Essay #3 - "Structures of Globalization (Part III)"

“Structures of Globalization (Part III)”

Bar Ranch Strategy Partners

August 16, 2024

Hello everyone -

Welcome to the final essay in our series on the structures of modern globalization. This piece is based upon Episode 4 of the New Pioneers, the official podcast of Bar Ranch Strategy Partners.

In the previous essay, we continued discussing Petricevic & Teece’s 2019 essay in the Journal of International Business Studies, which is entitled “The structural reshaping of globalization.”

From that second piece, we learned the contemporary globalization is being disrupted by the emergence of multipolar power blocs, that the “utopian” vision of frictionless cross-border trade is a myth, and that there are growing alternatives to the Washington Consensus model of economic development - particularly from China.

In fact, one of the primary disruptors of modern globalization is the rise of China, where the state actively intervenes in the global economy to promote the interests of its domestic firms, and thereby its own national development goals. China’s alternative model of economic development involves the utilization of state-level resources to promote domestic firms in the pursuit of national objectives - a form of “state-firm fusion” in which both the government and business collaborate to achieve larger goals.

The Chinese government actively supports its domestic companies in the acquisition and development of key technologies, which can then be utilized in other areas of their national economy through their positive “spillover” effects, particularly for “dual-use” technologies, which can be used for both commercial and military purposes.

China’s alternative method for development presents another possibility to those widely held in the modern Western world - that of engaging with the global economy across a wide range of industries, while simultaneously pursuing the protected domestic development of critical technologies and commodities. Utilizing a “techno-nationalist” industrial policy, China has identified specific strategic industries that are required for national strength and economic development, which it views as the sectors of the future.

In the modern world, those industries that help to feed, cure, and defend your people are absolutely critical, and any nation that loses the ability to produce these items fails in its most fundamental role.

For this third and final essay in the series, we will investigate the nature of “strategic industries,” and discuss how their recognition will reshape the future of the modern global economy.

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All this talk about “strategic industries,” of course, raises a fundamental question - what exactly are they?

According to Petricevic & Teece, a strategic industry “provides social benefits beyond the magnitude of its direct value-added contribution,” with the social benefits including “two classes of externalities - those due to spillovers from innovation and those stemming from locational synergies” (Petricevic & Teece, 2019: 1497). Continuing, the authors write that, “‘strategic’ industries can be defined according to whether: (1) they are technologically progressive, and (2) they provide infrastructure to other firms in the same industry or in related industries” (1497).

In essence, for the authors, a strategic industry advances the current level of technological output in an economy, while also providing support for surrounding and related industries, enabling critical areas of the economy to grow as well.

Which specific industries fall into this category?

“In the late 20th century,” the authors write, such industries included “the semiconductor, computers, biotechnology, and civilian aircraft industries,” while today “they are likely to also include artificial intelligence, advanced manufacturing, quantum information science, and 5G” (1497).

Practically speaking, when we look at the specific industries that have been deemed strategic by the Chinese government, we can perhaps extend this definition, or provide an alternative, condensed version.

Referencing the Made in China 2025 initiative, they write that Beijing “foresees massive subsidies, incentives, and mandates that require Chinese firms participating in high-tech sectors such as green energy, aerospace, pharmaceuticals, autos, artificial intelligence, and their related and supporting industries, to gain a global market leadership position.” These “‘strategic’ industries (or the industries of the future),” they go on, “underpin both economic and national security” (1498).

That last sentence, I believe, holds a key to understanding the fundamental nature of a “strategic industry.” In addition to all of the positive technological spillover effects, and the accompanying development of industrial infrastructure, the critical feature of a strategic industry is that it enables and is required for the operation of a modern nation-state.

In other words, a truly “strategic” industry are those sectors which are needed for a country to effectively operate. Areas such as energy, medicine, food, defense, computers, and transport fall into this category, as seen by the industries selected for support by China’s strategic industrial policies.

Put another way, we can look around our daily lives and ask: “What would cause social collapse - or at least real, immediate hardship - if it was unexpectedly taken away?” Such industries are accordingly strategic, and it is the responsibility of the national leadership to ensure that the country is able to consistently and effectively produce these items, if not in the entirety of domestic consumption demand, then at least in a significant portion with the ability to quickly scale if required.

The US and Chinese approaches to such critical, strategic industries is illustrative. Much of modern life is now digital, heavily reliant on computer technology (for better or worse). Computers rely on semiconductor chips, which the United States had been a technological leader in for much of the second-half of the 20th century. We will be digging into this topic in much greater detail in the future, through a reading of Chris Miller’s Chip War. As Petricevic & Teece acknowledge, “the semiconductor industry in California’s Silicon Valley can be defined as a ‘strategic’ industry” for the modern economy (Petricevic & Teece, 2019: 1497).

For various reasons, however, the US has fallen behind in advanced chip development, particularly concerning the actually hardware fabrication of the chips themselves, which have largely been outsourced to Asian “fabs” such as Taiwan Semiconductor Manufacturing Corporation (TSMC). The recent realization by Washington that a critical component in modern technology is concentrated directly off the coast of China has given rise to reshoring initiatives such as the CHIPS Act, which will also be a great subject of future analysis.

In order to spur catch-up development in the semiconductor industry, Petricevic & Teece write that “China is mobilizing a variety of techno-nationalist tools, which are directed at acquiring foreign innovations and technology,” creating domestic hubs of research innovation and reducing their reliance on foreign technology (1497). While industry subsidy schemes are not unique to China, Beijing’s “size and scope of such activities goes far beyond the classical conceptualizations of industry subsidies and protection” (1498), laying out an explicit strategy for global leadership in the strategic industries of the future.

The nature of response from the Chinese and American governments toward strategic industries are nearly diametrically opposed, at least until recently, with Beijing involved in a “whole-of-government” effort to develop these sectors domestically, and Washington allowing their foundational technological capabilities to be shipped overseas.

There are signs that the US is coming to this belated recognition, that the rules of international business have changed, with nations no longer acting as impartial arenas for global commerce, but as neo-mercantilist entities determined to occupy market share across strategic industries in a (nearly) zero-sum game.

This changing reality has implications for both policymakers and business executives, who must increasingly adapt to global trade environments characterized by “extreme VUCA conditions,” where the goal of international strategy is no longer cost-minimization/profit-maximization in the short-term, but the development of longer-term “evolutionary fitness,” in which corporate leaders must account for “explicit consideration of political and industrial policy actions and changes in institutional environments throughout the value-creating and -capturing process” (1498).

Specifically, the authors continue, “new leadership skills will be necessary, with emphasis on political astuteness, improvisation, and orchestration abilities that simultaneously elevate both leader character and leader competencies as well as creative search and strategic sense-making. Careful calibration of knowledge protection and disclosure, and enhanced strategic intelligence will underpin these leadership skills, so as to operate successfully in the amplified VUCA environment” (1498).

In the evolving environment of “state-firm fusion,” however, unilateral firm-level strategic adaptations will likely not be enough to protect competitive advantage. Confronting the adoption of strategic techno-nationalist industrial policies by major powers, the authors write that “an effective policy response will require comprehensive efforts and both unilateral and multilateral cooperation between and among MNEs, their home governments, and other stakeholders” (1502-03). Multinational enterprises “should actively devise their own destiny, and should engage, where possible, in collective responses utilizing a multi-level, multi-national, and multi-stakeholder approach,” and “individual firm actions should be augmented with coordinated industry (or ecosystem) and state-level responses” (1504).

Beginning to summarize, the key aspects of Petricevic & Teece’s analysis begin to take shape. The structure and ideology of modern globalization - of open and free cross-border trade between countries playing by the same rules - no longer reflects modern reality, if it ever did.

Major powers compete to become world leaders in critical technologies and strategic industries, and nations that do not produce what they require are vulnerable and weak. Individual company actions in the fact of coordinated state-firm fusion are not enough to reverse this tide, and new (or perhaps old) thinking is needed.

Accordingly, the authors suggest that it is time for the Western countries to adopt their own strategic industrial policies, identifying the sectors of the future and utilizing “the combined power of the state and private enterprise” to rebuild and restructure their productive capabilities.

The new realities “will require leveraging the power of the nation states where the rule-of-law prevails, and that of other stakeholders the firm engages with in its ecosystem, to develop and implement industrial policies bolstering innovation. […]. Such policies should support emerging business enterprises in strategic industries and those developing enabling technologies.” The time is right, they contend, to “consider a new type of industrial policy” (1503).

Despite a tentative, theoretical acceptance of these new policy requirements, the challenges to effectively implementing such strategies remain immense - antitrust legislation, administrative heritage, decentralized coordination, and more (Pack & Saggi, 2006). We will confront all of these challenges in future Bar Ranch research.

Nevertheless, there exists a long history in the United States concerning the promotion of domestic manufacturing and industrial capacity, stretching back to Hamilton’s Report on Manufactures and Clay’s American System (Nelson, 1979; Van Atta, 2001). All that - and more - will be explored as well.

The nature of modern globalization is changing, Petricevic & Teece contend, and quickly. Modern great powers are now "practicing novel, systematic, and systemic mercantilist approaches, thereby triggering massive VUCA conditions for MNEs and large-scale cascading processes” (Petricevic & Teece, 2019: 1504).

These “industrial policy interventions with their novel tools that we observe today are inconsistent with traditional theories on strategic trade and investment policies, and internationalization motives. The dynamics at play are not the conventional (temporary) sheltering of domestic markets against more advanced foreign rivals, through building up a domestic industry. The strategy is to acquire the most advanced IP of these foreign rivals by circumventing norms and rules on IP protection, and then to utilize their foreign-acquired knowledge to achieve global technological leadership. Such policies are eroding and fragmenting the global economic order based on the rule-of-law, and creating extreme VUCA conditions for both MNEs and nation states” (1504).

“However,” they conclude, the “countries that are now prioritizing industrial policies aimed at acquiring foreign technology and innovation, by deliberately eroding the rule-of-law, should not just receive a passive response” (1504).

The American economy, and those who build it, should confront the great challenge and opportunity of the structural reshaping of globalization, and rebuild the strategic industries and domestic manufacturing capabilities required for the modern world.

This is a massive task, of course, but we are ready and willing. And Bar Ranch will continue to make our small contribution.

Until next time, this is Sam from Bar Ranch, see you again soon.

Sam

References

Miller, C. (2022). Chip War: The Fight for the World’s Most Critical Technology. New York, NY: Scribner.

Nelson, J. R. (1979). Alexander Hamilton and American Manufacturing: A Reexamination. The Journal of American History. 65(4): 971-995.

Pack, H., & Saggi, K. (2006). The case for industrial policy: A critical survey. The World Bank Research Observer. 21(2): 267-297.

Pagnattaro, M. A. (2012). Preventing know-how from walking out the door in China: Protection of trade secrets. Business Horizons. 55(4): 329-337.

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.

Van Atta, J. R. (2001). Western Lands and the Political Economy of Henry Clay’s American System. Journal of the Early Republic. 21(4): 633-665.