We all know the politics of why globalization threatens to go into retreat. A backlash against job losses, the hollowing out of the middle class, the anger generated by growing inequality, resentment of the political power wielded by multinational corporations that have no democratic legitimacy, indignation caused by tax arbitrage, and so forth.
But leaving the politics aside, there are also market reasons why globalization is past its peak.
This week The Economist published an excellent review titled The retreat of the global company. The thesis, well supported by analysis, is that multinational corporations are in decline. They are losing market share to more locally focused firms. Rather than being powerhouses, they are now ‘rickety and overextended.’ Return on investment is falling.
The article provides many robust economic arguments for this decline. However, it misses out some crucial points.
Companies started going international to seek new markets. To bring their products to people far and wide. Over time, the primary purpose of being multinational changed. It became focused on cost savings. Production was moved to the cheapest countries and the primary focus became to optimize efficiency. In doing so, corporations took their eye off the customer. Customers were no longer people, they became merely as ‘consumers’ to be represented as ‘market segments’ in colourful pie charts. Standardisation, mass production and mass marketing became much bigger drivers than satisfying the needs of individuals. With millions of customers, losing a few here and there through dissatisfaction started to be seen as an irrelevance – there were more to be had to replace them. And it was certainly not worth compromising efficiency just to retain a few difficult customers.
We have all had to put up with the unpleasantness of dealing with multinational firms. We have all had to suffer through their offshore customer service call centres with the infuriating automated menus and, should one ever get to speak to a real person, the zombie-like answers parroted from their screens with total disinterest. But, from the corporations’ point of view, this was all worthwhile if it resulted in a penny off the goods sold and several extra millions (or billions) flowing to shareholders.
The net result has been highly complex organisations that have become hard to manage and where the cost of complexity is starting to overtake economies of scale. But, more important, organisations that have lost most of the connection with their own customers. Where the most important ‘customers’ for senior management are shareholders and the financial markets, not the people buying their goods and services.
Couple this with a cultural change that is starting to reject the blandness of mass produced goods, and it is hardly surprising that smaller, customer-focused, local firms are winning market share. Add in the shift from economies based on production to service-based economies, and the flaws of the multinational become multiplied (services are harder to standardize and mass produce and customer satisfaction much more difficult to sustain).
The political backlash against globalization will be an important driver of its reversal. But layer on to that the market rejection of where globalization has led large corporations, and we have a perfect storm.
Economists who keep churning out the economic benefits of globalization and why it should be maintained (let’s call them globalization’s protectionists) are past their sell-by dates. And it’s not just politics that are at play. “The market” (ie people like you and me) are voting against globalization with their wallets.
The only question worth exploring further is what the post-globalized world could look like.
For governments, a prosperous future may no longer lie only in attracting foreign direct investment from multinationals. They may be better off cultivating locally focused SMEs.