Globalization was responsible for much of the world’s economic growth in the last years. Trade, more precisely, contributed to an increase in countries’ welfare.
It is all about the comparative advantage one country has on another. For example, China may have a comparative advantage when compared to Germany in the textile-producing industry. On the other hand, Germany has a comparative advantage against China on specialized engineering. If both countries are open to trade, and Germany exports its engineering services to China while importing textiles, the welfare of both Chinese and German citizens will increase.
This is how trade works, and that is why protectionist policies (e.g., tariffs), will end up being a long-term cost on society. Tariffs may reduce the trade deficit of a large country, but, in the long run, the welfare of the society suffers.
Globalization took a step back lately. When measured by the size of the Foreign Direct Investment (FDI), globalization declined significantly in the last four years. Moreover, the trend is set to continue.
What does it mean for large, multinational businesses?
The Good and the Bad Things Of a Slowdown in Globalization
Naturally, a slowdown in globalization means “going locally”. In the era of the COVID-19, this is not such a bad thing as many local businesses, especially small to medium-size ones, had to suffer. However, if we check the chart above, the slowdown in globalization is not a 2020 theme, like the pandemic. Instead, it started several years ago and continues unabated.
Only this year, so far, FDI will drop by 40%. In the era of globalization, after China was admitted in the World Trade Organization (WTO), profits of large companies have outpaced by a mile the profits of small firms. However, the new trend results in customers turning away from large companies. Moreover, the pandemic amplified the “going local” trend.
Despite the sharp evidence of deglobalization, large companies have a hard time implementing strategies in this direction. According to a study run by Deutsche Bank, only 35% of the companies have started to implement strategies to localize their business.
ESG (Environment, Social, and Corporate Government) investment concerns resulted in many companies severing ties with businesses and countries failing to respect these principles. As such, large companies have additional costs when compared to local, small companies that do not have to share this burden.
The good thing is that the rise of the ESG considerations may offset the economic impact of deglobalization. Also, the rise of small companies will make large corporations rethink their strategy for the medium to long term from only profit-oriented to a stakeholders’ centric view.