So far, 2011 has been a remarkable year. With events like those that have changed the power dynamics throughout the Arab world, or the tsunami in Japan that disrupted many global supply chains, it's easy to think that the world is becoming ever more connected and interdependent.
So this year, as in years past, to get a sense of how people are thinking about globalization, I begin many of my speaking engagements with a brief test, a simple multiple-choice question:
Did you pick the third quote? If so, you're in good company. Among the several dozen audiences to which I have administered this test over the years, that third quote, which suggests that the we live in one, integrated world — what I call World 2.0 — is the one that garners the most support, usually a majority. Spouting such attitudes — the flattening of the world, the death of distance, and the disappearance of differences across countries — seems to be considered a hallmark of global thinking.
But I prefer to think of it as globaloney.
Why? Because economic data simply don't support the view that we live in a flat, connected world, even if we are technologically connected with everyone, everywhere, all of the time. Data show that most types of economic activity that could be carried out across national borders are actually still concentrated domestically. For example, take foreign investment. Of all the capital being invested around the world, how much would you think is foreign direct investment by companies outside of their home countries? 25%, maybe? More, if you've heard the globaloney about "investment knowing no boundaries"? The fact is, the ratio was less than 9% in 2009 and, while it may be pushed higher by merger waves, has never reached 20%.
As the chart below demonstrates, the actual levels of globalization associated with telephone calls, long-term migration, university enrollment, stock investment, and trade as a fraction of gross domestic product (GDP) — look at the blue bars — resemble the data presented above: they fall much closer to 10% than the levels close to 100% that one would expect if one took the gurus of globaloney at their word.
Most people aren't, of course, quite that credulous. But globaloney does seem to have influenced their perceptions. Thus, 400 respondents to a (pre-crisis) poll about globalization levels on HBR.org came up with the responses summarized in green in the chart below. Note the systematic tendency to overestimate globalization levels, and by a wide margin: the responses (the green bars) averaged 30% versus real values (the blue bars) that averaged 10%. And to aggravate matters, respondents with more than 10 years' experience actually are farther off the mark than ones with less experience!
Even though there are many skeptics, as I was recently reminded when the Economist presented some of these data in its Schumpeter column, stirring a lot of skeptical commentary online, the fact is that the world is far from being completely integrated and that the rhetoric of globaloney is far removed from reality.
Why are smart people so susceptible to globaloney? One reason is that we tend to believe whatever we most desire or fear. For businesspeople, there is the big draw of unbounded profits in a borderless world. And for many others, there are deep seated fears that globalization might be exploitative, harmful to our cherished cultures, dangerous for the natural environment, and so on. In reality, both of these perspectives are misguided. Increasing cross-border integration offers the potential for huge economic and other gains, but not through the development of stateless corporations that sell the same things to everyone, everywhere. And most of the prevalent fears about globalization are also overblown, or otherwise amenable to mitigation.
If you were as surprised by these data as some of the folks in my audiences this year so far, what do you make of it? Are you, too, susceptible to globaloney?
Pankaj Ghemawat is the Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Barcelona, and the author of World 3.0: Global Prosperity and How to Achieve it (HBR Press, 2011).