International Association for Intercultural Dialogue and Geostrategic Studies
Themes
The evolution of globalization
Author: Dr. Rolf Clauberg
The globalization of our economies started with trade thousands of years ago. But it took a long time before this went beyond trade. In
1776 Adam Smith published his work “An Inquiry into the Nature and Causes of the Wealth of Nations” and in 1817 David Ricardo published his
work “On the Principles of Political Economy and Taxation”. Both roughly concluded that it is best for all nations to produce those goods
they can produce best and import those they can buy cheaper from other nations.
This point of view already leads to international dependencies because corresponding countries depend on the import of those goods,
they need but to do not produce themselves. Even if countries choose to import only goods, they can’t produce themselves there is a
corresponding dependency. For high technology products e.g., many raw materials are available only in specific countries.
The evolution towards globally integrated enterprises
In the mid-19th to early 20th century most companies with international trade based most of their operations in the home country with only
overseas sales and distribution offices.
But from the point of view of the producers of goods simple trade means to rely on other companies in the foreign countries and thereby
lose control over your products as well as not getting feed-back on your products. Consequently, in the mid-20th century multinational
companies created smaller versions of themselves in other countries and made heavy local investments abroad. These companies are called
multinational because they create products in multiple countries.
A Multinational Company with home in the USA In the 21st century so-called globally integrated enterprises [1] [2] or transnational companies [3] occur. These companies base locations and
functions wherever cost, skills, and business environment are best. This often creates companies which produce components for their final
products at many different locations. These companies critically depend on well operating supply chains between their different
locations. In extreme cases a local disturbance at just one of their locations may impede all products of the company [3].
Another aspect where globally integrated enterprises may cause unexpected economic results is the reaction of such companies on e.g.,
exchange rate changes. The reason is that the export of components from a unit in one country to a unit in another country legally is export
plus import, but economically this is an intra-company transfer based on long-term investment. The company will not change such operations
because of short term exchange rate changes.
A Transnational Company
The evolution from vertically integrated companies towards a global network of separate companies
(We are here not considering conglomerates which combine completely unrelated business areas within one company.)
Besides the evolution to globally integrated enterprises, there is also an evolution to global networks of separate companies.
In the past most large companies were vertically integrated. This means that all processes relevant for the production of its products
were performed within the company. Outsourcing of operations and production steps was too expensive or even not possible at all. One of the
main reasons for this were high transaction costs between separate companies and the lack of companies which offered services for other
companies. In the last 30 years this has changed substantially. Transaction costs between separate companies decreased substantially and are
no longer a barrier to outsource the production of components needed for a final product of the company. Also, electronic markets made
outsourcing easy. Professor Faltin [4], who in 1977 built up the chair of Entrepreneurship at the Free University of Berlin clearly recommends
to built new companies with the use of “components”. With this he means the use of all kinds of services and outsourcing to other companies.
One extreme example is the RatioDrink AG founded in 2006 [5] which practically outsources everything except the management of its entire value
chain and its customer relations.
The evolution from vertically integrated companies towards a network of separate companies is usually accompanied by strong specialization
of the separate companies. These separate companies specialize on the fields where they see their best chance in the market and evolve wherever
the conditions are best for them. This is very similar to the evolution of globally integrated enterprises, but now the companies evolve as
separate companies participating in a global network. The figures we used above for visualizing the evolution towards a globally integrated
enterprise can also be used to understand the evolution towards a global network of separate companies. In both cases we start with a complete
locally integrated company and end with a global networks of plants. But in the global network of separate companies all cooperation is organized
by the separate companies through the global supply-chain network, there are no distributed functions of a global company.
Also, separate companies in a network may cooperate with companies which compete against each other. One example would be e.g., a company
producing braking systems for cars, and which sells its units to multiple competing car producers. Such networks of separate companies are
most likely global networks and will strongly depend on well operating global supply chains. They will have a similar dependence on supply
chains as globally integrated enterprises.
The importance of supply chain networks for the global economy
As a conclusion from the points discussed above it should be clear, that well-functioning global supply chains are of utmost importance for
the global economy as well as for every country participating in the global economy. Every disturbance of the global supply chain system
may lead to non-operating companies and scarcity of goods or complete non-delivery of needed goods in every country. The scarcity of goods may
lead to substantial increases of inflation while non-operating companies, caused by scarcity of production inputs, may lead to
serious layoffs in companies and to recession. If central banks then fight the increase in inflation with rate hikes, this may increase
the recession instead of damping it. This double-blow to the economy may create a serious social crisis.
