Full Essay - "Structures of Globalization"

“Structures of Globalization”

Bar Ranch Strategy Partners

September 14, 2024

We are pleased to present the complete “Structures of Globalization” the first content essay and episode series from Bar Ranch Strategy Partners, published in the summer of 2024.

Based upon this context of fundamental shifts in the modern global economy, we can embark upon future research and analysis on the revitalization of the American Midwest.

There is much more to come, and we are very excited - and we hope you will enjoy the ride as well!

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Part I

Originally published July 20, 2024

Welcome to the first content post 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.

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Part II

Originally published July 25, 2024

Hello everyone -

Welcome back to our ongoing essay series on the structures of modern globalization. This piece is based upon Episode 3 of the New Pioneers, the official podcast of Bar Ranch Strategy Partners.

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

Our major takeaways from the first part of the piece were that 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.

From our perspective, it appears that to be a modern sovereign nation-state, certain necessary industrial sectors are required. Countries need energy, steel, food, medicine, and computer technology to function, and if nations do not produce these strategic items themselves, they are vulnerable to disruption.

As seen with recent crises, vast cross-border supply chains and the production of necessary commodities in foreign (often hostile) countries, are increasingly forms of weakness, not strength. If you are dependent on hostile foreign rivals for the production of your necessities, you may be in trouble.

To be a major power, nations must be producers, not merely consumers.

One of the major drivers of disruption in the global economic order is the contemporary rise of China, which Petricevic & Teece write, “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” (Petricevic & Teece, 2019: 1491).

In this episode, we will expand on this insight, and discuss how the rise of China is challenging contemporary globalization and the international economic order.

…

The economic rise of modern China is a massive topic, and something that we will certainly dive into with further detail in the future, particularly with a discussion of Ezra Vogel’s book Deng Xiaoping and the Transformation of China.

More narrowly, Petricevic & Teece are concerned with how the Chinese government intervenes in the economy in pursuit of its state-level goals, something that has been considered anathema to the more laissez faire philosophical conceptions underpinning modern globalization.

As opposed to taking an ostensibly neutral position in economic competition, or acting as an impartial referee enforcing “the rules of the game,” the Chinese state actively intervenes in the global economy to promote the interests of its domestic firms, and thereby its own national development interests.

This active intervention is apparent in many areas, from foreign technology acquisition to the development of parallel institutions, such as the Belt and Road Initiative and the Asian Infrastructure Investment Bank.

Beijing’s “state-backed and government-imposed controls and mechanisms,” the authors write, “are in fact China’s way of ‘shaping the rules’ by creating parallel institutions to the existing ones. In fact, many individuals and nations seem to welcome the new global realities and changing posture of international commerce and influence” (1492). In the modern global economy, China is moving from being a “rule-taker” to a “rule-shaper.”

Further, “China’s rapid growth, its hybrid economic structure, and its arguably opportunistic approach to norms and rules that guide international commerce, have created tensions among existing power constellations and revealed an alternative model. The model that China has developed may not be fully replicable, but it does offer an alternative lens on how to spur growth in developing nations (especially those of the autocratic type), and perhaps offers a credible path towards becoming a hegemon” (1492).

“In fact,” the authors write, “many argue that the Washington Consensus model is ebbing, while the model China has developed is advancing” (1492).

It would be ironic, ultimately, if China - welcomed into the World Trade Organization and supported by Western investment and technology - would ultimately become the viable alternative to the modern global economic order. The real risk is that such an alternative model were to become attractive around the world, and if the cracks currently showing in the existing order were to grow.

This begs the question, of course - what exactly is the modern Chinese model of economic development?

In essence, it might be defined as the utilization of state-level resources to promote domestic firms in the pursuit of national objectives. In other words, there exists a form of “state-firm fusion,” in which both the government and business collaborate to achieve larger goals (Li, 2022).

Put another way, Petricevic & Teece write that, “China’s unique combination of market size and accelerated growth, particular emphasis on tapping into advanced innovation and technology development through outward FDI activities, and the distinctive government’s role in systematically drawing upon its bargaining power to support technological upgrading, depart from traditional frameworks and empirical findings on FDI motivations and the internationalization process more generally” (Petricevic & Teece, 2019: 1493).

They continue, writing, “China’s FDI policies provide the platform that facilitates Chinese firms’ international expansion trajectories with the goal of capturing the fruits of innovation and knowledge from foreign entities to serve nation-state objectives. The pursuit of nation-state objectives is especially pronounced in the case of state-owned enterprises (SOEs) that China is increasingly mobilizing in its quest of technological upgrading” (1493).

The key here is that the strategic industries and technologies required to “upgrade” the country are identified and consciously built, with the specific intention of benefiting the nation as a whole (or the government, if you are cynical). Instead of operating in a neutral and open arena - which is the Platonic ideal of economic liberalism - 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. The most prominent example of this phenomenon is so-called “dual use” technologies - like advanced jet engines - which can be used to enhance both commercial and defense capabilities.

Referencing projects like Belt and Road and the Made in China 2025 initiative, the authors write that, “China’s systematic and coordinated actions towards technological dominance” represent a “state-led techno-nationalist industrial policy that focuses on ‘winning at all costs’ to facilitate China’s rise and dominance in key technological domains and enable its self-sufficiency” (1493-94, original emphasis).

The key here is the focus on national self-sufficiency, a goal often scoffed at in modern international economics as impossible. Widely accepted theories of competitive and comparative advantage highlight the critical importance of free trade for national development, while presumptions to “autarky” are often associated with closed-off, centrally-planned economies and their accompanying poverty, stagnation, and backwardness.

China’s alternative method, however, presents another possibility - 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. Far from the Maoist-inspired peasant egalitarianism of the past, the modern Chinese economy balances global trade and national production.

Increasingly, and in defiance of the “utopian globalists,” some international business scholars are suggesting that “the world had reached the stage of techno-nationalism,” where nation-states wish “to have their own enterprises as market leaders in high-technology sectors.” In essence, Petricevic & Teece write, “techno-nationalism assumes that nations are units that innovate, facilitate, and fund R&D and cultures of innovation, and that they use and diffuse those innovations and technologies to further national goals” (1495, original emphasis).

China’s challenge to modern globalization, both in structure and philosophy, means rejecting the promise of continued international integration and frictionless cross-border trade. Beijing utilizes participation in the global economy as a method of “capturing foreign innovations to further hegemonic goals of technological leadership,” rapidly “reintroducing techno-nationalism” back into the global economic order (1496).

Specifically, the authors contend, "China has developed a state-directed approach that leverages national resources and regulatory systems to gain access to foreign-developed technology in key strategic areas.” Rejecting laissez faire platitudes about free trade and global economic cooperation, China focuses “primarily on state-led interventionist policies to acquire technology advances that originate in other countries, thereby supporting its national objectives” (1496).

If China is actively engaging in a “techno-nationalist” drive to develop and acquire technology, the question then becomes - what technology? And why?

The core emphasis is on “strategic” industries and technologies, or those required for the effective functioning of a modern nation-state. Claims of a “postindustrial” or “service-based” economy notwithstanding, countries still need food, housing, and medicine for their people, and steel, energy, and chemicals for their militaries. This baseline reality - that economies must be productive and make things - appears to be lost on many, but not Beijing.

A specific illustration of China’s prioritization of strategic industries can be seen with the Made in China 2025 initiative, which focused on providing government assistance to domestic companies operating in ten key sectors: electrical equipment, agricultural machinery, new materials, new energy vehicles, robotics, information technology, aerospace equipment, railway equipment, medical devices, and high-tech ships.

Prioritizing these strategic industries, amongst others, has key advantages for a nation - it produces new jobs and entrepreneurial startups; it enables cutting-edge research and development in globally competitive fields; it provides training opportunities to develop advanced specialists; it creates supporting industries that spur economic growth; and it enables civil-military collaboration through the development of dual-use technologies that advance both commercial and defense objectives. Further, in the event of a global crisis or confrontation, the existence of domestic productive capabilities insures against being cut-off from necessary items.

China’s alternative model to contemporary globalization is based upon identifying and developing “new forms of strategic trade and investment” that focus on “new knowledge, technological, or managerial capabilities” (1493).

The primary basis of this techno-nationalism is “that states protect the development of their technological capabilities,” instead of openly sharing them with the world, with the main goal of achieving “access to advanced technology and established global innovation networks,” no matter their origin, in a process that the authors label “innovation mercantilism” (1496-97).

The challenge that techno-nationalist policies such as Made in China 2025 pose to the structure and ideology of modern globalization is that they do not “call for long-term cooperation, but for “self-sufficiency” through technology substitution and global leadership in strategic, high-tech industries (1497).

Instead of seeking self-sufficiency in all economic sectors, China has identified specific strategic industries that are required for national strength and economic development, which it views as the sectors of the future. Taking a state-level view, it is clear that not all industries are equal, and that some are inherently more important than others.

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

These insights, of course, are not new, nor are they particularly Chinese. Scholars, executives, and policymakers have known for centuries that national strength is based on industrial might, and those countries which lose their productive edge fall behind, and are destroyed.

Referencing Witt (2019) on how hegemonic status is gained and maintained, Petricevic & Teece write that, “creating and capturing value through the use of new technology lies at the heart of the wealth of nations, and relatedly, military potential and national security” (1495).

We will be taking a much deeper dive into the connection between economic strength and military power through a discussion of Paul Kennedy’s The Rise and Fall of the Great Powers, which will appear on a future episode of the New Pioneers.

The emergence of the Chinese model - based on a strategic techno-nationalist industrial policy - has had two major consequences for contemporary globalization: the disruption of the international economic order, and the emergence of an alternative philosophy of national economic development. Both pose fundamental challenges to the Western-led system.

China’s new role in shaping the global economy, the authors write, is acting to “disrupt the existing norms, values and the commonly understood rule-of-law” in global economics (1492). They go on to write that, “this reshaping will alter the structure of the global economic system along the lines of China’s own economic model and its own ‘rules of the game,’ and may pave the way for other peripheral economies to emulate China’s behavior (or even invent their own models or path to hegemony).” For Petricevic & Teece, this reshaping “presents one of the “grand challenges” that future IB scholarship should address” (1493).

However, the disruption of contemporary globalization and the emergence of alternative models was not caused by China alone - they had significant help from the West itself. Looking back, it is becoming apparent that the 2007 Financial Crisis, in addition to unleashing untold miseries of countless people, enabled a challenging of conventional orthodoxies regarding economic policy and regulatory management, shifting the Overton Window regarding what is considered appropriate for the modern global system.

As the authors write, the Global Financial Crisis “has been a catalyst for the erosion of the prevailing rules-based system of international commerce,” fundamentally challenging “the role of institutions that have underpinned the global commerce system thus far and the competitive advantage of companies that have relied on these institutions” (1493).

The shift signaled by the financial crisis was understood around the world. As documented in Richard McGregor’s book, The Party: The Secret World of China’s Communist Rulers, the “implosion of the western financial system, along with an evaporation of confidence in the US, Europe and Japan, overnight pushed China’s global standing several notches higher” (McGregor, 2011: xxiii).

Recounting the collision of philosophies created by the crisis, McGregor states that for many years, “Beijing had resisted pressure from Washington, led latterly by the former Goldman Sachs boss, Hank Paulson, as Treasury Secretary, for wholesale financial liberalization. In the seven years to 2008, the Chinese economy had more than tripled in size. But alongside China’s rise, the patience with which Beijing listened to advice from foreigners had been dwindling. It wasn’t until the western financial crisis that the confidence of the likes of Wang Qishan spread through the system and burst to the surface like never before. Many Chinese leaders were beginning to voice out loud sentiments expressed privately by Wang: what on earth have we to learn from the west?” (xix-xx).

In addition, the perceived negative consequences of modern globalization - deindustrialization, offshoring of critical manufacturing, and the death and decay of formerly prosperous regions - has reached deep into the Western economies themselves, giving rise to populist movements such as Brexit and the Trump election.

Many influential groups within the advanced economies - particularly those with electoral power - are consciously rejecting the stated promises of modern globalization, shifting away from ideologies of free trade and economic liberalism. As Petricevic & Teece write, “negative distributional effects in the country that has benefited most from the existing world economic order, are now giving rise to “America First” anti-globalism, protectionist policy by the current United States administration” (Petricevic & Teece, 2019: 1493). While this reference, from 2019, refers to the previous Trump administration, the Biden presidency has kept on many of these protectionist and local development policies, increasing tariffs on Chinese imports and providing subsidies for domestic manufacturing.

Nevertheless, while it is clear that the Chinese model has been enormously successfully - both in developing its own domestic economy and challenging the contemporary architecture of globalization - it is likely not directly replicable in other circumstances, primarily due to the nature of China itself.

Simply put, China is different than others. Its population and market size are larger; its politics and governance model are unique; and it is coming off the backend of nearly four decades of phenomenal economic growth. Few countries in the world can compare in this regard.

Despite the previous emergence of other developing economies, particularly the Asian Tigers, the authors write that “the rise of China and the pressure China is exerting should not be dismissed as deja vu or equated with the previous paths of Japan, Korea, Singapore, or Taiwan,” as with these countries, their “impacts on the global economic system were absorbed with manageable disruption, because: (1) their economies were relatively small, and (2) these countries were themselves on a path evolving towards adopting a more liberal and open, rule-of-law order. Neither condition applies to China” (1494). Accordingly, China is the sine qua non of the structural reshaping of globalization.

In addition, the method by which China has implemented its alternative model - a strategic techno-nationalist industrial policy implemented by a competent, centralized, and authoritarian elite - may not be replicable in other countries, even if desired. Policymakers operate within the political and bureaucratic structures of their given countries, many of which may not be able to carry out such a monumental effort over the time required.

Referencing previous arguments against adopting strategic policies in the US, the authors write that, “for example, Rugman and Verbeke (1989) observed 30 years ago that various forces in the United States were strongly advocating in favor of strategic trade policies, even though this country’s administrative heritage would have made effective implementation of such policies highly unlikely” (Petricevic & Teece, 2019: 1492). We will be digging into these arguments on a future episode of the New Pioneers, rest assured.

Even so, it is clear that certain insights can be identified from analyzing China’s alternative model for economic development, particularly concerning the nature of “strategic industries,” which will be the subject of our third and final episode on the structures of modern globalization.

In essence, the modern global economic order, as it exists today, is being challenged from both without and within, by those who want to chart a different course to the future. As the authors write, “by playing by a different set of rules, China is affecting the viability of the existing global innovation ecosystem, requiring that other ecosystem partners change their strategy.” Because of “China’s ambitions as a hegemon,” their development of an alternative model “is not just an economic and business issue. It is a national security issue too, as the United States and the European Union are now starting to realize” (1497).

We’ll continue to discuss the implications of this new reality in the next episode of the New Pioneers podcast, our third and final segment on the structures and ideologies of modern globalization.

See you then.

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Part III

Originally published 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.

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