Deglobalization: What Business Historians Can Teach Managers

26 03 2017

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Deglobalization is the current buzzword, as I pointed out in a  blog post I published soon after the WEF meeting in Davos.  Actually economists have been talking talking about deglobalization for a number of years, ever since international trade as a share of world economic output began to decline. Now, however, CEOs and other top executives are really worried about how to respond to the rising levels of protectionist sentiment and the apparent trend in actual government policies towards protectionism.

Stephen D. King, the chief economist of HSBC, discusses deglobalization in a new book on the future of the global economy. King notes that we are in a very different historical epoch than the sunlit uplands of the 1990s, when globalization appeared unstoppable and public intellectuals announced the end of history and great power conflict. King sees a pattern that others have observed, namely that we are going back to an era of protectionism, nationalism, and  ethno-religious tensions similar to that of the interwar period of the 1920s and 1930s.  As a senior executive at a corporation that embodies the multicultural, multiracial global financial capitalism that emerged at the end of the twentieth century, King has very good reasons to be worried about deglobalization.  A similar historical analogy was used by Ruchir Sharma, Morgan Stanley’s chief global strategist in December 2016, although Sharma observed that today’s deglobalization  is somewhat different from the deglobalization of the interwar period .

 

It seems to me that mainstream strategy literature doesn’t appear to offer much guidance to managers seeking to formulate strategies to cope with the new phenomenon. Perhaps that’s because strategy professors haven’t yet had a chance to think about managerial responses to the newly discovered phenomenon.  Similarly, political science doesn’t  seem to offer a lot of practical advice to decision-makers in the private sector.  Michael Witt is a first-class political science/IR professor who teaches at INSEAD business school. If any political scientist could help executives to deal with deglobalization, it would be him.

Late last year,  Dr Witt wrote two pieces in which he pondered what deglobalization means for multinational firms. His first piece did an admirable job of summarizing the political science literature on globalization and deglobalization and tells people how two of the three main schools of thought in IR (Realism and Liberalism) view these phenomena. Somewhat curiously, Witt doesn’t say much as about Constructivism, another interpretative tradition in IR, which is unfortunate since constructivism has a great deal  to offer here. Anyway,  his second piece, which was published a week after the first one, sought to offer concrete advice to business executives interested in this topic. Sadly, the main pieces of managerial advice he provided weren’t that useful to managers.

Let me justify that assessment. Witt says that Liberal IR theory argues that  deglobalization is driven by rising inequality, which caused an upsurge of populist, anti-globalization sentiment from the parts of the electorate that have suffered from globalization.  Witt says that if firms wanted to continue doing business across borders, they need to shore up the political foundations of globalization by accepting a more progressive form of taxation. (Similar sentiments were heard from CEOs the January 2017 gathering in Davos).  Witt also argues recommends that  “longer-term investment plans should probably involve scenario planning”  that takes the re-imposition of tariffs into account.

The second piece of advice is sound and common-sensical, but the suggestion that senior executives do more to combat inequality  isn’t really practical, since a single CEO would be unable to combat rising inequality in their home country, unless that country happened to be very small and their firm was a major employer. There is a sort of free rider problem—if a CEO increases the wages his firm pays and no other firm follows suit, the CEO will have added to his costs without having done much to change the overall level of inequality in the country. A CEO operating in a corporate system dominated by Shareholder Value Ideology has very limited freedom to act.  That’s the problem with the argument that the left-wing venture capital Nick Hanauer made, when he said that CEOs who are worried about Trump’s protectionism should simply have paid their workers more.

It seems to me that Constructivist IR and, especially, my own home discipline of Business History could offer more useful advice to the makers of MNE strategy at this junction. (Business History informed by Constructivist IR could be a very powerful tool indeed).

The Constructivist approach to IR and International Political Economy (IPE) stresses that nations make policy in a cultural context that shapes how contemporaries view their self-interest. In other words, cultural differences such as gender ideologies, racial, religious, and ethno-national identities need to be taken into account. Deglobalization, both historically and in the present, appears to be associated with the rise in ethno-nationalist sentiment and growing hostility to the perceived other. While no single firm can reverse a pronounced trend in the culture towards  greater intolerance towards the Other, a group of firms, working together, can help to limit the spread of ethno-nationalist ideologies. For instance, they could do so by agreeing not to advertise on websites that promote the alt-right mentality that is congruent with tariff protectionism (see here).

Business history provides even more concrete advice. As business and economic historians know, deglobalization has happened before, most famously with the outbreak of the First World War. We can look to see how firms at the time handled deglobalization. Business historians have shown that a classic response to the imposition of tariff barriers is for firms to create local manufacturing subsidiaries within foreign nations.

There are other lessons about how to deal with deglobalization that managers can take from the historical record.    In a paper I published in an international-business journal, I discussed how the Hongkong and Shanghai Banking Corporation dealt with the First World War, a crisis that had the potential to destroy the corporation. HSBC, which was founded in 1865 and which had a multinational shareholder base and board of directors on the eve of the First World War, embodied that the open and cosmopolitan capitalism of the late nineteenth century, an era that was marked by falling trade barriers and increasing interconnectedness. HSBC was able to survive the First World War by paying close attention to the state of public opinion in Britain, which became increasingly xenophobic, and by severing ties to its German shareholders, directors and customers and by purging its executive workforce of a prominent individual of German-Jewish ancestry. HSBC was a much less profitable firm at the end of the conflict, but unlike many of the international banks in existence in August 1914, it survived the war. My paper aimed to use the historical experience of HSBC in war to identify lessons for the managers of present-day firms confronted with war and other drivers of deglobalization. One of these  lessons for present day managers is that conserving political capital in periods of heightened tensions between nations or other imagined communities may require the ruthless termination of relationships with people who are associated with the Other, at least insofar as the law of the land permits. (Note that I’m not saying that such a strategy would be morally right, just that it has worked in the past for firms). Another lesson that wartime managers could take from my paper on HSBC in WWI is that preserving legitimacy in the home country requires the head office to exert more control over overseas managers, less they embarrass the MNE in the home country, than would be the case in a time of generally good international relations.

There are important lessons for managers in the edited collection on the impact of the First World War on firm strategy was released by Routledge.  This book brought together the research of a business historians who use corporate archives. It is a common place among economic historians and historians of globalization to say that First World War end a long period of globalization and initiated a long period of deglobalization that that continued until after 1945. The edited collection was intended to help explore how firms confronted with a radical change in their operating environment responded. The papers in the collected documented a range of creative managerial responses to the First World War and its aftermath that included the creation of trans-national interfirm research alliances (see the paper by McGlade),  the adoption of new legal forms for companies (see the paper by Hannah), and the adoption of new management techniques in France and the UK (the chapter by Boyns). Studying how firms responded to sudden and dramatic change in the geopolitical environment in 1914 has the potential to offer lessons to the managers of today’s multinational firms.

 

 

 

 

 

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Justin Fox on Shareholder Primacy in the Age of Trump

6 01 2017

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The excellent Bloomberg columnist Justin Fox has published a great piece on the current state of corporate governance in the United States. He speculates that the “shareholder value” view of corporate purpose — that corporations exist to maximize value for their investors — is finally on its way out…. Donald Trump is effectively challenging the gospel that shareholder interests should come first. 

As Fox points out, the doctrine that the sole or primary purpose of a public company is to make money for shareholders has long been challenged by a group of academics who believe that CEOs should revert to running firms with the interests of a wider group of stakeholders in mind. (That was the dominant philosophy in corporate America from teh 1930s to the late 1970s). What is new is that the President-elect is questioning the ideology of shareholder primacy through his repeated criticisms of US corporations for sending manufacturing jobs overseas and otherwise being insufficiently patriotic. In effect, Trump has been calling on US corporate managers to adopt the ethos that pervaded US business life in the years between the New Deal and the 1970s, when CEOs saw themselves as stewards who would manage in firms in a way that balanced the interests of workers, shareholders and other stakeholders. In that era, US corporations certainly regarded their interests as closely tied to those of the nation, as evidenced by Charles Erwin Wilson’s famous declaration during his Senate confirmation hearing that For years I thought that what was good for our country was good for General Motors, and vice versa. The difference did not exist. Our company is too big. It goes with the welfare of the country.

Fox’s article deals with many of themes (the impact of shareholder primacy, short-termism, and the obligations of corporations to the nation-states that charter them) that are examined in the paper I wrote with Kevin Tennent and Jason Russell. The title of our paper is: “Berle and Means Reconsidered: the Military Roots of a Philosophy of Stakeholder Governance”. If all goes as planned, we will be presenting this paper on the conference circuit (Academy of Management, EURAM, BAM, Association of Business Historians) this summer. Our paper examines the relationship between military service and the ethos of public service associated with it and competing ways of thinking about the social responsibility of business corporations.  We structure our analysis around a discussion of The Modern Corporation and Private Property by Adolf Berle and Gardiner Means (1932), a text that influenced a generation of US business executives that remains one of the most cited works in management.

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Our paper shows that Berle and Means espoused a stakeholder theory of corporate governance that challenged the idea that the sole purpose of a corporation is to create value for the shareholders. Whereas shareholder value ideology was dominant in the United States in the 1920s, the nation’s corporate governance system moved towards a stakeholder model during the New Deal. Berle and Means clearly disagreed with the view that the primary purpose of a corporation was to serve the interests of the shareholders. The communitarian ethos advocated by Berle and Means can be seen in this passage:

 Neither the claims of ownership nor those of control can stand against the paramount interests of the community. . . . Should the corporate leaders, for example, set forth a program comprising fair wages, security to employees, reasonable service to their public, and stabilization of business, all of which would divert a portion of the profits from the owners of passive property, and should the community generally accept such a scheme as a logical and human solution of industrial difficulties, the interests of passive property owners would have to give way…It is conceivable—indeed it seems almost essential if the corporate system is to survive—that the “control” of the great corporations should develop into a purely neutral technocracy, balancing a variety of claims by various groups in the community and assigning to each a portion of the income stream on the basis of public policy rather than private cupidity (Berle and Means, 1933, 356, emphasis added).

In the paper, we argue the ethos espoused by Berle and Means remained dominant in the US corporate world until the late 1970s, when it was challenged by the re-emergence of shareholder value ideology.By the time Gardiner Means died in 1988, the shareholder-centric ideology of corporate governance presented by Jensen and Meckling (1976) had largely displaced the stakeholder approach espoused by Berle and Means.

There is something of an affinity between the view of the purpose of the corporation outlined by Berle and Means and that recently advocated by Donald Trump on Twitter in that they both challenge shareholder primacy. Of course, there are massive differences between Berle and Means on the one hand and Trump on the other. These differences are evident in terms of temperament and style of communication. Berle and Means wrote a scholarly book. Trump writes tweets in the middle of the night. Berle and Means patriotically served in the military when called to do so in 1917. Trump obtained dubious medical deferments during the Vietnam War, although that doesn’t stop him from being a cheerleader for war now that he is too old to serve. There is also a massive disconnect between Trump’s rhetoric on Twitter and the way in which Trump’s companies have actually been run. I’m probably the last person in the world who would defend Trump. However, I do think that Fox and other observers are right to argue that Trump is pushing back against shareholder value ideology in his own crude fashion. I suppose the danger of someone like Trump being the champion of some variant of the stakeholder model is that he may end up discrediting the entire concept.

I would also hasten to add here Hillary Clinton, Trump’s Democratic opponent, also critiqued the doctrine of shareholder primacy. She did so by calling for a return to “corporate patriotism” during her campaign. Her first use of this term was during the Democratic presidential primaries, when she was battling with Bernie Sanders, a fierce critic of outsourcing and globalization. Campaigning in Detroit in March 2016, Clinton criticized the outsourcing of US manufacturing jobs to low-wage countries: “I’m not asking corporations to be charitable, although that’s important. I’m asking corporations to realise that when Americans prosper, they prosper too. The idea of corporate patriotism might sound quaint in era of vast multinationals, but it’s the right thing to do” and in the long-term interests of the companies themselves, as “more money in the hands of working people helps everyone, including businesses” .

In her speech to the July 2016 Democratic National Convention, Hillary Clinton once again called on American corporations to begin acting in a more “patriotic” fashion. Clinton’s call for a “New Bargain” with American workers, which was delivered after a series of military speakers had warmed up the audience, echoed the ideas of Berle and Means and challenged the view that the sole purpose of a company is to make money for its worldwide shareholder base. Noting that the US left had appropriated the rhetoric of militarism and patriotism, Megan McArdle quipped that progressives had “learned to speak Republican” .

I think that McArdle is on to something there. The US has been on a war footing ever since 9/11. For fifteen years, nationalistic flag waving and patriotic exhortations to “service” to the nation (i.e., military service)  have been everywhere. In this political climate, it is not surprising that the idea that a CEO’s primary duty is to maximize returns for his or her global shareholder base would come to be regarded as unpatriotic.  The US appears to be locked in a cycle of perpetual war, fighting perceived Others in the Middle East and elsewhere. Given this cultural and political context,  it will be difficult to defend the Friedmanite thesis that the sole purpose of a corporation is to make profits for the shareholders. This idea may have flied in the peaceful days of the 1990s, but it doesn’t fit the nationalist and anti-globalization mood of the present.

 

 





Is Globalization Slowing Down? Is Banking Experiencing Deglobalization? Is the Perceived Relative Decline of the United States to Blame?

20 04 2015

There is some evidence that globalization has slowed down since the Global Financial Crisis. One way of measuring globalization is to compare the growth of global trade to growth in the world economy in general. By that measure, the rate of globalization definitely appears to be slowing. According to a recent article in the FT, in three decades before the 2008 financial crisis, global trade regularly grew at twice the rate of the global economy.”With last year’s growth of 2.8 per cent, global trade has now expanded at, or below, the rate of the broader global economy for three straight years.”

In the last year or so, the term “deglobalization” has been on everyone’s lips (see here, here, and here). I get the impression the word was used frequently at the 2015 World Economic Forum meeting (see here and here). This discourse of deglobalization can also be seen in the Wall Street Journal and the other publications read by senior corporate managers. In The System WorkedDan Drezner has argued that we haven’t seen any deglobalization.  My own view is that while the global trade data suggests that while we haven’t witnessed any actual deglobalization, the process is decelerating dramatically.  Recent news out of the banking sector provides some evidence of deglobalization: HSBC is retreating from key emerging markets: the “world’s local bank” has decided it will no longer provide retailing banking service in Turkey and Brazil, two important countries.  See here, here, and here.

As I read the press reports about HSBC’s exit from emerging markets, I noticed the frequency of references to political factors in influencing the change in the bank’s strategy. As a business historian who is interested in globalization, I’ve long believed that the changing political institutions are incredibly important as drivers of the various waves of globalization and de-globalization the world economy has experienced over the last few hundred years.  I’m particularly sympathetic to the view that rapid globalization requires a strong global hegemon, which means that globalization is most likely to take place in a world dominated by a single superpower capable of providing global public goods such as international stability. We had such a superpower for almost a century after Napoleon’s defeat in 1815 (it was the British Empire). Banks and other firms made their strategies accordingly. Britain’s status as the first of the great powers was challenged in the early 20th century by rising great powers like Germany and the world experienced de-globalization, largely because of the reluctance of the interwar US to step into the shoes of the British Empire. International firms still made money, but they had to adjust their strategies to the new geopolitical landscape. Globalization did not resume until the post-1945 period, when the United States began to perform many of the functions  that had the previous liberal capitalist global hegemon, the British Empire, had discharged (Kindleberger, 1986 and Gilpin, 2011, 94-95).

Recent years have seen the accumulation of evidence of American relative decline. I don’t know if we are really in a post-American world, but the unipolar system that underpinned rapid globalization in the 1990s no longer exists. Perhaps the Obama’s administration’s foreign policy has contributed to the perception of American weakness. Such perceptions, accurate or not, may influence the strategies of MNEs. In any event, we now live in a world of great power rivalries that is uncannily similar to the world circa 1905. The outbreak of the First World War in August 1914 ended the first era of globalization and initiated several decades of deglobalization and de-financialization. I’m certainly not saying that great-power rivalries will continue to intensify. Nor am I saying that the expectation of intensification now informs the strategy of HSBC and other multinationals. (I simply don’t know what the senior managers of such firms think about the international system, although I would very much love to talk them about this issue!). However, I would speculate that the people who make high-level strategy in firms like HSBC expect that the world’s political systems are moving in a direction that means that a business model of providing retail banking services on every continent and in every major emerging market no longer makes sense.

Please note that I am not saying that either globalization or deglobalization are normative. I’m mainly interested here in how shifting policy environments influence the strategies of multinational firms.





Description of Our Forthcoming Book on Globalization and Canadian Business History

26 07 2013

AS: Later this year, University of Toronto Press will be publishing an edited collection on the history of Canadian business in the global economy called Smart Globalization. My co-editor is Dimitry Anastakis of Trent University. I was asked by someone at the publishers to write up a short précis of the book. Here it is.

This book will use the Canadian historical experience to speak to present-day debates about how nations should respond to globalization. Neoliberals believe that if a nation is to prosper in the global economy, it should adopt a policy of complete economic liberalization (i.e., the elimination of all tariffs and other trade barriers). Neo-mercantilists, in contrast, believe in development through the selective embrace of globalization and the intelligent use of industrial policy. Ha-Joon Chang, who recommends a neo-mercantilist strategy for today’s developing nations, has said that the countries which are today wealthy acquired their wealth by adopting protectionist measures, not a policy of laissez-faire. The research presented in this edited collection will use Canadian history to test the claims the neo-mercantilists makes about economic history.  Canada is one of the world’s most successful countries in terms of average living standards. The chapters in this collection will show that Canada’s success stemmed from neither complete openness to globalization nor policies of autarky or self-sufficiency. Since the time of Sir John A. Macdonald, Canada has developed through a complex policy mix we call “smart globalization,” a term we have borrowed from Dani Rodrik. This book should interest historians, economists, and policymakers in Canada and other countries.





Program of “Globalization and the Making of Canada: Canada’s International Economic Linkages from the Fur Trade to the 21st Century”

17 09 2009
Unknown Artist, Port of Halifax, 1830s

Unknown Artist, Port of Halifax, 1830s

Workshop Theme:

Globalization is transforming Canada and the world. Moreover, it is a process whose roots go back a long time. For many people, the term globalization refers only to developments in the last few decades. The reality is that there have been successive waves of globalization going back centuries.  The papers presented at this workshop will show that globalization has been transforming Canada since the time of the fur trade. The picture above of a ship leaving Halifax harbour in the 1830s is, in a sense, documentary evidence of early globalization. By some measures, the world was more globalized in July 1914 than it is today. The fact that there have been successive waves of globalization and de-globalization helps to falsify the widespread notion that the process of globalization is inevitable or irreversible. The research presented at this workshop will also remind us that globalization is historically contingent and shaped by the decisions by policymakers and other actors. Another aim of the workshop is to connect Canadian historiography with the burgeoning body of literature on the history of globalization and international trade.

Workshop Venue: Woerner House. Woerner House is the conference facility owned by the Centre for International Governance Innovation, which is located in Waterloo, Ontario. It is located in a wooded area roughly thirty minutes from the University of Waterloo campus.

Please note that the papers are protected by passwords. To obtain the passwords, please contact Andrew Smith.

Friday, 29 January 2010

1:00-1:30 Registration

1:30-1:50 Opening Remarks by Andrew Smith, Laurentian University.

2:00-3:00 Session 1: Early Globalization

Professor Mike Dove, Department of History, University of Western Ontario. “Pelts and Profits as Precursors: Antecedents of Globalization in the Canadian Fur Trade”

Professor George Colpitts, Department of History, University of Calgary.  “Early Globalization and the Pricing of Plains Provisions for the Canadian Fur Trade, 1811-1882

3:00-3:15 COFFEE BREAK

3:15-4:35 Session 2: Globalization and the British Empire

Professor Andrew Smith, Department of History, Laurentian University.  “Globalization in British North America in the 1860s: the Economic Foundations of Confederation?

Dr. Andrew Dilley, Department of History, University of Aberdeen, Scotland. “Development Politics and Power in the British World: The City of London and the early years of Ontario-Hydro paper

Commentator: Professor William Coleman, Canada Research Chair on Global Governance and Public Policy, McMaster University.

4:35-4:45 COFFEE BREAK

4:45-5:55 Session 3: Globalization and Canadian Natural Resources

Dr. Daryl White, Grande Prairie Regional College, Alberta. “ Managing a War Metal: the International Nickel Company’s First World War

Professor Mark Kuhlberg, Department of History, Laurentian University. “The Myth of Provincial Protectionism in Ontario’s Forest Industry, 1894-1963

Professor Herb Emery, Department of Economics, University of Calgary. “Natural Resources Exports, Wealth, and Accumulation and Development in Settler Economies: North-western Ontario and South Australia, 1905-1915

6:05-6:35 Keynote Address,”Canada’s Place in Global Business: Past, Present, Future”, Professor Matthias Kipping, Chair in Business History, Schulich School of Business, York University.

6:35-7:15 RECEPTION

7:15-7:45 Travel to Conference Dinner location (Blackshop Restaurant)

8:00 CONFERENCE DINNER

Saturday 30 January 2010

8:30 BREAKFAST

9:00-10:20 Session 4: The Political Economy of International Trade 1867-1914

Professor Eugene Beaulieu, Department of Economics, University of Calgary. “The Political Economy of Canadian Trade Policy from 1881 to 1925

Mr. Jevan Cherniwchan, Department of Economics, University of Calgary. “The Restrictiveness of Canada’s Trade Policy: 1880-1910

Michael Huberman, Département d’Histoire, Université de Montréal, “ Riding the Wave of Trade: Explaining the Rise of Labour Regulation in the Golden Age of Globalization

10:20-10:30 COFFEE BREAK

10:30-11:50 Session 5: Multinational Enterprise and Canada

Dr. Greig Mordue, Toyota Canada. “Public Policy Meets Industrial Strategy: Building Paradigmatic Change in the Canadian Auto Industry, 1945-1960”

Professor Graham Taylor, Department of History, Trent University. “The The Whisky Kings: The International Expansion of Seagram, 1934-2001

Professor Robin Gendron, Department of History, Nipissing University. “Seeds of Decline: Inco and Globalisation in the Nickel Industry 1960s and 1970s

Commentator: Professor Joe Martin, Director of Canadian Business History, Rotman School of Management, University of Toronto.

12:00-1:00 LUNCH

1:00-2:30 Session 6: The Political Economy of International Trade Since 1945

Dr. Michael Stevenson, Schulich School of Business, York University. ” The Limits of Alliance: Cold War Solidarity and Canadian Wheat Exports to China, 1950-1963

Professor Bruce Muirhead, Department of History, University of Waterloo. “Canadian Participation in the International Monetary Fund, 1944 – 1973”

Commentator:  TBA.

2:30-2:45 COFFEE BREAK

2:45-3:15 Roundtable Discussion

3:15 WORKSHOP ENDS

Any questions about this workshop should be sent to adsmith@laurentian.ca . If you wish to attend the workshop, please let us know by 10 January 2010.

Organizing Committee:

Dimitry Anastakis, Trent University
Eugene Beaulieu, University of Calgary
Herb Emery, University of Calgary
Mark Kuhlberg, Laurentian University
Andrew Smith, Laurentian University (Contact Person)

We would like to thank CIGI for its generous support of this workshop.

The image above is in the public domain and is available from the Wikimedia Commons (click here).

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