globalization of firms in historical perspective

Globalization Note Series Pankaj Ghemawat and Geoffrey G. Jones

Copyright © 2013 Pankaj Ghemawat and Geoffrey G. Jones. This material was developed for students in the GLOBE course at IESE Business School and should not be cited or circulated without the authors’ written permission.

The Globalization of Firms in Historical Perspective

Semiglobalization—the incomplete integration of markets across national borders that was emphasized in the note on “The Globalization of Markets”—is also the state of the world that attaches importance to firms’ cross-border activities. Perfect cross-border integration of markets for products or inputs would limit the value of the bridges firms can build across borders. And perfectly separated national markets would dispense with the need for cross-border activities. It is between those extremes of complete separation and integration that the scope, complexity and profit-impact of firms’ cross-border activities are maximized.

This note focuses on the role firms have played over time in promoting trade and investment. It takes a chronological perspective organized around a first wave of globalization that stopped after World War I and a second wave that started after World War II and is still unfolding (see Figure 1). The note on “The Globalization of Management” provides a snapshot of the state of globalization by business area in 2012 to complement the longitudinal perspective taken here.

1. The First Wave In 1500 CE, the world’s export-to-GDP ratio is estimated to have been only about 0.1%, and

international trade mostly occurred within geographic regions: the costs and hazards of interregional transportation by land, e.g., along the Silk Road between Europe and China, were extremely high. But improvements in seafaring technology in the 15th and subsequent centuries by West Europeans eased trade with India and China, each of which had an economy significantly larger than all of Europe’s at the time. Particularly critical was the discovery of a sea-route to the East, around the Cape of Good Hope, by the Portuguese navigator, Vasco da Gama, in 1497. The sea-route sparked a surge in the trade of luxuries between Europe and Asia, starting with trade in spices that could be sold for more than a hundred times as much in Europe as in their Asian countries of origin. The returns from trade were nonetheless limited by very high costs and risks: about half of the ships that set sail from Portugal for the East in the 16th and early 17th century never returned.

A major development in the 17th century was the chartering of the first joint stock trading companies in Europe to trade with particular countries, most notably the English and Dutch East India Companies. These companies focused on pooling risks across investors as well as arbitraging differences in costs and willingness-to-pay between Asia and Europe (since they also purchased goods in Europe for sale in Asia). In so doing, they undertook hundreds of thousands of transactions every year.1 While not remotely comparable to the volumes of such flows in a large modern multinational, these requirements were sufficient to create the need for several hundred administrative personnel at the headquarters of the English East India Company and to force the replacement of owner-managers with salaried managers organized into hierarchies that included committees to control accounts, buying, private trade, presidencies, shipping, and treasure. The company began to experiment with contracts and incentives to motivate and control these managers. Eventually, it introduced a system of merit-based appointments that provided a model for the British and Indian civil service and—early in the 19th century—set up what may have been the world’s first corporate university, the East India College, to train officers going there. Thus, it actually set up many of the systems for modern management that are commonly supposed to have been pioneered by companies much later in the 19th century. But by then, the English East India Company itself had gone out of business, after a long political as well as commercial decline because of liberal sentiments in Britain, jealousy of its commercial rights and apprehensions about its security


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apparatus and empire overseas. The Indian Mutiny/War of Independence of 1857 brought British possessions in India under the direct control of the British crown.

That did not mark the end of all the original trading companies: Hudson’s Bay Company, incorporated by English royal charter in 1670, still operates as a retailer in Canada and the United States. And others entered the fray. British trading houses such as Jardine Matheson participated in the forced opening of the China market, originally trading Indian opium for Chinese tea. German traders such as Metallgesellshaft secured control of the global non-ferrous metal trade.2 When Japan reopened to the world with the Meiji Restoration in 1868, several dozen trading companies modeled on Jardine Matheson and other British merchant houses were set up to ease the effects of more than 200 years of isolation. By 1914, trading companies handled 51% of Japanese exports and 64% of imports, and Mitsui Bussan alone—part of the Mitsui diversified holding company—accounted for 20% of Japan's exports and imports. In the 1990s, nine general trading companies, led by Mitsubishi and Mitsui, continued to handle over 40 per cent of Japanese exports and over 70 per cent of its imports.

Looking beyond trading companies, overall trade grew particularly explosively starting in the early 19th century—a few decades after modern economic growth began with the industrial revolution.. The world’s export-to-GDP ratio increased from 1% in 1820 to 5% by 1870 and 9% by 1913, even though GDP itself was starting to grow much faster than population in parts of the world. Much of this increase was due to the expansion of trade beyond luxuries to agricultural and mineral commodities. World markets emerged for foodgrains after the mid-nineteenth century, aided by the shift from sail to steam and other improvements in transportation. Meat followed foodgrains, although perishability meant that the trade was organized around large vertically integrated firms that coordinated flows from slaughter to sale. Significant trade emerged in minerals as well, usually on the back of FDI, as described below. These and other commodities dominated international trade in the first wave of globalization, although trade in manufactures, particularly textiles, grew to be significant as well.

Telecommunications technology was important in enabling the increasing integration of many commodity markets during the first wave of globalization. In the 1850s, Siemens and Halske pioneered the development of telegraph and cable equipment, and established workshops in St. Petersburg, Russia and London, England to install and maintain products manufactured in Berlin. Siemens Global cable systems were built and operated by giant utility firms, especially the British-owned Globe Telegraph and Trust Company.3 These developments and particularly the deployment of the first transatlantic cables forced significant price convergence of commodities for which a few reference prices served to summarize conditions in geographically separate product markets—and for widely-traded financial instruments. Thus, price differentials between the London and New York markets for U.S. Treasury bonds fell by 69% when the first transatlantic cable was introduced in 1866.4

Britain, the first country to experience the effects of the industrial revolution, was also well-positioned geographically vis-à-vis global economic shifts. Europe and the United States’ combined share of world GDP increased from 28%—or less than China’s—in 1820 to 53% by the end of the century, and Britain was situated right between those two growing regions. It became the pacesetter at industrial transformation and specialization: a major shift from agriculture to industry and rapid urbanization turned the country into a big importer of grains and a big exporter of manufactures. But British manufactured exports focused on traditional sectors such as textiles rather than new, higher-tech ones such as chemicals and electrical machinery. And after 1870, it steadily lost ground to Continental Europe, particularly Germany. Great Britain’s share of world exports of manufactures fell from 37% in the second half of the 1870s to 25% by 1914, while exports of manufactures from northwestern Europe, already a bit larger, grew to be about twice as large. However Britain was responsible for a growing global share of high value-added financial services, including insurance.

Britain continued to dominate international capital flows to a much greater extent than international trade through to the end of the first wave of globalization. Some of this took the form of bank intermediation: British banks started setting up large branch networks across the British Empire in the 1830s. The 1840s, for example, saw British interests floating a bank called the Oriental Bank Corporation in Bombay that quickly moved its head office to London and then constructed a branch network all over South Asia, South Africa and Australia. It entered Japan in the 1860s, and floated the Japanese government’s first ever foreign loans in the early 1870s before collapsing in 1884. Subsequently,

Pankaj Ghemawat and Geoffrey G. Jones Globalization Note Series

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British overseas banks like HSBC focused on a particular region.5In addition to bank intermediation, large amounts of securities, typically debt obligations based on measurable revenue-generation potential (of governments, railways, etc.) were also invested in directly across borders, in the form of foreign portfolio investment. And then there was the emergence, especially in the closing decades of the 19th century and early in the 20th, of large volumes of foreign direct investment (FDI). Through the late 19th and early 20th century, Britain was the dominant home country for FDI: its share of the worldwide stock of FDI amounted to 40-45% in 1913.

Two-thirds of British FDI was accounted for by what Mira Wilkins has called free-standing enterprises.6 In addition to obtaining its source capital from the U.K., a typical firm of this sort would be organized as a standalone entity in London, under British law, and would typically operate in just one country, owning a discrete foreign asset such as an Argentine railway, a U.S. mine or an Iranian oilfield that was managed locally by a British expatriate. Thus, free-standing enterprises were “born global” They served, in effect, as project financing syndicates with delegated project management that transferred capital to foreign countries while taking advantage of cross-country differences in institutional infrastructure, particularly contract enforcement, to reduce transactions costs. Although termed free-standing, many were clustered through various linkages, especially around trading companies, which established new ventures and then did initial public offerings in London or other markets—not unlike modern-day business groups.7

In terms of sectors, data on listed companies suggest that before World War I, about 85% of British FDI was concentrated in (and spread relatively evenly across) resource-based sectors, railways, and other utilities and services.8 The geographic scope of British FDI was broad, although British firms did account for the bulk of investment in the British Empire outside Canada (where the U.S. led). The colonial context was even more evident in FDI from France, the third largest source overall, in developing countries: this was, after all, the high point of the age of empire. Most French (and German) manufacturing investments, however, were located in Europe.9

An interesting contrast is presented by FDI from the United States. The US had, of course, historically been a technological follower. Thus, its textile yarn industry got off the ground when Samuel Slater, known as the "Father of the American Industrial Revolution" in the United States and "Slater the Traitor" in Britain, carried from the latter to the former not only Richard Arkwright’s spinning technology but also the highly disciplined, profitable factory system he had developed . But ultimately, it was the United States rather than Britain that overtook China as the largest single economy in the world based on GDP measured at purchasing power parity, in 1890.10 As of 1914, U.S. FDI continued to be dominated by the resource-based sector—mining, agriculture and petroleum accounted for 54% of total investment—but manufacturing accounted for another 18%. Geographically, 72% of U.S. investment was concentrated in the Americas, led by Canada and Mexico, but investments to seek out new markets for manufactures—as opposed to resource-seeking investments aimed at arbitraging differences in costs and availability—focused on Canada, Europe and Russia. Such manufacturing FDI was spearheaded by large scale enterprises with significant administrative hierarchies unlike the free-standing firms that accounted for the bulk of British FDI—although this also meant that their domestic operations typically dominated their international activities in terms of size and how things were done.

Unlike traditional vertical multinationals in agriculture and mining, which used outputs from some countries as inputs into their operations elsewhere (i.e., exploited differences across countries), manufacturing multinationals were horizontal multinationals that replicated parts of their business models across the countries in which they operated to turn out broadly the same range of products (i.e., exploited similarities). Singer, the U.S.-based manufacturer of sewing machines, was an unusually successful early example.11 Its key challenges concerned not manufacturing but the marketing, distribution and retailing of a consumer durable with a cost comparable to U.S. per capita income at the time. Singer’s innovations in response to this challenge included the development of hire purchase and then the invention of direct selling as door-to-door salesmen were both a way to collect money and expand the market where retail infrastructure was weak. Many of these innovations originated outside the U.S., and were then transferred back. Investment in foreign manufacturing was complemented by a network of branch offices that ultimately came to be overseen by three regional offices, in New York, London and Hamburg. By the early 1900s, Singer held 90% of its market despite not being the technological leader, and was the


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7th largest firm in the world by sales. It sales profile was also unusually dispersed, even by the standards of today’s multinationals: Russia, not the U.S., was its largest single market (see Figure 2).

2. The Great Reversal The first wave of globalization stalled and, based on measures of market integration, went into

reverse after World War I. The most obvious reason had to do with disruptions of the international political (and economic) order. Singer, for example, lost its entire Russian business as a result of the Revolution in 1917. And France lost two-thirds of its entire foreign investment. The Communist Revolution was the first case of large-scale expropriation of foreign FDI. Also striking, however, were the sequestrations of German-owned affiliates by U.S., British and other Allied governments during World War, which not only reduced the stock of German FDI to virtually zero, but also signaled the end of the era when foreign companies could operate in most countries on more or less the same terms as domestic ones. Receptivity to foreign firms did not recover after the end of World War I. Although the United States shifted from being the world’s largest debtor nation to being a net creditor over the course of the war, growing nationalism resulted in major restrictions on foreign ownership in shipping, telecommunications, resources and other industries.

While trade flows did recover during the 1920s, the Wall Street crash of 1929 and its global spread finally ended the first wave of globalization. Tariffs and exchange controls proliferated. Immigration plummeted as governments introduced quotas and work visas. And capital market integration went intoreverse as the gold standard collapsed and the international monetary system disintegrated into regional currency areas.

The result was the creation of new subworlds based on the alternative currency areas that appeared after the collapse of the gold standard in the early 1930s. The Sterling Area, the Franc Area, and the Dollar Area shaped flows of capital and of trade during the 1930s, and were significant influences on international business and trade for several decades thereafter. Thus, on the eve of World War II, the British Empire accounted for 75 per cent of all non-oil British foreign investment.12 Distinct spheres of influence were also evident in the proliferation of international cartels, which governed 40% of world trade by the end of the 1930s.13 While the U.S. government was officially suspicious of international cartels, major U.S. firms, whether in oil or manufactured goods (GE dominated the world electric lamp cartel, which sold 85 per cent of lamps in the world) were extremely important actors in them. Such cartels persisted as major forces in Europe and Japan for decades and continued to be significant in some key commodities (e.g., oil) and some other sectors critical to globalization (e.g., international shipping and air transport).

Less obviously, the shift in output from agriculture to manufacturing and the decades it took most firms—unlike Singer—to figure out how to sell differentiated manufactures rather than commodities overseas played a role as well. Some have even argued that this shift was more important than the upheavals of the interwar era. Thus, in the U.S., trade plummeted from 24% of GDP in 1920 to just 11% by the end of the decade—a level that would be maintained over the next 30 years—before the Smoot-Hawley Tariff Act of 1930 led directly to the Great Depression.14 The infrastructure developed to trade commodities had to be elaborated to handle differentiated products that lacked well-defined reference prices, could not be shipped in bulk, and often required substantial local adaptation, marketing and after-sales support. To this day, trade in differentiated manufacturers remains more sensitive to proximity and common language/colonial ties than trade in commodities.15

After the horrors and disruption of World War II, much of the world shut itself off from globalization. Communism closed Russia, and then Eastern Europe, China and elsewhere to global capitalism. These regimes instead attempted their own non-capitalist globalization: post-war Communist rulers encouraged their countries to specialize in particular sectors and trade with one another. Until political relations between Communist China and the Soviet Union deteriorated in the late 1950s, this Communist subworld covered a significant fraction of the world. The state-led model also attracted developing countries whose independence often intertwined with a backlash against Western capitalism. Thus, India engaged in large-scale state planning in order to promote industrial catch-up a la the Soviet Union—with which it also developed close trading and technological relationships.


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3. The Second Wave Globalization eventually did resume its onward march in the decades after World War II, with

trade surging starting in the 1960s and FDI in the 1980s (see Figure 1). Drivers included changes in governmental policy, the expansion of globalization beyond commodities as companies figured out how to sell differentiated manufactures and, to some extent, services, across borders, the increasing intensity of investments in intangible assets such as technology and marketing expertise subject to some cros-border economies of scale and advances in information technology in particular. What resulted, in addition to more globalization, were both a broader range of strategies than pure arbitrage and more elaborate attempts at coordination within and across organizational boundaries. And in the last few decades, emerging markets reemerged as an engine of world growth, and companies from them as new players on the global scene.

The Role of Government

The General Agreement on Tariffs and Trade (GATT), eventually replaced by the World Trade Organization, served as a platform for global negotiations that greatly reduced artificial barriers to trade. Regionally, the European Common Market and other integration initiatives provided impetus for more trade. So did broader moves by countries to open up. Thus, a classification of countries as closed or open based on trade barriers but also on whether they were “socialist,” black market premia for hard currency and state monopolization of major exports, suggested significant increases in openness to trade since the 1960s, especially in the last two decades of the 20th century (see Figure 3). The countries that remained open throughout this period (e.g., the U.S. and a number in West Europe) also experienced large declines in tariffs and other contrived trade barriers, to levels generally well below those prevailing in the early 20th century. And even countries classified as remaining closed (e.g., China, India and Russia) did integrate more with the global economy.

These two dynamics—the visible hand of government and the challenges of globalizing differentiated manufactures—continued to affect the development of multinationals in the decades that followed World War II. The vertical integration of the natural resource companies, a key feature of the first global economy, came under pressure as host governments objected to having their resources owned by foreigners—although large oil, minerals and fruit companies and other vertical multinationals retained some of their importance through their downstream control of distribution, access to markets and (limited) contractual protections. And a new generation of trading companies emerged, such as Philipp Brothers and later Glencore, which purchased commodities from suppliers in developing countries that were now state-owned and sold them worldwide.16

During the second wave of globalization, governments continued to matter a great deal—and arguably even more so now than at the crest of the first wave of globalization. One reason had to do with the rapid expansion of the state sector: for a sample of industrialized countries, for example, the share of governmental expenditures in total GDP increased from about 10% in 1870 to 45% in 1996.17 Another reason was provided by the breakup of empires in the course of the 20th century: the number of independent countries increased from an all-time low of about 60 at the beginning of the 20th century to nearly 200 by 2000.18 Others pointed to the shifting distribution of power across countries rather than their number as a problem. For example, Pascal Lamy, the outgoing head of the World Trade Organization, invoked multipolarity as one of the key reasons for the failure to conclude the Doha round of trade talks despite more than a decade of negotiation:

Power is shifting from West to East and shifting quickly. Countries like India, China, Brazil and Indonesia would, quite rightly, like a great share in the management of world affairs. But those who have held power for many decades are ready to accept this only if the emerging countries also take a larger share of the burden.19

In contrast, during the first global economy, governments rarely intervened in international

economic affairs. Trade was the sole exception: governments such as those in the UK and the US relied on tariffs as the largest source of governmental revenue and after 1870, the United States led the world in raising tariffs in order to also facilitate import substitution in manufacturing. But there were almost no restrictions on foreign investments in the United States or elsewhere—they were not even monitored.


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Nor were there many restrictions on labor mobility, although by the early twentieth century the United States had begun to restrict Asian immigration, and almost entirely prohibited it after World War I.

World War I and the Great Depression were turning points. Governments were everywhere in the lives of multinationals after 1914—expropriating, regulating, providing incentives, etc.—and this has remained the case. As a result, administrative arbitrage—arbitraging between governments and their rules and regulations—achieved some prominence alongside more traditional economic arbitrage. Examples include global shipping and flags of convenience, location of financial activities in loosely regulated offshore financial centers, and of dirty manufacturing in countries with weak environmental restrictions, and the broad use of foreign affiliates to reduce tax burden—a focus of mounting public outrage and tough talk from many governments in 2013. But such international administrative arbitrage notwithstanding, it remained easy to assign nationalities, as in clear roots in one country, to almost all firms, even the most internationalized—arguably easier than at the peak of the first wave of globalization.20 And even the very few long-running exceptions to this rule seemed to have come under pressure recently: thus, the traditional two-headed Anglo-Dutch structures at Unilever and Shell had finally been consolidated.

Sectoral Shifts

Horizontal multinationals in manufacturing continued to struggle with the challenges of globalizing differentiated manufactures. But through to the 1960s there was little rationalized production in such companies; subsidiaries tended to operate on a standalone basis, intra-firm trade was very low, and when it did take place, tended to be one way, from home to abroad. This was partly a legacy of the welter of exchange controls and tariffs of the interwar years. But it also reflected continued lags in building up the kinds of intangible assets that pioneers such as Singer had started to amass a century earlier. Intangible assets such as technological knowhow and marketing expertise tended to exhibit increasing returns to scale and (partial) fungibility across locations, but it was often difficult to contract out their services. So they spurred the international expansion of horizontal multinationals despite large differences across national markets. To this day, R&D-intensity and advertising-intensity are robust predictors of the incidence of horizontal MNEs in manufacturing, presumably because such expenditures serve as proxies for the underlying importance of intangible assets.21

What did change—particularly about advanced economies—in the period after World War II was the shift of economic activity and particularly employment toward services. Thus, between 1953 and 2005, service sector employment in the U.S., Western Europe and Japan rose from 44% of total employment to 78%.22 In tandem, service firms swelled the ranks of globalizers. During the 1950s consultants, ad agencies, hotels and film distributors went global, spreading management practices and lifestyles. The globalization of these firms’ footprints did, however, present some performance challenges. Among the top 50 law firms, for example, a negative relationship persisted in 2010 between the percentage of overseas partners in the firm and its profit per equity partner.23

The biggest changes in services were due to banks. The creation of the Euromarkets in the late 1950s by British overseas banks like the Bank of London and South America revolutionized the world financial system.24 Over the next two decades, the growing pool of offshore capital increasingly impinged on the ability of governments to regulate financial systems. The new unregulated financial markets were and remained clustered in places such as London, and offshore centers such the Cayman Islands, where they were disconnected from “real world” activity such as foreign trade. Financial market liberalization, including the removal of controls on international capital flows, accelerated in the 1970s and has been cited as a contributor to a resurgence of banking crises in that decade, after several decades of near-invisibility in major economies. From the mid-1980s through the end of the 1990s, countries accounting for a quarter of the world’s GDP were routinely in crisis in any given year.25 Nonetheless, trade in the services sector continued to remain limited, illustrated by the fact that services account for roughly 70% of global GDP but only about 20% of global trade, making trade in services only 10% as intense as trade in merchandise.26 New analysis of trade in value added, however, indicates that accounting for services content embodied in manufacturing exports, e.g. in the form of labor services, perhaps doubles the “services” share of world exports.27 And by 2010, roughly 2/3 of global FDI was in the service sector, up from half in 1990.28


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Some services such as haircuts were, of course, intrinsically untradeable. Trade and particularly FDI in others, while feasible, required a sophisticated system of rules and regulation that not all World Trade Organization members were equipped to operate—nor politically willing to do so, as evidenced by the breakdown of the Doha round of trade talks. Policy restrictions continued to be particularly pronounced in transportation and professional services. Some analysts nonetheless concluded that services globalization represented a great opportunity, although not a simple one: that a given percentage cut in services barriers would produce greater gains than those from a comparable cut in merchandise trade barriers.29 Others asserted an analogy with the decades it took firms to figure out how to sell differentiated manufactures rather than commodities overseas:

“We are currently in a period like that from 1920 to 1950, in which changes in the composition of economic activity—then the trend toward differentiated manufacturing; now the move toward locally produced and consumed services—outweigh the impact of improving transportation and communications on globalization. It is likely to be a period in which economic globalization declines in importance.” 30

Intangible Asset/Information-Intensity

What is clearer is that as the relative importance of commodities declined and the emphasis on selling differentiated manufactures and, to a lesser extent, services across borders went up during the postwar period, the intensity of investments in intangible assets shot up . Thus, in the U.S., which led on this metric, gross business investment in intangibles increased from slightly over 4% of nonfarm business output at the end of World War II to nearly 14% by 2007—with about one-half of the total being accounted for by investments in R&D and brand equity—while the rate of investment in tangible assets hovered between 10% and 12%.31 In addition, investment in information technology (IT) in the form of both hardware and software came to account for a significant chunk of total investment as well.

IT was the big technological story of the second wave of globalization, especially in the last few decades (see Figure 4). Which is not to say that transportation technology didn’t experience significant improvements as well. The development of shipping containers facilitated “unitization” or the shipping of less-than-full shiploads (note the continuing response to the challenges of differentiated manufactures vs. commodities), slashed handling costs and times, and permitted more efficient multimode shipments in which maritime transport interfaced with rail or road. But the advent of OPEC (state-sponsored cartels continued to be entirely legitimate in many commodities—if ineffective in most) and recurrent peaks in the price of oil slowed progress. And the jet plane not only improved air transport costs and times, especially on the North Atlantic route that still dominated global interactions in the early decades of the second wave, but also opened up new markets (e.g., for perishables) and permitted the development of quick-response global supply chains. As a result, air transportation is estimated to account for about 40% of world trade by value. But again, fuel prices have flattened the cost trajectory recently and environmental concerns loom ever larger.

The IT revolution—the development of transistors and microprocessors, massive increases in processing power, the Internet revolution and the prospect of a new digital wave around social media, mobility, analytics, big data and the cloud—is a familiar story that will not be repeated here. What is worth emphasizing here is that the significant improvements in the speed and richness with which information could be exchanged between places had profound implications for how global organizations connected themselves up internally as well as externally to suppliers, buyers and others.

Strategy and Organization

In addition to the arbitrage strategies aimed at exploiting differences that vertical multinationals had traditionally pursued, the second wave of globalization saw more and more horizontal multinationals also wrestling with the tension between adaptation and aggregation as they sought to exploit at least some similarities across countries to tap economies of scale or scope while remaining locally relevant. But this was often hard to get right, as illustrated by Ford’s attempts over nearly a century to develop “a world car.”32 The runaway success of Ford’s fully standardized “any color so long as it’s black” Model T in the early 1900s inspired the company to build a giant plant modeled on its River Rouge complex in the US in the UK, even though the market there was much smaller. Utilization problems were


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compounded by insufficient adaptation to local demand (e.g. use of powerful U.S. engines while local preferences were shifting to smaller cars with lower operating costs) and rising trade barriers that stymied planned exports to France and Germany. GM historically achieved stronger results in Europe by allowing its subsidiaries there to pursue strategies more tailored to local markets. Ford nonetheless continued to pursue its vision of a “world car” despite setbacks such as the 1981 Ford Escort which was planned as a “totally common vehicle” across the US and Europe but was launched with only a single common part across the regions—with even that part changed six months later. Later attempts did achieve more parts commonality, however, and in the 2010s, Ford was again pursuing its world car ambitions—but so far, the original Model T is the only exception to the rule regarding the unworkability of complete standardization in autos.

Overall, improvements in IT combined with rising levels of globalization and deepening intangible asset-intensity to prompt many multinationals to expand the amount of cross-border coordination that they attempted well beyond the traditional emphasis on resource allocation across and monitoring of national operations by headquarters. Multinationals typically started out by tying foreign ventures to the parent with loose organizational links because of their riskiness as well as the prohibitive costs of establishing an elaborate organization to administer them.33 As foreign operations matured, they typically established an international division to coordinate such functions as transfer pricing, finance, and the distribution of exports among production units. As foreign operations became even more important, however, the mismatch between domestic and international structures prompted a search for alternatives ranging from global product divisions and geographic divisions to matrix structures involving more elaborate coordination across products or geographies that became more popular over the 1990s and 2000s. 34

Increasing integration within multinational firms also involved transforming their subsidiaries in foreign countries--to the point where free-standing subsdiaries had been deemed an endangered species.35 But cross-border geographical and functional integration had proven very difficult to achieve, especially for companies where borders had previously been sharply drawn. Thus, the regional integration of the European Union prompted Unilever’s top management to promote pan-European integration at Unilever as well, starting in the 1950s, but in the early 21st century, the company was still struggling to integrate the production and marketing facilities of its European firms.36

In addition to attempts to achieve greater coordination internally, leading multinationals also paid more attention in the 1990s and 2000s to strategic alliances involving significant inter-organizational coordination—a change typically attributed to the development of the internet, the diffusion of models for outsourcing, and the push in many lines of business to provide integrated solutions from participants across the entire value chain. Thus, according to rough estimates based on a range of data sources, alliances’ share of revenues for the top 1000 U.S. public corporations increased from about 1% in 1980 to 6-7% by 1990, 15% by 1995, 20% by 1998, and perhaps 30% or even 40% by 2010.37

Value chains in the consumer electronics industry exemplified the new reliance on webs of external partners. Taiwan’s Foxconn assembled an estimated 40% of the world’s consumer electronics in 2011 for clients such as Apple, Dell, Amazon, Samsung, and Sony. Apple and other Foxconn clients, however, came under fire for working conditions at Foxconn’s plants, including a spate of suicides, illustrating some of the difficulties associated with managing such extended supply networks.38

Emerging Markets

Foxconn also exemplified an even larger change in the world economy: the changing role of emerging countries, particularly China and India. The two had accounted for nearly one-half of world GDP between them in 1820. By the end of the first wave of globalization, that figure had fallen to about 20% as their income levels stagnated. China and India became suppliers of primary commodities—cotton, tea, etc.—so they continued to be important to the global economy, but they captured little value from it. They truly became peripheral only with the second wave of globalization, when Communist China and state-planned India opted out of the global economy. By 1980, their share of world GDP had dropped to 4% (or 8% in purchasing power parity terms) versus 21% for the US and 28% for the EU27. It has since turned around, rising to 19% by 2010 (nearly the same size as the US or the EU’s), and is forecast to reach 30% by 2030 (nearly as much as the U.S. and the EU combined), with China becoming


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the biggest single economy. Figure 5 summarizes these GDP shifts and Figure 6 lists emerging economies’ share of global totals for a broader range of variables in 2010.

Overall, the data in Figure 6 suggest a severing of the link between market size and income that had lasted most of the 20th century. The largest markets for most products had long been developed ones but now, emerging markets in general and China in particular often led. And for some products and services (consumer durables, telecommunications, construction inputs), the shift was occurring at a very high velocity. Thus, in autos—a particularly large, asset-intensive industry that one might think of as slow-moving—emerging markets’ share of unit sales increased from 17% in 2001 to 48% in 2011!39

In response to this shift, multinationals from advanced economies (again) expanded their horizons to encompass such markets. Once again, large-scale resource-seeking investments—although the resource being sought was often labor rather than some mineral or other commodity—appeared to precede large-scale market-seeking investments. Penetrating emerging markets posed particular challenges. Price points were generally much lower. Companies from advanced countries also had to deal with greater distances than, say, faced by a U.S. multinational expanding into Europe along dimensions such as cultural values and the quality of institutions, infrastructure and human resources. And they often also had to contend with low-cost, fast-moving local companies.

Emerging Competitors

Large companies were actually one of the dimensions along which emerging economies’ share of the world total lagged, as indicated in Figure 6. But even here, their influence was increasing rapidly: in 2012, 104 of the firms in the Fortune Global 500 hailed from emerging countries, versus only 11 in 1995. A new set of competitors was emerging on the global arena. Some Latin American, Asian and other firms—the Cemex’s and Tata’s—had grown substantially behind protective tariffs during the 1950s-1980s, reaching a decent scale and developing their own capabilities, even if they were rarely internationally competitive. With the removal of many of these restrictions, the most competitive of them were intent on expanding abroad. And they were joined as credible multinational challengers by Chinese private companies—although size-based rankings were still dominated by state-owned companies, which accounted for more than four-fifths of the 70+ Chinese companies on the Fortune Global 500 and one-half of the companies from other emerging economies (vs. 4% of the companies from advanced economies).

Such multinational challengers had, with a particular focus on China and India, been characterized as lower cost, better adapted to their home market and often nimbler than established multinationals but lacking the latter’s marketing expertise, technological knowhow and management systems. Industry-level patterns provided some support for this characterization: established multinationals tended to do better in the China and India in industries with higher differentiation potential—i.e. with high R&D and advertising intensity—and local companies in industries with lower differentiation potential.40 Further support came from the macro observation that investment rates in intangible assets tended to be much lower in emerging economies. China was a partial exception, with an intangible investment rate in 2010 of 10% of nonfarm business output (versus less than 3% in India), focused on software, R&D and design.41 But this level was low relative to Chinese rates of investment in tangible assets and appeared not to be yielding commensurate increases in output, perhaps because it seemed to be driven top-down by Chinese policymakers.42

While going head-to-head with incumbent multinationals in their home markets in the advanced countries as well as in one’s own was one option for companies from emerging economies, it wasn’t the only one. Shifts in world demand presumably combined with low levels of intangible assets and continued restrictions on foreign competitors in many sectors to make focusing on the home market a more attractive option for a company from an emerging economy than a company from an advanced one. Burgeoning commercial links among emerging economies represented another possible focus: trade between emerging markets, for example, had recently been by far the fastest growing component of world trade.43 Focusing by region or sub-region was another, probably even more common option: for example, many Latin American companies that internationalized, for example, became regionally-focused “MultiLatinas.” Other bases for expanding—e.g., by following the diaspora or colonial-era linkages—further multiplied the possibilities.


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From a historical perspective, the multinational challengers from emerging economies were not entirely without precedent. Some: non-western business enterprises seemed to be emerging in the first global economy, and some developed significant global footprints. Thus, the Patiño tin company from Bolivia acquired mines overseas, smelters in Britain and the U.S, and shipping and transport interests but was nationalized in 1952. Many of the other earlier multinational challengers were also done in by interventionist governments as well as regulations from the interwar years until the 1980s.

4. The Global Financial Crisis and Aftermath

In the immediate aftermath of the global financial crisis that struck in 2008, global connectedness

faltered because of declines in international trade and, especially, capital flows: see Figure 7.44 These developments marked, at a minimum, a lull in the surging globalization that the world had seen in in the previous few decades. And by 2013, there started to be talk of fragmentation, motivated not only by increases in protectionism and corporate retrenchment but also broader concerns: regional crises, most notably in the Eurozone, and general economic malaise, especially in developed countries; rising income inequality in many countries and the rise of xenophobia in quite a few; continued large trade imbalances, talk of currency wars and uncertainty about the future of the dollar as the world’s reserve currency; the doubling of the number of independent countries in the previous half century; the obsolescence of existing multilateral institutions because of economic shifts as well as other, more miscellaneous ailments (e.g., the death of the Doha trade round for the World Trade Organization and the withdrawal of the United States for UNESCO); and the challenges of dealing with multipolarity in international relations, particularly the emergence of an increasingly assertive China.

Would the second wave of globalization resume, or might it end in a second great reversal?


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Figure 1: Exports and Outward FDI Stock (Percentage of World GDP, 1820-2011)

0%

5%

10%

15%

20%

25%

30%

35%

1810 1860 1910 1960 2010

Exports

FDI

Export Sources: 1820-1992: Angus Maddison, Monitoring the World Economy 1820-1992, OECD 1995; 1993-2011: World Bank World Development Indicators and IMF World Economic Outlook. FDI Sources: 1913-1985: World Investment Report 1994; 1990-2011: World Investment Report 2012. Geoffrey Jones and David Kiron, Globalizing Consumer Durables: Singer Sewing Machines before 1914, HBS Case 9-804-00.

Figure 2: Singer Sales Distribution, 1910

Source: Geoffrey Jones and David Kiron, Globalizing Consumer Durables: Singer Sewing Machines before 1914, HBS Case 9-804-00. Note: Based on unit sales, not revenues


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Figure 3: Openness to Trade

Source: Romain Wacziarg and Karen Horn Welch, “Trade Liberalization and Growth: New Evidence,” The World Bank Economic Review, Vol. 22, No. 2, 2008, p.188.

Figure 4: Transport and Communications Costs Indexes, 1920-2009

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10

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30

40

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60

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100

1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

Sea Fright Air Transport Telephone Call Computers

Source: Source: UNDP (1999), Human Development Report 1999, p. 30, with Air Transport (average revenue per passenger kilometer) updated to 2009 based on ICAO, “Regional Differences in International Airline Operating Economics: 2008 and 2009.”

Figure 5: Shares of World GDP (PPP), 1820-2030F

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1820 1850 1880 1910 1940 1970 2000 2030

EU‐27

United States

China

India

Sources: 1820-1945: Angus Maddison; 1980-2016: IMF World Economic Outlook Database; 2017-2030: EIU Forecasts, Author Estimates.


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Figure 6: Emerging Countries’ Share of World Totals, 2000 vs. 2010

Note: Emerging market countries are those designated as Developing and Emerging by the IMF in the April 2013 edition of the IMF World Economic Outlook database. Sources: IMF World Economic Outlook April 2013, World Bank World Development Indicators (WDI), International Copper Study Group, Euromonitor, World Steel Association, UNCTAD World Investment Report (2002 and 2012 editions), Fortune Global 500 in Fortune Magazine.


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Figure 7: Exports and Outward FDI Flows (Percentages of World GDP and GFCF, 2005-2011)

0%

5%

10%

15%

20%

25%

30%

2005 2006 2007 2008 2009 2010 2011

Merchandise Exports (% of GDP)

FDI Outflows (% of Gross Fixed Capital Formation)

Services Exports (% of GDP)

Sources: World Bank World Development Indicators, UNCTAD World Investment Report 2012

1 Ann M. Carlos and Stephen Nicholas, "Giants of an Earlier Capitalism": The Chartered Trading Companies as Modern Multinationals,” The Business History Review, Vol. 62, No. 3 (Autumn, 1988), pp. 398-419 (p. 401). 2 Susan Becker, “The German Metal Traders Before 1914.” In The Multinational Traders, edited by Geoffrey Jones (London: Routledge, 1998) 3 Geoffrey Jones and Bjoern Von Siemens, “Werner von Siemens and the Electric Telegraph,” HBS Case No. 9-811-004 (Boston: Harvard Business School Publishing, 2012) 4 Kevin H. O’Rourke and Jeffrey G. Williamson, Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy (Cambridge: The MIT Press, 1999) , p. 220. 5 Jones, British Multinational Banking, 20-23, 27. 6Herbert Feis; MIRA WILKINS, “Defining a Firm: History and Theory,” in PETER HERTNER and GEOFFREY JONES (eds.), Multinationals: Theory and History (Aldershot, 1986). 7 Geoffrey Jones, Merchants to Multinationals: British Trading Companies in the Nineteenth and Twentieth Century. (New York: Oxford University Press, 2000). 8 T.A.B. Corley, “Britain's Overseas Investments in 1914 Revisited,” in Geoffrey Jones, ed. The Making of Global Enterprise (London: Frank Cass & Co. Ltd., 1994), p. 80. 9 Mira Wilkins, ed., The Growth of Multinationals,(Aldershot: Edward Elgar Publishing Ltd., 1991) 10 Angus Maddison, “Historical Statistics of the World Economy: 1-2008 AD,” http://www.ggdc.net/maddison/Historical_Statistics/vertical-file_02-2010.xls 11 Geoffrey Jones and David Kiron, “Globalizing Consumer Durables: Singer Sewing Machine before 1914,” HBS No. 9-804-001 (Boston: Harvard Business School Press, 2008) 12 Mira Wilkins, ed., The Growth of Multinationals, (Aldershot: Edward Elgar, 1991),pp. 163-167, based on data from A. R. Conan, Capital Imports into Sterling Countries (London, 1960) and exclusive of oil-related foreign investments. 13 Fear chapter in Jones and Zeitlin, Oxford Handbook of Business History (OUP 2008), p. 279. 14 Globalization: n. the irrational fear that someone in China will take your job”, Bruce C. N. Greenwald and Judd Kahn, Wiley; 1 edition (November 10, 2008), p. 19.


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15 Rauch, James E. "Networks versus markets in international trade." Journal of international Economics 48.1 (1999): 7-35. 16 Geoffrey Jones and Espen Storli, “Marc Rich and Global Commodity Trading,” HBS No. 9-813-020 (Boston: Harvard Business School Press, 2012) 17 Vito Tanzi and Ludger Schuknecht, Public Spending in the 20th Century: A Global Perspective, Cambridge University Press, 2000 (Table I.1, p. 6). 18 Alberto Alesina et al., “Economic Integration and Political Disintegration,” American Economic Review 90 (December 5, 2000): 1276–1296. 19 Nayanima Basu, “If countries don’t want to negotiate and agree, a WTO head can’t do much: Pascal Lamy,” Business Standard, January 28, 2013. 20 Geoffrey G. Jones, “Nationality and Multinationals in Historical Perspective,” Unpublished Harvard Business School working paper no. 06-052 (2005). 21 See Richard E. Caves, Economic Analysis of the Multinational Enterprise, 1996 for a more precise statement of the necessary conditions for horizontal MNEs and an overview of the empirical evidence on their incidence (pp, 2-9, 26-35 and 83-87). 22 Calculated based on Angus Maddison dataset contained in Groningen Growth and Development Centre (GGDC) 10-sector database, http://www.rug.nl/research/ggdc/data/10-sector-database. These data include government as well as commercial services. 23 George Beaton “Mega Trends in Professional Services,” presentation at Gro Pro Conference, April 19, 2011, p. 19. 24 Catherine R. Schenk, “The Origins of the Eurodollar Market in London : 1955-1963,” Explorations in Economic History, 35 (1998): 221-238 25 Carmen M. Reinhart and Kenneth S. Rogoff, “Banking Crises: An Equal Opportunity Menace,” Working Paper, NBER Working Paper 14587, December 17, 2008. 26 Based on 2010 data reported in the World Bank’s World Development Indicators. 27 Hubert Escaith, “Trade in Tasks and Global Value Chains: Stylized Facts and Implications,” presentation to WTO Trade Data Day, January 16, 2013. See also UNCTAD, “Global Value Chains and Development: Investment and Value Added Trade in the Global Economy,” which was released only in its preliminary unedited version as of this writing. 28 UNCTAD World Investment Report 2012, Appendix Tables 24-27. 29 Yvan Decreux and Lionel Fontagné, “Economic Impact of Potential Outcome of the DDA,” CEPII-CIREM, February 2009. 30 Globalization: n. the irrational fear that someone in China will take your job”, Bruce C. N. Greenwald and Judd Kahn, Wiley; 1 edition (November 10, 2008), p. 19. 31 Carol A. Corrado and Charles R. Hulten, “How Do You Measure a “Technological Revolution”? Paper presented at the American Economic Association meetings in Atlanta, Georgia, January 2010. 32 The material in this paragraph is drawn from: Geoffrey Jones, Multinationals and Global Capitalism. (Oxford: Oxford University Press, 2005), p. 175; Timothy J. Sturgeon and Richard Florida, “Globalization and Jobs in the Automotive Industry,” MIT Industrial Performance Center Working Paper, November, 2000; and Nick Scheele, “It’s a Small World After All…or Is It?” in The Global Market: Developing a Strategy to Manage Across Borders, John Quelch and Rohit Deshpande, editors, Jossey-Bass, 2004. 33 The discussion in this paragraph follows the richly detailed review of the literature in Richard E. Caves, Multinational Enterprise and Economic Analysis. (Cambridge: Cambridge University Press, 2007), Chapter 3. 34 The tension among these organizational forms was described in Louis T. Stopford and John M. Wells, Managing the multinational enterprise : organization of the firm and ownership of the subsidiaries, (New York: Basic Books), 1972. Pankaj Ghemawat and David J. Collis, unpublished Globalization Survey, 2007, indicate that based on based on self-reports, the incidence of the matrix form went up from 14% in late 1990s to 37% by 2007 while that of functional organizations, in particular, declined. 35 Julian Birkinshaw, “Strategy and Management in MNE Subsidiaries,” in The Oxford Handbook of International Business, Alan M. Rugman and Thomsas L. Brewer, editors, (Oxford: Oxford University Press, 2001), p. 381. 36 Jones and Peter Miskell, “European Integration and Corporate Restructuring. The Strategy of Unilever c1957-c1990”, Economic History Review, 58/1 (2005):113-39. 37 Data through 1995 based on Cyrus Friedheim, The Trillion Dollar Enterprise, and since then, on Warren Company, Strategic Alliance Best Practice User Guide, 2002; these sources themselves rely on a range of others that they cite in more detail. 38 Charles Duhigg and Keith Bradsher, “TheiEconomy: How the U.S. lost out on iPhone work,” The New York Times, January 21, 2012.


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39 Based on data reported by Wards Auto, with countries emerging markets defined as all countries that were not classified as “high income” by the World Bank in 2012. 40 Pankaj Ghemawat and Thomas M. Hout, “Tomorrow’s Global Giants? Not the Usual Suspects,” Harvard Business Review, November 2008. (Details in prepublication version, available from the authors) 41 The Conference Board, “Intangible investment in China has grown rapidly—but is it efficient?” China Center for Economics and Business: Chart of the Week, August 24, 2012. 42 The Conference Board, “China—Increasing intangible investment not yielding commensurate increases in output,” China Center for Economics and Business: Chart of the Week, September 17, 2012. 43 Emerging markets were defined, for this analysis, as all countries that were not classified as “high income” by the World Bank in 2012. Trade data were drawn from the IMF Direction of Trade Statistics and the UN Comtrade databases. 44 Pankaj Ghemawat and Steven A. Altman, “The DHL Global Connectedness Index 2012,” Deutsche Post AG.

globalization of firms in historical perspective

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