Pankaj Ghemawat: The World Is Still Round

Want to build an effective cross-border business strategy? This researcher says you need to first acknowledge that we don’t yet live in a borderless world.

July 2015

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At the dawn of the new millennium, it was common to hear about a “flat world” — one in which digital technology, global capitalism and flexible business structures would create a prosperous world without borders. But as Pankaj Ghemawat argues, it hasn’t quite worked out that way. To be sure, trade and culture cross borders more freely now than ever before. But national identity, regional proximity, languages and networks of family and friends all help keep borders in place. Ghemawat, a professor of global strategy at IESE Business School in Barcelona and at New York University’s Stern School of Business and the author of World 3.0: Global Prosperity and How to Achieve It, offers a real-world perspective on the factors influencing connections in today’s international economy — and how companies can take advantage of the enduring roundness.

WHY DOES THIS “ROUNDNESS” PERSIST?

It reflects the fact that while technology has improved our potential to connect across borders, many other factors continue to matter as well. Take the example of Facebook. It’s just as easy to friend somebody halfway around the world as it is next door. But what percentage of people’s Facebook friends are from other countries? The answer tends to be somewhere between 10 and 15 percent. Unless you’re friending people at random on Facebook, the technology is superimposed on a pre-existing matrix of relationships. We’re more likely to friend people who are close to us because they’re already more likely to be friends and speak a common language.

WHAT ARE SOME OF THE “OTHER FACTORS” YOU REFER TO?

I call one the “law of distance” or the “law of localization.” For instance, if two countries share the same language, they’re likely to have more than twice as much trade as two otherwise similar countries that lack a common language. In particular, a common language matters most when cultural differences are especially salient.

There are numerous other factors. Geographical distance remains important when it comes to trade — the farther apart two countries are, the less they will tend to trade. Whether a country is part of a regional trade agreement also helps a great deal. Conversely, not being part of one dampens trade. Also, if two countries had a colony-colonizer relationship in the past, that will tend to have a stable, positive, ongoing effect on their interactions.

WHAT DOES THE “WORLD 3.0” IN YOUR BOOK TITLE REFER TO?

World 3.0 is meant to be a description of the world as it is, rather than how it might be. I contrast that with what I think of as two extremes. There’s World 1.0, in which world borders matter a great deal. That’s the purely national or local world which has characterized the globe through most of its history. World 2.0 refers to the idea that national borders matter so little that material goods and ideas cross them very easily.

World 3.0 is the intermediate conclusion that the data steers you toward. There is some globalization going on, but the extent is limited. Much of the challenges, complexities and opportunities of international business stem from the fact that we’re operating in this intermediate zone.

WHAT ARE THOSE COMPLEXITIES AND OPPORTUNITIES?

To live in and devise your strategy in World 3.0, you need to pay serious attention to the differences across countries and make sure you have strategies to actually address them.

What you need to do is figure out the differences you would encounter on the ground in these vast markets relative to what you’re used to at home. Can you find ways of surmounting those differences? It’s only by doing so that you will have a clear case for trying to compete for a significant position.

The main goal of any global strategy must be to manage the large differences that arise at borders, whether those borders are defined geographically or otherwise.

One way is adaptation, which seeks to boost revenues and market share by maximizing a firm’s local relevance. An extreme example is simply creating local units in each national market that do a pretty good job of carrying out all the steps in the supply chain; many companies use this strategy as they start expanding beyond their home markets. Another means is aggregation, which attempts to deliver economies of scale by creating regional or sometimes global operations; it involves standardizing the product or service offering and grouping together the development and production processes. And finally, arbitrage takes advantage of the differences between national or regional markets, often by locating separate parts of the supply chain in different places — for instance, call centers in India, factories in China, and retail shops in Western Europe.

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