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The Myths of Globalization, Part 1

Part 1

Canadian managers have recently witnessed the two sides of globalization pitted against each other-in April, in Quebec City, and in August, in Genoa. On one side were the protesters; on the other, the presidents and prime ministers with their finance and trade ministers. Undoubtedly, these divisions will again dominate the agenda when Canada hosts the G8 meeting in Alberta in June 2002. At the centre of the debate is globalization. Many suggest that globalization is well on the way to becoming a fait accompli.

Yet, while globalization has become a contentious issue, we believe that much of the discussion has missed a very important point. To put it simply, recent research suggests that globalization, as it has been presented, is a myth. The globalization debate presents us with two choices: our nation or the world. "But what choice? " is no longer a valid one because it fails to acknowledge the role and reality of regions and clusters. This is an important point because the meetings in Quebec City were about a regional trade agreement, which will span the Americas, and because corporate executives will end up making bad decisions if they don't understand what globalization is about. In this article, we will discuss research that shows that the debate on globalization has tended to ignore several very critical points. Beyond trying to explode some of the myths of globalization, we will also suggest what Canadian executives should do in the face of this confusing debate.

REGIONAL TRIAD ECONOMIC ACTIVITY Let us first address the evidence on globalization. Far from taking place in a single global market, most business activity of large firms takes place in regional blocks. Governments, trade agreements like NAFTA, and cultural differences divide the world into the triad of North America, the European Union (EU) and Japan. Only in a few industries, consumer electronics, for instance, is a global strategy superior. For most manufacturing and for virtually all services, taking a national or regional approach makes more sense.

We have seen the evolution from a national focus to a regional one in many multinational subsidiaries in Canada; they now report to a regional headquarters, which is responsible for the three NAFTA members.

This occurs for bulk chemicals, automobiles, pharmaceuticals and so on. For a growing number of multinational enterprises (MNEs), a regional strategy works best, with national needs taking a back seat in many sectors. One key exception is Quebec, where responsiveness to the local culture is still important to success. Globalization has been defined in business schools as the production and distribution of products and services of a homogeneous type and quality on a worldwide basis. However, reality is sometimes considerably different from classroom theory. For example, most MNEs headquartered in North America earn the majority of their sales within their home country or by selling to members of the triad-NAFTA, the European Union, or Japan and a small group of Asian and Oceania nations.

The facts tell the story: Over 85 percent of all automobiles sold in North America are built in North American factories; over 90 percent of the cars produced in the EU are sold in that region; and more than 93 percent of all cars registered in Japan are manufactured domestically. In the specialty chemicals sector, over 90 percent of all paint is made and used regionally by triad-based MNEs.

The same is true for steel, heavy electrical equipment, energy and transportation. The most dramatic example is New Economy services, which now employ about 70 percent of the workforce in North America, Western Europe and Japan. These activities are all essentially local or regional. It is hard to overstate the fact that the vast majority of Canada's activity is not, in any sense, global. Nevertheless, we certainly can improve these sectors by learning from the best foreign competitors, no matter where they are located and whether we directly compete with them.

REGIONAL CLUSTERS The other entity which has also come to the fore in the last decade is the city or city region. Prominent global examples include Silicon Valley for high tech, and the area surrounding Milan for textiles. Examples in Canada are Hamilton and steelmaking, Calgary and energy, Ottawa and high tech, Montreal and aerospace.

There is a realization that though companies can source goods, technology, information and capital from around the world, business today tends to be clustered in certain cities or city regions in a few parts of the world. If you want investment banking on a world-class level, you turn first to New York, London, Frankfurt and then to a second tier-Singapore, Sydney, Paris, Toronto and maybe Amsterdam.

It is the tight concentration of competitors, associations, suppliers, educational institutions, start-ups in clusters that makes it hard to replicate these very clusters in other places. Clusters take many years, even decades, to fully develop. The recognition of the importance of clusters has given city states more clout on the national and indeed world scene, as they battle with other cities for new R&D; labs, plants and head office locations. Mayors and other government officials have not been slow to recognize their new-found clout and they use it at the negotiating table with other levels of government.

It is an intriguing paradox that as the world's economy becomes more networked, the "local" becomes more important-for example, the knowledge, relationships and motivation that reside in a particular geographic area. Thus, though location remains fundamental to competition, it is quite different from yesteryear. Many of today's most important cities in Europe and in the Middle East rose to greatness and economic prosperity because of their location on seas and rivers or on caravan routes. These comparative advantages lasted for centuries.

Today, competition is more dynamic and leadership more tenuous, unless capabilities are upgraded constantly. Firms can now use global sourcing to reduce input-cost disadvantages. In fact, the productive use of inputs in the new source of competitive advantage, the potent mix that fuels high productivity.

What exactly are clusters? Michael Porter of the Harvard Business School defines them as geographic concentrations of interconnected firms and institutions in a particular field. They include suppliers of specialized inputs such as components, production machinery, services and consulting. That definition can also include those demanding customers who keep pressing for the latest innovation; it can be extended to include makers of complementary products and firms in industries related by skills, customers, technologies or common inputs.

Finally, clusters usually include government and other, more public-sector institutions, such as universities, community colleges, trade associations and think-tanks which provide vital specialized support to industry.

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Part 1

Canadian managers have recently witnessed the two sides of globalization pitted against each other-in April, in Quebec City, and in August, in Genoa. On one side were the protesters; on the other, the presidents and prime ministers with their finance and trade ministers. Undoubtedly, these divisions will again dominate the agenda when Canada hosts the G8 meeting in Alberta in June 2002. At the centre of the debate is globalization. Many suggest that globalization is well on the way to becoming a fait accompli.

Yet, while globalization has become a contentious issue, we believe that much of the discussion has missed a very important point. To put it simply, recent research suggests that globalization, as it has been presented, is a myth. The globalization debate presents us with two choices: our nation or the world. "But what choice? " is no longer a valid one because it fails to acknowledge the role and reality of regions and clusters. This is an important point because the meetings in Quebec City were about a regional trade agreement, which will span the Americas, and because corporate executives will end up making bad decisions if they don't understand what globalization is about. In this article, we will discuss research that shows that the debate on globalization has tended to ignore several very critical points. Beyond trying to explode some of the myths of globalization, we will also suggest what Canadian executives should do in the face of this confusing debate.

REGIONAL TRIAD ECONOMIC ACTIVITY Let us first address the evidence on globalization. Far from taking place in a single global market, most business activity of large firms takes place in regional blocks. Governments, trade agreements like NAFTA, and cultural differences divide the world into the triad of North America, the European Union (EU) and Japan. Only in a few industries, consumer electronics, for instance, is a global strategy superior. For most manufacturing and for virtually all services, taking a national or regional approach makes more sense.

We have seen the evolution from a national focus to a regional one in many multinational subsidiaries in Canada; they now report to a regional headquarters, which is responsible for the three NAFTA members.

This occurs for bulk chemicals, automobiles, pharmaceuticals and so on. For a growing number of multinational enterprises (MNEs), a regional strategy works best, with national needs taking a back seat in many sectors. One key exception is Quebec, where responsiveness to the local culture is still important to success. Globalization has been defined in business schools as the production and distribution of products and services of a homogeneous type and quality on a worldwide basis. However, reality is sometimes considerably different from classroom theory. For example, most MNEs headquartered in North America earn the majority of their sales within their home country or by selling to members of the triad-NAFTA, the European Union, or Japan and a small group of Asian and Oceania nations.

The facts tell the story: Over 85 percent of all automobiles sold in North America are built in North American factories; over 90 percent of the cars produced in the EU are sold in that region; and more than 93 percent of all cars registered in Japan are manufactured domestically. In the specialty chemicals sector, over 90 percent of all paint is made and used regionally by triad-based MNEs.

The same is true for steel, heavy electrical equipment, energy and transportation. The most dramatic example is New Economy services, which now employ about 70 percent of the workforce in North America, Western Europe and Japan. These activities are all essentially local or regional. It is hard to overstate the fact that the vast majority of Canada's activity is not, in any sense, global. Nevertheless, we certainly can improve these sectors by learning from the best foreign competitors, no matter where they are located and whether we directly compete with them.

REGIONAL CLUSTERS The other entity which has also come to the fore in the last decade is the city or city region. Prominent global examples include Silicon Valley for high tech, and the area surrounding Milan for textiles. Examples in Canada are Hamilton and steelmaking, Calgary and energy, Ottawa and high tech, Montreal and aerospace.

There is a realization that though companies can source goods, technology, information and capital from around the world, business today tends to be clustered in certain cities or city regions in a few parts of the world. If you want investment banking on a world-class level, you turn first to New York, London, Frankfurt and then to a second tier-Singapore, Sydney, Paris, Toronto and maybe Amsterdam.

It is the tight concentration of competitors, associations, suppliers, educational institutions, start-ups in clusters that makes it hard to replicate these very clusters in other places. Clusters take many years, even decades, to fully develop. The recognition of the importance of clusters has given city states more clout on the national and indeed world scene, as they battle with other cities for new R&D; labs, plants and head office locations. Mayors and other government officials have not been slow to recognize their new-found clout and they use it at the negotiating table with other levels of government.

It is an intriguing paradox that as the world's economy becomes more networked, the "local" becomes more important-for example, the knowledge, relationships and motivation that reside in a particular geographic area. Thus, though location remains fundamental to competition, it is quite different from yesteryear. Many of today's most important cities in Europe and in the Middle East rose to greatness and economic prosperity because of their location on seas and rivers or on caravan routes. These comparative advantages lasted for centuries.

Today, competition is more dynamic and leadership more tenuous, unless capabilities are upgraded constantly. Firms can now use global sourcing to reduce input-cost disadvantages. In fact, the productive use of inputs in the new source of competitive advantage, the potent mix that fuels high productivity.

What exactly are clusters? Michael Porter of the Harvard Business School defines them as geographic concentrations of interconnected firms and institutions in a particular field. They include suppliers of specialized inputs such as components, production machinery, services and consulting. That definition can also include those demanding customers who keep pressing for the latest innovation; it can be extended to include makers of complementary products and firms in industries related by skills, customers, technologies or common inputs.

Finally, clusters usually include government and other, more public-sector institutions, such as universities, community colleges, trade associations and think-tanks which provide vital specialized support to industry.