Deglobalization: What Business Historians Can Teach Managers

26 03 2017


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.