Firms in a tough global environment
Strategy thinkers have to redesign firms
The scaling back of cross-border restrictions — on the movement of goods, services, capital, labour, and ideas — was a central source of high economic growth in the post-war period. There are four concerns or problems roiling this global environment. Just as greater integration creates growth in gross domestic product (GDP), de-integration creates a decline in GDP. It is in the interests of policymakers everywhere to grapple with the problems of protectionism to better contain
China, and to engage in unilateral liberalisation. Strategy thinkers in financial and non-financial firms need to critique and correct organisation designs to fare well in this evolving landscape.
1. From about 2018 onwards, we have been in “the third globalisation”, where economic engagement into the advanced economies is now more restricted for the countries which have poor alignment on foreign policy and military affairs. The second globalisation argument — that giving access to globalisation to countries like Russia or China would work out in the end because these countries were groping their way to freedom — has been proven wrong. Each undeveloped country has a rough struggle over many generations in its journey to prosperity and freedom, and there is merit in the third globalisation strategy. Along the way, it involves the destruction of tangible and intangible capital such as factories in China, oil extraction in Siberia, and justin-time production chains involving China. This decline in capital stock is a one-time negative level shock to global GDP.
2. Carbon-border taxes will reshape the structure of global production. Many people are wrongly mixing this up with protectionism. European consumers (voters) have signed up to pay higher prices for carbon-intensive products. The European Carbon Border Adjustment Mechanism is not about protectionism, it is about a level playing field between producing in Europe or producing across the border. At the level of principle, it is analogous to valueadded tax (VAT) on imports, which permits domestic policy (of setting the VAT rate) without trade distortions. The emergence of carbon-border taxes at many important countries will also involve the destruction of capital stock in carbon-intensive ways. China is ahead of India on the transition out of carbon: They are already at 33 per cent renewables and growing strongly. The weaknesses of Indian energy policy will reduce the global competitiveness of Indian exports.
3. The Chinese economy has been under severe stress. President Xi Jinping concentrated power (reversing the Deng Xiao Ping attempt at modernising the Chinese state) from 2013 onwards. The policy stance has emphasised a prickly nationalism, hostility to foreigners, and the arbitrary state coercion of private persons. As with other such episodes in economic history, Chinese optimism and growth have consequently faltered. In the past, Chinese policymakers have tried to prop up the economy using credit booms, infrastructure spending, and the construction sector. Each of these instruments is hard to deploy today. There now appears to be a systematic attempt at subsidising exporters (in ways that global trade accords do not permit). China is a big player in the world economy, and their behaviour can have substantial repercussions upon other countries. At present, there are many piecemeal efforts in trying to block the damage that is caused by these subsidised exports. It would be better to find a foreign policy solution where the advanced economies lead a negotiation with China.
4. Layered on top of these three systematic problems is the noise of a large number of unsystematic movements on trade policy by various countries that are often in the wrong direction. The General Agreement on Tariffs and Trade/world Trade Organization process has long since broken down. Every day, there are threats to openness, such as the attempt to disrupt the global agreement on free trade for digital services. There is a 40 per cent chance that Donald Trump will win the November elections in the United States, in which case there would be a decline in the quality of policy making in the most important country.
This is the tough context in which we should see the problems of Indian internationalisation, where the last decade has had poor growth in foreign direct investment (FDI) and exports expressed in real dollars. Total exports grew by about 3 per cent per year in real dollars from 2012-22 even though one component (services exports) has won big. Some moves by policymakers, such as cutting import duties for phone parts (which helps Apple and Xiaomi) or electric vehicles (which helps Tesla) are in the correct direction, but the strategy of being unstrategic has problems.
The most important site of activity is strategy thinking by firms. In the second globalisation, firms were lazy, and they did not think much about the economic policy and political environment. The firms that pushed themselves to more globalisation did well. Good firms export, and the best firms do outbound FDI, and the world reaps great gains. Hundreds of important Indian firms are now deeply wired into the world economy through exports and FDI, and hundreds of foreign firms are in a place where India is now important to them. These developments have been the central engine of Indian progress.
A firm is a raft of capital owners, contracts, physical assets, workers, and legal structures across multiple countries and tax havens. Strategy formulation at firms needs to have clarity with this four-part decomposition: Third globalisation, carbon-border taxes, Chinese government subsidies, and the noise of numerous actions by numerous governments (that are often in the wrong direction). The organisation design of firms needs to be improved to fit better in this environment. Diversification will help cope with collapses. In some cases, envisioning bad scenarios and establishing financial risk management can help.