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GLOBE Teaching Materials / 2. GLOBE Readings
The Globalization of Markets - Globalization Note

The term “globalization” first appeared in a dictionary of (American) English in 1951, and its roots can be traced back to the terms “global” (which took on the meaning of ‘world scale’ in the late 19th century) and "globalize” (which appeared in the 1940s).1,2 Globalization came to prominence in popular discourse in the late 1990s and early 2000s, concurrent with a surge in publications on the topic. In the early 1990s, the U.S. Library of Congress catalog listed less than 50 publications per year related to globalization – from 2002 to 2008 there were more than 1100 every year.

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The Globalization of Firms - Globalization Note

This note considers how firms have globalized by extending themselves—in multiple ways—across national borders. While only a very small fraction of firms have meaningful cross-border activities, the ones that do tend to be larger and more innovative than other firms and account for significant shares of international flows and even aggregate economic activity. Thus, in the U.S., while multinationals represented well under 0.1% of all companies, they accounted for about 24% of all private jobs, 71% of exports of goods, and 84% of nonpublic R&D in 2009.1 For the very largest multinationals, “international” activities account for more in the way of sales, assets and employment than their domestic operations.

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Adding Value

This note introduces the ADDING value scorecard and uses it to identify and calibrate the levers through which global strategy can create (or destroy) value, and to assess alternative strategy options. Some of the levers are likely to be familiar from single-country strategy but others are new or applied in rather different ways.

The ADDING Value Scorecard

The late C. Northcote Parkinson noted in one of his less famous laws that businesspeople tend to do detailed cost-benefit analyses of relatively small decisions but simply throw up their hands and surrender to animal spirits when making large ones. There is a sense in some quarters that global strategic moves are so complex and so subject to uncertainty that they essentially become matters of faith. The ADDING value scorecard presented here is intended as an antidote to this kind of thinking. ADDING is an acronym that parses the assessment of international business strategy into the individual levers via which value is created, each of which is amenable to careful (and in many cases quantitative) analysis: Adding volume, Decreasing costs, Differentiating or increasing willingness to pay, Improving industry attractiveness, Normalizing risks, and Generating knowledge and other resources.

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Differences and the CAGE Distance Framework

This note introduces the CAGE distance framework, which is used to identify and prioritize the differences between countries that companies must address when developing cross-border strategies.

Begin by considering the example summarized in exhibit 2-1, which plots Walmart’s operating margin by country in 2004 against the distance between each country’s capital and Walmart’s headquarters in Bentonville, Arkansas. The impact of geographic distance is obvious, but what other types of difference or distance can you identify that separated the markets that were profitable for Walmart from those that weren’t?

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National Cultural Differences and Multinationals Business - Globalization Note

The eminent Dutch psychologist, management researcher, and culture expert Geert Hofstede, early in his career, interviewed unsuccessfully for an engineering job with an American company. Later, he wrote of typical cross-cultural misunderstandings that crop up when American managers interview Dutch recruits and vice versa:

“American applicants, to Dutch eyes, oversell themselves. Their CVs are worded in superlatives…during the interview they try to behave assertively, promising things they are very unlikely to realize…Dutch applicants in American eyes undersell themselves. They write modest and usually short CVs, counting on the interviewer to find out by asking how good they really are…they are very careful not to be seen as braggarts and not to make promises they are not absolutely sure they can fulfill. American interviewers know how to interpret American CVs and interviews and they tend to discount the information provided. Dutch interviewers, accustomed to Dutch applicants, tend to upgrade the information. To an uninitiated American interviewer an uninitiated Dutch applicant comes across as a sucker. To an uninitiated Dutch interviewer an uninitiated American applicant comes across as a braggart.”

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Adaptation Strategies

Adaptation is the most obvious strategic response to differences, and variation the most obvious lever for achieving it: as the adage has it, when in Rome, do as the Romans do. This note adds three additional points, which are captured in exhibit 3-1. First, variation should be thought about more broadly than simply tailoring products or services to local market requirements. Second, since variation is costly, smart adaptation typically involves not only appropriate decisions about the amount of variation but use of one or more complementary levers—focus, externalization, design, and innovation—that help improve its effectiveness. Finally, the sheer variety of the levers and sublevers for adaptation suggests room to broaden strategic discussions beyond the usual tug-of-war between headquarters and the field over centralization versus decentralization.

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Differences in Business Ownership and Governance around the World - Globalization Note

Culture, the first element of the CAGE framework presented in the article “Distance Still Matters,” refers to the attributes of a society that are sustained by interactions among people, whereas the administrative element of CAGE refers to aspects that are sustained by state authority: governmental policies (and practices), laws and public institutions. As noted in that article, administrative attributes such as colonial-era ties, preferential trading arrangements, a common currency, political amity, policies of openness, and strong public institutions significantly boost trade. Similar influences also seem to apply to foreign direct investment and other cross-border flows of capital, of people and of information. And while administrative similarities account for most of these influences, selected administrative differences can also generate cross-border activity, e.g., through the exploitation of tax or regulatory differences.

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Arbitrage Strategies

Arbitrage is a way of exploiting differences by seeking absolute economies rather than the scale economies gained through standardization. It treats differences across borders as opportunities, not as constraints. This note begins by underscoring the importance of arbitrage. Then, the CAGE framework is used to unpack potential bases of arbitrage and the ADDING Value scorecard is applied to analyze arbitrage strategies.

The Absolute Importance of Arbitrage

Arbitrage, of course, is the original cross-border strategy. Many of the great traders throughout history got their start by trading luxuries that were subject to extreme differences in absolute costs and availability. Thus, Europe’s spice trade with India because spices could (initially) be sold in Europe for several hundred times what they cost in India. Furs and fish that were abundant only in North America helped create a transatlantic trade and, incidentally, led to the colonization of the continent.

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Aggregation Strategies

Aggregation involves using various grouping devices to create greater economies of scale or scope than country-by-country adaptation allows. The key idea is to find ways to group things so that within-group differences are minimal compared to differences between groups, facilitating the pursuit of cross-border scale or scope economies within groups.

Just as there are many adaptation levers and sublevers, there are many possible bases of aggregation. But in the context of international strategy, an obvious focus is provided by approaches to aggregation that cut across national boundaries and, in particular, ones that operate at the regional (continental) level, i.e., at a level between the individual countries emphasized by adaptation strategies and the whole world.

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