Constraints on Globalization - Principles of Management

Despite the historic nature of the trends we have just reviewed, we must be careful not to overemphasize their importance. Globalization is not inevitable. Powerful countervailing forces are constraining the pace at which production and markets are becoming global. Theseconstraints limit the ability of managers to disperse production activities to locations in the world where they can be performed at the lowest cost, as well as managers’ ability to treat the entire world as a single homogeneous marketplace.


The worldwide march toward market-based economic systems with few or no barriers to cross-border trade and investment is not guaranteed to continue. History is full of reversals away from progressive trends. The first bloom of modern global trade in the late 1800s and early 1900s was brought to an end by protectionist policies in major trading nations during the 1920s and 1930s, which led to a slump in international trade and helped usher in the Great Depression.

This could happen again. Many politicians and media commentators have argued that international trade destroys jobs and that outsourcing production to foreign nations is akin to exporting jobs and hollowing out the American economy (the CNN commentator Lou Dobbs frequently voices such concerns). They also suggest that globalization is promoting a “race to the bottom,” with wage rates being driven down in developed nations.

Supporters of free trade reject these arguments. They point out that the gains from international trade far exceed its costs and that international trade promotes economic growth and raises living standards. For example, although free trade in textiles means that American textile workers in South Carolina might lose their jobs as production moves to other nations where production costs are lower, the result will be lower prices for clothes, increasing the disposable income of American consumers. Thus as a result of free trade in textiles Americans can purchase more clothes and purchase more of other goods and services.

The consequence is greater economic growth in America, which helps to create additional jobs that offset those lost as a result of free trade in textiles. Moreover, free trade opens foreign markets, allowing American businesses to sell more overseas, which further stimulates economic growth. Thus even though jobs are lost in low-technology, labor intensive industries such as textiles, the American economy as a whole can reap substantial benefits if free trade allows U.S. firms to sell more commercial jet aircraft, software, pharmaceuticals, computers, and the like in other nations.

This is not just a theoretical argument; economic evidence suggests that international trade promotes economic growth for all nations that participate in a free trade system. The problem, as economists often point out, is one of public relations: The gains from international trade are widely distributed, but the pain is concentrated in a few sectors where people lose their jobs, and focusing on the pain makes for better news copy.

Despite the substantial theory and evidence in support of free trade, some politicians would like to engineer a return to the days of high barriers to cross-border trade and investment, which would inhibit the process of globalization. Indeed, there is still substantial protectionism in the world economy. Recent WTO talks to lower barriers to cross-border trade in agriculture,for example, have been stalled by the unwillingness of several developed nations, including the United States, Japan, and particularly the European Union, to remove tariffs and quotas that currently protect their agricultural sectors from foreign competition.

The rise of China as a major export power is also straining the world trading system, much as the rise of Japan did in the 1980s, and is leading to renewed calls for protectionism against “unfair” competition. If some of the advances of the last 50 years are turned back and barriers to cross-border trade and investment are raised, national markets will once more be segmented from each other, and the globalization of production and markets will stall. Such a scenario seems unlikely at present but is not impossible.


It is important not to overstate the globalization of markets. Although many goods and services are sold globally—from Boeing jets and Nokia cell phones to Starbucks coffee and McDonald’s hamburgers—there are still often substantial differences between the tastes and preferences of consumers in different nations. Many enterprises have discovered (at their cost) that foreign consumers differ from domestic consumers, and that accounting for these differences requires them to customize goods and services to better match local demand. In other words, truly global markets may be some way off.

For example, the American automobile market is very different from the European market. Driving in Europe you see few of the large SUVs so beloved by Americans. There are two good reasons for this: Gas prices are much higher in Europe, so fuel economy is valued over vehicle size and power, and smaller roads and parking spots in Europe’s historic cities and towns makes a smaller car more practical. Thus even though automobile firms such as Toyota and Ford might like to design cars they can sell the same way worldwide to realize substantial scale economies, reality requires that cars and their marketing be tailored to different regions.

Even in a young industry such as the cell phone business, important national differences in consumer usage patterns can be observed. Americans, for example, tend to think of cell phones primarily as devices for talking, not as devices that can also send e-mail and browse the Web. Consequently, when selling to U.S. consumers, cell phone manufacturers focus more on slim good looks and less on advanced functions and features.

This contrasts with Asia and Europe, where text messaging and Web browsing functions have been much more widely embraced. A cultural issue seems to be at work here. People in Europe and Asia often have more time to browse the Web on their phones because they spend more time commuting on trains, whereas Americans tend to spend more time in cars, where their hands are occupied.


There are still major differences between nations in business systems, legal systems, infrastructure, and overall level of economic development, and this works against treating the world as a single global marketplace. In the pharmaceutical industry, for example, Americans are used to seeing advertisements for drugs on television; but in many nations direct advertising of drugs to consumers is prohibited by law (the belief being that such advertising interferes with the doctor–patient relationship).

Thus pharmaceutical companies have to use different marketing strategies in different countries. Moreover, in many nations pharmaceuticals are still subject to government price controls, so firms charge different prices in different nations (prices tend to be higher if they are not controlled by the government). Competition can also vary from nation to nation. Due to differences in patent law, for example, Amgen’s best-selling drug Epogen will be subject to competition in Europe much sooner than in the United States.

Distribution channels may vary significantly from nation to nation, and this can require different approaches. Whereas Coca-Cola cans are distributed by trucks in much of the world, in parts of rural China they are distributed on the backs of motorcycles, and in Nepal on the backs of yaks or human porters.

Differences in income levels also have a major impact. In the West Unilever sells shampooand soap in the larger bottles we are used to seeing in our supermarkets; but in poor nations such as India and much of Africa, it sells the same products in much smaller containers because local consumers cannot afford to purchase the larger ones.

Many similar examples can illustrate the same basic point: Business systems, legal systems, infrastructure, and income levels differ from nation to nation. Handling these differences requires adaptation, and the process of adaptation (customizing the product offering, marketing message, sales strategy, pricing, and distribution system) runs counter to viewing the world as a single homogeneous global marketplace.


Finally, it is important to realize that differences in social culture across nations are often profound. As such, they make it harder for firms to view the world market as homogeneous and more difficult to manage operations in different countries. By social culture we mean the system of values and norms that are held in common by people living in a society. Values are abstract ideas about what a group believes to be good, right, and desirable; they are shared assumptions about how things ought to be. Norms are the social rules and guidelines that prescribe appropriate behavior in particular situations.

To pick a vivid example of cultural differences and why they matter, consider the differencesbetween the cultures of Saudi Arabia and the United States. Saudi views diverge from those of many Americans about the role of women in society, the consumption of alcohol (which is illegal in Saudi Arabia), the nature of time, and the connection between religion and the state. Saudi culture is strongly influenced by a strict interpretation of Islam and by the traditions of the nomadic Bedouin society that gave birth to modern Saudi Arabia.

These antecedents of Saudi culture support restrictions on the role of women in society and the prohibition against alcohol. It would represent a lack of cultural sensitivity, therefore, for anAmerican firm to send a woman to run its subsidiary in Saudi Arabia, particularly if that subsidiary were staffed by local Saudi employees. Similarly, offering alcohol might offend a visiting Saudi businessman.

Moreover, Americans need to understand how cultural values influence the way a Saudi does business. Reflecting the traditions of Bedouin society, Saudis will often conduct business only after trust has been established—a process that might require many face-to-face meetings. Saudis may resent being rushed into a business decision, preferring to let discussions proceed in a more relaxed fashion—something that Westerners with their attachment to precise rather than approximate time might find taxing.

Business meetings may be long because many Saudis maintain an “open office” and will interrupt a meeting to conduct other business. This can be traced back to the Bedouin tradition in which all tribal members have a right to visit and petition their leaders without a prior appointment. In addition, given the cultural importance attached to status, Saudi executives will not react well if a foreign company sends a junior executive to transact business.

More generally, managers need to be sensitive to cultural differences across nations, and they need to understand how cultural differences can require adaptation not only of marketing and sales strategy, but also of basic management practices. Not everybody thinks and acts like Americans, and the American way of conducting business does not always succeed in a foreign land.

Even in countries that seem much more similar to the United States than Saudi Arabia, deep-seated cultural differences affect how business is conducted. For example, anthropologist Edward T. Hall has described how Americans, who tend to be informal, react strongly to being corrected or reprimanded in public.

This cancause problems in Germany, where a cultural tendency toward correcting strangers can shock and offend most Americans. For their part, Germans can be surprised by the tendency of Americans to call everyone by first name. This is uncomfortable enough among executives of the same rank; but it can be seen as insulting when a young, junior American executive addresses an older, more senior German manager by first name without having been invited to do so. Hall concludes that it can take a long time to get on a first-name basis with a German; if you rush the process you will be perceived as overly friendly and rude, and that may not be good for business.

Another common cultural difference concerns attitudes about personal space, which is the comfortable amount of distance between you and someone you are talking with. In the United States the customary distance apart adopted by parties in a business discussion is five to eight feet.

In Latin America it is three to five feet. Consequently many North Americans unconsciously feel that Latin Americans are invading their personal space and can be seen backing away from them during a conversation. Indeed, the American may feel that the Latin American is being aggressive and pushy. In turn, the Latin American may interpret such backing away as aloofness. The result can be a regrettable lack of rapport between two businesspeople from different cultures.

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