Globalization Backtracks! How Will Companies React?

One of the biggest discussions today is on how attitudes toward globalization have changed in recent times. We have not only seen statements, but also actions undertaken against immigration, trade agreements, and multinational enterprises (MNEs). More importantly, we have seen populist movements that aim to put the rear shift on globalization as a key component of their ideological platforms. A major question for scholars and researchers is how to interpret these changes: how is it that attitudes have changed so radically? What will happen in the future? Why are people so willing to give up the tested gains of globalization for the untested and mostly psychological benefits of "national identity"? And last but not least, how will global business be affected by all this?

Putting globalization in a long-term historical context can help us understand the current change in attitude toward globalization. Globalization, i.e. the growing economic interdependence and integration of countries and regions, has two main drivers: technological progress and institutional change. The first driver, technology, has enabled the interlinking of faraway lands and the reduction of the time and cost needed to move goods, people, capital and knowledge across the world, that is, it has brought about a dramatic reduction in spatial transaction costs. Technological advances are likely to continue, driven by the twin forces of market competition and belief systems. Companies, universities and individuals have the incentive to compete in the search for new solutions to current and future problems. Technological change can seldom be halted, in spite of governments and individuals who might display Luddite attitudes. Technology spreads across national borders and organizational boundaries via intended and unintended spillovers.

The second driver, institutional change, in the shape of pro-market reforms, has enabled the reduction and/or dismantling of barriers and regulations hampering the transfer of goods, capital and ideas across and within national economies. Today's world has its roots in the early 1980s, with the an acceleration after 1990. Salient events include the pro-market reforms introduce in advanced capitalist economies (which included the privatization of major industries that had been formerly state-owned or state-controlled), the transition of China from a command economy to a market economy, and the fall of the Berlin Wall in 1989 and the collapse of the Soviet empire in 1991. All of these events accelerated the process of market-driven global integration and interdependence that created today's globalized world. Most governments reduced regulations, implemented pro-business policies, and liberalized their economies, enabling and speeding up the movement of goods and services, capital and ideas, and also people, across national borders. Protests against again globalization began in the late 1990s and grew in the 2000s. However, but it was not until the Great Recession of 2008 that opposition to globalization moved from the fringes to the mainstream of politics. Rich countries, which had previously been strident promoters of open borders, saw opposition to liberalization mount, fueled by falling real wages (also nominal ones in some cases) for less-skilled citizens.

Thus, in contrast to technological progress, the institutional evolution that promoted globalization has in many cases gone in reverse, with many governments imposing new barriers to the free movement of goods, capital, ideas, and people. It is here that the political power of governments can express itself, by quickly reversing long-standing efforts towards global interdependence and integration, in response to their ideological convictions and populist pressures.

How will global business be affected in our time by the populist backlash against globalization? Will MNEs be forced to reconfigure their global value chains and possibly repatriate (re-shore) some of their activities? Will global networks enable them to leverage their operational flexibility and avoid some or most of the effects of current political changes? Is the distinction global vs. local too one-dimensional? The verdict is still out!