Beware going global!

Also at the SMS conference, Pankaj Ghemawat reviewed some of the recession’s impact on globalisation trends, a talk that included a useful warning. Big indicators, like the rate of Foreign Direct Investment, have slowed sharply with the down-turn, but no worse than last time. But he warned of some additional dangers this time:

• a risk of more protectionism due to more widespread job losses and distrust of business
• massive public debt slowing recovery
• shortage of finance

The intriguing content concerned the still remarkably low penetration of between-country trade – e.g. US/Canada inter-state trade is a tiny fraction of trade between Canadian states, in spite of NAFTA. The extent of trade between country pairs seems strongly determined by the factors you would expect – historic colonial ties, membership of trade-groups, common language, geographic distance.

The warning, though – and a big one – is that loss-making overseas operations are very common, even for apparently powerful firms, e.g. most of Walmart’s non-US business units are either not profitable or only marginally so. So the warning is to be very careful about ‘going global’ – in spite of the enthusiastic encouragement from the advocates.

Worryingly, he reports that many large firms, when asked whether they plan to carry out careful evaluation of entry into rapidly-developing economies or just ‘go for it’ seem to have chosen the latter!