Faculty insight by Prof. Phillip Nell & Esther Tippmann
Globalization has been misperceived for a long time: there have always been strong forces against globalization, and these forces will persist. The COVID-19 crisis makes this very evident: there is a spotlight on borders and differences across borders. Due to the immediate and massive effect of COVID-19 for international business activity, there will be lasting implications for the global strategy of firms, including their subsidiaries.
Cultural, institutional, and economic differences as well as geographic distance between countries inhibit international transactions and cross-border flows of people, capital, information, goods and services. The gradual dismantling of barriers to such cross-border flows, such as the creation of the Eurozone, the reduction in tariffs, and the harmonization of rules and regulations, has fueled globalization during the last decades. Nevertheless, the integration across national borders was never as advanced as many believe. Students, managers, and policy makers consistently overestimate how internationally connected the world was and underestimated that, on average, the world is still relatively local or regional - as opposed to global.
Instead of globalization, we should have rather spoken of “semiglobalization” - a coexistence of strong forces in favor, but also against, globalization and international business activity.
The COVID-19 crisis reminds us, in a terrible and abrupt way, of the strong forces that exist and persist against globalization. We currently experience the strongest decline in international business activity in modern times – 13-32% decline in merchandise trade, 30-40% decline in foreign direct investment, even larger declines are forecasted for cross-border tourism and travel. Furthermore, COVID-19 highlights differences across countries: the pandemic hit countries at different points in time and with different speeds. Countries differ greatly in how well prepared their governments and political systems are to manage pandemics and the subsequent economic crises, including surges in unemployment.
Differences in health care systems and ICU capacity across countries are more evident than ever. Among others, countries also differ in how much people believe in experts, such as virologists or economists, how much people are concerned about lock down initiatives interfering with their personal rights, how dependent national economies are on jobs that cannot be done remotely, and how soaring unemployment is kept under control. For the most part, responses by authorities have been everything but global with countries largely taking their own actions. Responses were not even regional. Even in the European Union, countries pursued different approaches to contain the virus and the effects of the pandemic. EU-wide harmonized activity is scarce and slow. The Economist recently highlighted that the economic recovery is “extraordinarily uneven” across countries and regions.
COVID-19 has two effects: First, as outlined above, COVID-19 will strengthen globalization barriers. It will increase differences across countries and accentuate the inhibiting role of national borders.
Second, based on our talks with managers, we think that COVID-19 will correct the perceptions of the globalization-enthusiastic majority of managers and politicians. Borders and barriers to globalization do matter more than many have thought in the past.
It is these two effects that will have implications for firms. We have investigated the role of cross-country differences for a long time. Based on this knowledge and more than a decade of our own research, we can derive some implications for firms. In essence, we predict that COVID-19 will impact the mix of the different types of global strategies. And, as structure follows strategy, we also predict organizational changes, with important implications for Ireland and Austria, the two countries where we are based.
Aggregation strategies, which are geared towards maximizing efficiency, do not fit well a world in which borders and cross-country differences matter a lot. They thrive on the absence of important cross-country differences and focus on standardization and harmonization across countries. If your strategy is not strongly based on digital and thus information flows, which are much less hampered by globalization barriers, then recheck if cross-country differences really do not matter for your business. They might matter now more than before, and you might be more aware of them. Your strategy should take this into account.
Differences across countries have been accentuated recently, and while this hinders aggregation strategies, many firms may be able to exploit these differences. Such arbitrage strategies include the ability of firms to switch resources and focus quickly to build up flexibility in their system. For example, while manufacturing is impossible at one location, perhaps another one can take over with additional shifts. Global value chains, which do not have such flexibility and redundancy, will be much less resilient to shocks such as COVID-19, and other uncertainties related to Trumpism, a resurge in trade wars or political instability as in Chile, Hong Kong or Catalonia.
A surge in country-specific particularities, barriers to cross-border business activities, and a local orientation of consumers and decision-makers means that domestic businesses have an edge as they can focus on the specific local opportunities. Local competitors, which you may have neglected in the past, could become more important. They may have strong local business models which take market share from you. Proper attention to domestic competitors is thus fundamental. This might involve strengthening how well embedded your subsidiaries are in their local communities.
A move towards adaptation strategies is in principle the right move in the context of important cross-country differences. However, adapting your products and your market approach to every single international market creates cost disadvantages compared to domestic competitors. After all, you need to finance a large international overhead in your corporate headquarters. And you will seldom be as fast and agile as domestic competitors. A move towards more adaptation should thus always come with an eye for divestment options. Divest in those international markets, where, once you adapt more to the local conditions, you do not have a clear competitive advantage. Concentrate on your well-functioning home and performing international markets. Including a subsidiary perspective, because it is close to the local markets, is critical for those decisions.
A growing importance of adaptation and arbitrage needs to be accompanied by some degree of decentralization. This means that headquarters-subsidiary relationships need to change, and allocated resources and decision rights should move downwards. It also entails some form of intermediate headquarters below the corporate level. Regional headquarters and their regional strategies and engagement with local subsidiaries will become even more important.
We already see that some firms are pursuing the strategies that we predicted. For example, just recently, Danone Group, a French consumer goods giant, announced that they will downsize their corporate headquarters and become much more decentralized, making regions more powerful. Similarly, Accor – a hotel group pushes power away from the corporate headquarters towards regions.
All you need to know about crises and their implications on globalization and international business, you can learn in the Executive MBA Bucharest.
If you would like to hear more about this topic from Prof. Phillip C. Nell, join his upcoming webinar.