writing in the 1990s and early 2000s, concerning the predicted benefits and costs of modern globalization, to see what accurately came to pass, and what did not.

As such, one of the most interesting parts of Petricevic & Teece’s piece is the authors’ acknowledgment that while “many anticipated greater convergence of norms and values amongst nation states as globalization advanced,” the “view of a frictionless, homogeneous, rule-of-law borderless world” is now “clearly an illusion” (1489).

“It is increasingly apparent,” they write, “that the proposition that globalization has negated the power of nation states […] is a myth.” As opposed to the irresistible integration of nations and the decline of borders predicted by many advocates of contemporary globalization, it is clear that “not only are national boundaries still important, the national identity of firms still matters” (1490).

This is a critical contention, and serves as a significant rejection of the more “utopian” ideologies of globalization that have guided many policy decisions in the international economy (particularly in the United States). The idea that “frictionless” cross-border trade, the development of vast global supply chains, and the outsourcing of critical manufacturing would always be guaranteed, is being rejected. The contemporary era is marked by the “return of nation-states” - the return of borders, the return of distance - in the global economy. It matters where you are.

The (re-)emergence of new great powers, the establishment of alternative centers of economic power (particularly China), the enforcement of sanctions on certain major countries (particularly Russia), the regionalization of important trade blocs - all of these phenomena not only splinter the actual architecture of globalization, but the philosophical ideology behind it as well. History has not ended, and the world is not flat.

Accordingly, there is a growing realization that vast cross-border supply chains, and the production of necessary commodities in foreign (often hostile) countries, are increasingly forms of weakness for modern nations, not strength. If you are dependent on foreign nations - particularly rivals - for the production of your necessities, you may be in trouble.

Continuing, Petricevic & Teece write that “there have been ongoing changes in the balance of global powers in the last two decades,” and that “the locus of economic power may have shifted to a state where there is a power vacuum in which no single country (or constellation of countries) is willing or able to provide global leadership. These shifts are especially acute in the technological and innovation spheres” (1490)

As we will see in future discussions, it is now very apparent that contemporary globalization - as it exists now - is largely dependent upon the United States, particularly in the form of its military power and ability/willingness to enforce the rules of the game for the modern international economy.

If those rules start to break down, if they lose legitimacy, if the US government loses its ability or desire to enforce the rules, then the structure will start to erode. In such a case, there would be a reemergence of a geo-economic power vacuum, or a contested space encouraging conflict between rival alternatives.

Further, in such a scenario, a US economy that did not maintain its own domestic strategic industries - and did not have immediate and guaranteed access to necessary items - would find itself in a challenging situation.

In the context of the restructuring of globalization under conditions of the great power competition, Petricevic & Teece “see the possibility of a ‘bifurcated world’ arising with an increase in conscious decoupling of firms’ and nations’ objectives as well as economic and innovation trajectories” (1490).

This ongoing splitting of the global economic order - “bifurcation” - means that the contemporary rules of the game are losing legitimacy. This might not have been a problem in the past, as the US had the diplomatic, economic, and military power to enforce the rules regardless of their popularity - during its “hyper power” or “unipolar” moment after the end of the Cold War.

If effective alternative centers of power and strength arise, however, that challenge the existing order, it can result in “decoupling,” or the splitting of relationships between firms and states. Petricevic & Teece note that this is especially apparent in strategic sectors that rely heavily on advanced innovation, with contemporary great powers now systematically discriminating against foreign firms, and championing domestic incumbents” (1490) in order to ensure that sophisticated technologies remain within the borders of the nation-state.

This structural reshaping represents a direct rejection of modern globalization and its justifying ideology of homogenized international economic integration, and a “noticeable defiance of the principles of classical economic liberalism and the rule-of-law” (1491). The identification of Western-led globalization with the “rule-of-law” - and alternative orders as “authoritarian” and the “rule of rulers” - betrays a specific allegiance on the part of the authors. For them, this acknowledgement takes the form of a sort of mourning, but it is likely that not all see it that way.

In many ways, this is a return to history. The idea of ever-increasing globalization, of a universally agreed-upon rules of the game for international trade, of shared and homogeneous interests between nation-states - is a myth. A Hobbesian state of nature in global trade, composed of rival trading blocs with competing interests and standards, is likely much closer to historical reality.

The rejection and ongoing breakdown of modern globalization, as it exists, has many causes, but a principle one is the modern rise of China. The authors acknowledge this reality, writing that “China’s alternative model of governance is deploying coordinated protectionist trade and investment policies and government intervention aimed at accessing and acquiring foreign intellectual property, thereby influencing the global economic and innovation system” (1491).

More than any other, China is the country in the modern world that has the size, power, and ability to provide a potentially effective alternative to contemporary globalization. Particularly since the reign of Deng Xiaoping, modern China’s progression through the stages of economic growth and geopolitical power development have been extraordinary, and will certainly provide us with extensive areas of research in the future.

In direct opposition to the supposedly free market, non-interventionist standards of globalization as a philosophy, the law in China, the authors write, “is used to facilitate government industrial policy goals,” particularly in “those sectors where technological prowess is considered ‘strategic’.” It is worth noting, they go on, that “China has effectively created a new form of market capitalism and adopted a panoply of explicit pro-business policies, some of which have been highly effective” (1491).

This represents the alternative challenge to the contemporary global economic order, as it currently exists. Beijing’s effective utilization of state power to achieve commercial and economic goals - through the enactment of industrial policies, protection of domestic sectors, the provision of state-level resources to national champions, and the “non-market” acquisition of foreign technologies - highlights a shifting perspective on modern state-firm relations.

China’s success raises potentially difficult questions for American analysts, policymakers, and executives, concerning the proper management of the national and international economy.

Is the People’s Republic of China, founded by Chairman Mao, now better at capitalism that the United States itself? We don’t know the answer yet, but there is a significant likelihood that we may not like it.

In essence, the contemporary global economic order - as it was developed after World War II, and solidified after the Cold War - is now under significant pressure. The idea of a homogeneous globalization, where everyone has similar interests and plays by the same set of rules, is now clearly a myth. Alternatives to the existing order are forming both around the world, and within the Western nations themselves.

What the future holds is now very much up in the air, and we will continue on that topic on the next part of “Structures of Globalization” from Bar Ranch Strategy Partners.

Sam

References

Ghemawat, P. (2003). Semiglobalization and international business strategy. Journal of International Business Studies. 34: 138-152.

Friedman, T. (2005). The World is Flat: A Brief History of the Twenty-First Century. New York, NY: Farrar, Straus and Giroux.

Hill, C. W. L. (2021). Global Business Today. (12th ed). New York, NY: McGraw-Hill.

Petricevic, O., & Teece, D. J. (2019). The structural reshaping of globalization: Implications for strategic sectors, profiting from innovation, and the multinational enterprise. Journal of International Business Studies. 50(9): 1487-1512.