Myths of Globalization

Reading the summary of Scotiabank CEO Rick Waugh’s speech last night to the Toronto Board of Trade is interesting. But more interesting is the uncritical reaction to what he prescribes by those who heard his speech. As Waugh tells it, globalization is the key to what ails business and if firms are to be competitive in a modern global economy they had better start focusing on emerging markets.

Much of what Waugh says seems, on the surface, sensible, but the premise of his talk that globalization is both desirable and necessary for firms requires closer examination.

In public discourse on globalization, there is a widespread view that the big markets are in the large developing countries such as China, India, and Brazil. However, much of world trade is still centered on the developed countries. It’s important to remember that ten developed nations – Canada, USA, UK, Germany, France, the Netherlands, Sweden, Switzerland, Japan and Australia – still account for a large portion of world trade. Thus, while firms should certainly keep developing countries on their radar screens, transacting business in the markets of developed countries may yield more benefit, at least in the short run.

Secondly, while Waugh argues that globalization allows firms to drive greater volumes and achieve economies of scale, this is not always true for all businesses. Economies of scale may exist for some firms, but so may diseconomies of scale. Bigger is not always better. What’s important is that a firm operate at least at its minimum efficient scale, taking advantage of economies of scale if they exist. However, even if scale economies exist, getting bigger brings attendant problems that can, if unmanaged, erode a firm’s performance and competitiveness, undoing the unit cost advantages gained through scale economies.

Thirdly, going global by offshoring operations into lower labour cost markets does not always bring the gains promised by cheaper labour. What’s important is final delivered cost, not wage costs. So firms who offshore operations such as manufacturing often find themselves blindsided by higher material costs and lower productivity and quality, all of which raises costs. Which is why there is now a significant movement for reshoring among US manufacturers.

Fourthly, taking a service business such as Scotiabank global is quite different from taking a manufacturing firm global. While there are similarities, there are also differences, such as establishing market access through distribution channels, dealing with local suppliers, product localization, and the like. One size does not fit all and success for a large service business such as Scotiabank does not guarantee success for a manufacturer.

Fifth, and finally, there is the myth that any firm with money can go global. Firms often underestimate the challenges associated with going global. Firms selling into a foreign market are often at a disadvantage relative to local producers. Customer tastes and preferences are likely to be different, reliable local suppliers may be difficult to find, and local authorities may be difficult to deal with.

Domestic success does not guarantee global success. Before attempting to penetrate international markets, firms should first assess their ability to successfully compete in such markets. In particular they should assess not only their financial resources and track record with exporting, but also their  intangible assets such as brand recognition and awareness,  the firm’s value proposition and it’s fit with international markets, the degree to which the firm’s core competencies are exportable, and the presence of economies of scale, if they exist.

It is easy to be seduced by the allure of global markets, but clear thinking is required as a first step.

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