Free Trade, Globalization and International Business
to take part “in a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress”.
The Economist, September 1843.
In 1991 hikers in the Austrian Ötztal Alps discovered a mummified body protruding from a melting glacier. Archaeologists dated the frozen remains at 5,300 years old and gave him the nickname Ötzi, ‘the Iceman’. They were able to demonstrate that he was travelling between two locations, contending with confidence that he was moving with the purpose of exchanging goods, one community to another. Consequently, we can claim that the oldest proven profession in history is trading (not prostitution) and that Ötzi was engaged in a ‘go-to-market’ strategy, the first international marketing manager!
International trade, free or otherwise, is undertaken within a framework of political economy. Briefly, in the liberal model, economic resources are allocated through the interaction of supply and demand. Consumers have free choice in what to buy, and firms have free choice in what to produce. This is the essence of economic liberalism, a philosophy based on the twin principles of consumer sovereignty (freedom to choose) and self-interest (rational choice).
The profit motive ultimately drives firms to produce efficiently and consumers to maximise their own satisfaction. In his 1776 two-volume five-book magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations, the founding father of political economy and the greatest proponent of liberalism, Adam Smith, described the process as follows:
Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interests in his own way and to bring both his industry and capital into competition with those of any other man, or order of men.
The fundamental principle underpinning this liberal form of economic organization is free competition and a market mechanism that links individual decisions (demand) to aggregate output (supply). As Smith further noted, every individual:
intends only his own gain and is in this as in many other cases led by an invisible hand to promote an end which was no part of his intention.
He proposed the theory of Absolute Advantage to explain the logic of specialisation and exchange for wealth creation via trade between nations.
In 1817 David Ricardo published On the Principles of Political Economy: And Taxation in which he expanded Smith’s ideas to include the opportunity cost calculus (choice) of producing goods within and between countries and demonstrated that, under most conditions, a nation would still benefit from trade even if it had an absolute advantage over every product category than that of another country, i.e. in principle it could be self-sufficient in all goods, a condition known as autarky (economically independent/self-sufficient). In practice, however, Ricardo argued that engaging in the international exchange of goods enhances productivity and enables greater wealth creation for all participant countries.
Ricardo’s theory of (free) international trade is known as Comparative Advantage.
In a liberal form of economic organization, the role of government is primarily to set an institutional framework that facilitates rather than obstructs freedom of choice. In developing his thesis on the wealth of nations, Adam Smith for the first time integrated these twin themes of government and economy.
Both Smith and Ricardo were firm believers in free trade between nations, and Ricardo actively agitated against the Corn Laws. These were tariffs that made imports more expensive. They protected the aristocratic agrarian rich but were punitive towards the urban poor during a period in time when Britain was at the forefront of the industrial revolution driven by an emergent, entrepreneurial ‘middle’ class.
The Corn Laws, the last bastion of British mercantilism, were repealed in 1846 and still provide the benchmark for the institutionalisation of international free trade principles to the present day. This single event is undoubtedly the primary milestone in the history of the international free trade movement because, for the first time, it addressed reality, not philosophy — actions, not words.
The epigraph to this Introduction is the rationale provided by the publishers of The Economist when the magazine was launched in September 1843, three years before the repeal of the Corn Laws Act. It conveniently describes the philosophy of Ten Years, and I unashamedly borrow it.
In 1933 the Swedish economist, Nobel Laureate Bertil Ohlin, published a dynamic theory of comparative advantage and international trade based upon the work of his PhD mentor Eli Filip Heckscher and his own doctoral research.
Factor endowment theory (commonly known as Heckscher-Ohlin theory) develops the Ricardian comparative advantage concept by acknowledging that countries are blessed with factors other than land, labour and capital. In essence, he transformed them into factor categories. So, for example, ‘land’ embraces location, topography, resources, climate and so on. Historically, ‘capital’ would reflect accumulated resources collected by countries, most commonly expressed as ‘treasure’ and treated in theory as a static construct.
In the context of international trade, Ohlin referred instead to dynamic capital movements. These are financial transactions made by individuals, firms and government bodies to compare receipts and payments arising from trade in goods and services, accounted for in macroeconomics as the ‘balance of payments’.
Consider Malaysia, for example, which has a comparative advantage in rubber and peanut oil as a function of its location and rainforests, and it is indeed one of the world’s biggest exporters of these commodities. But it also uses its exotic location of beautiful coastlines and abundant coral reefs to ‘export’ tourism. Alongside trading rubber and peanuts with other nations, tourism revenues enable the country to accumulate foreign currency reserves to buy things it doesn’t have, e.g. advanced technologies, and also to attract Foreign Direct Investment (FDI) from companies such as HP, a long-term partner.
The Competitive Advantage of Nations: A Theory of Everything?
In a critique of the explanatory power of factor conditions (land, labour, technology, capital etc.) which underpin most fundamental principles of international trade, and addressing the ‘competitive avoidance’ tendencies of countries (and companies), Harvard economics professor Michael Porter argued that traditional theories do not address the real-world country challenges of seeking out, securing and, if necessary, rejuvenating a nation’s true comparative advantage.
Porter embarked on a four-year study and examined ten major trading nations in-depth: Denmark, Germany, Italy, Japan, Singapore, South Korea, Sweden, Switzerland, United Kingdom, United States. Alongside these major industrial countries, Porter chose other nations to vary widely in size, government policy toward industry, social philosophy, geography, and region.
The research focused on documenting the process of gaining and sustaining national competitive advantage in relatively sophisticated industries and market segments. The findings were published in 1990 in a mammoth 855-page tome, The Competitive Advantage of Nations, a new paradigm to explain world trade, investment and innovation. It combined macroeconomic international business concepts with Porter’s more familiar territory, the principles and practice of business strategy and competitive dynamics.
Determinants of national competitive advantage.
A fundamental question addressed by Porter’s research was why a particular nation had historically achieved international success in a specific industry, e.g. Germany in cars, Italy in fashion, Switzerland in pharmaceuticals. In seeking a comprehensive explanation, he proposed a “diamond system” of four attributes that shape the national context in helping to promote or impede the creation of a nation’s competitive advantage. An adapted model of his framework is presented in the ‘Determinants of International Competitive Advantage’ illustration below.
The diagramme’s simple presentation disguises the complex interactions between governments, industries and companies in the conduct of international trade.
The double-headed arrows which link the four dimensions in the illustration demonstrate two fundamental factors which combine international business theories with international business practice in the Porter diamond framework. First, each element of the diamond impacts the others, i.e. they constitute a nexus of inter-dependence. Second, the four elements of the diamond must be in alignment.
In this schema, the effect of one determinant is contingent on the state of the others. For example, favourable demand conditions (e.g. well-informed and discerning consumers) will not lead to competitive advantages unless the intensity of industry rivalry is sufficient to trigger a corporate response to them.
The complex interplay of the complete system provides a unique context for international competitive advantage and is extremely difficult for other nations to copy. Once in place, the system tends to be self-reinforcing over lengthy timeframes.
The diamond system is influenced by two additional factors: chance and government. Chance events create discontinuities that can significantly and radically change industry structure. Examples include wars, technological breakthroughs and changes in political regimes. Governments can create and foster competitiveness or impede the development of an appropriate dynamic within the diamond. Overt interference, protectionism, shelter strategies, slack anti-trust regimes (which protect monopolies) and the “narcotic” of government subsidies will hinder a nation’s industries from developing natural and sustainable international competitive advantages.
Conversely, careful stimulus through the four attributes of the diamond can inject dynamism and innovation within the system. For example, investments in training and education fundamentally and lastingly affect factor conditions, although the positive results may only be visible in the medium or long term.
Taiwan provides a good example. While it was busy building the manufacturing base underpinning its export drive in the 1960s and 1970s, it simultaneously financed many citizens to study abroad. In the mid-1980s, a quarter of PhD students studying electronic engineering in the US were from Taiwan. On their return, these ‘returnees’ helped transform the country from a basic manufacturing assembly ‘clone economy’ to a high-tech, R&D-driven powerhouse.
Decades later, Taiwanese companies dominate multiple global technology industries. Foxconn is well known as the manufacturing force underpinning Apple’s extraordinary success from the noughties onwards. Less well-known is Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract manufacturer of semiconductor chips (integrated circuits, or ‘chips’) that power smartphones, laptops, cars, watches, refrigerators and more, including the much-lauded ‘internet of things’. Its better-known customers include AMD, Apple, Intel, Nvidia, Qualcomm and, indirectly, multiple global industrial sectors, including automotive, defence and aerospace.
Two key themes emerge from Porter’s research, each of which has enormous significance in today’s competitive international business climate.
First, there appears to be a convergence of economic systems around the classical microeconomic models first proposed by Adam Smith and David Ricardo, particularly regarding the structure of markets and the Darwinian impact of competitive forces.
Second, the importance of sophisticated consumers as a vital force in the economic process is emerging as a profound driver of international competitiveness and company strategy.
In the passages which follow, I continue the discussion of international trade. However, the emphasis will shift from why countries should engage in international trade towards a rationale for why companies should consider conducting enterprise beyond their national boundaries. In parallel, I also explore the complexities they are likely to encounter in assessing the attractiveness of country markets for such international business adventures.
The Globalization Phenomenon and the International Business Strategy Response
The illustration below shows the three broad dimensions of international business strategy.
The decade examined in this book focuses on the Globalization Processes, Events and Dynamics ‘oval’ depicted in the illustration above. Ten Years emerged from a broader research project exploring global business strategies and business organization in the context of these globalization dynamics.
The opportunities for companies to design and implement successful international business strategies by adopting a structured and systematic approach to strategic management, marketing, innovation and branding, backed up by efficient operations and supply chain management, are potentially huge.
Despite this, traditional organizational structures such as multinational corporations (MNCs), designed for a different competitive era, have struggled to come to terms with the globalization phenomenon. This challenge has been made significantly more difficult by dramatic changes in the global communications infrastructure over the last two decades.
Other companies have grasped the opportunities that globalization presents with open arms. For example, Taiwanese company Foxconn, a manufacturer of global products such as those marketed by Apple and Samsung, now has its own aspirations to build a global brand. Meanwhile, new(ish) companies such as Airbnb, Alibaba, Amazon, Baidu, Booking.com, eBay, Etsy, Facebook (Meta), Google (Alphabet), Just Eat, LinkedIn, Lyft, Netflix, Snapchat, Tencent, Twitter, TikTok, Uber, WhatsApp and Zoom have taken the opportunity to establish international business structures and processes from scratch, becoming genuinely global in an extraordinarily brief period. These firms should be examined from a perspective commonly described as born global brands, and, unsurprisingly, many have been acquired with this in mind (e.g. Microsoft/LinkedIn, Meta/WhatsApp).
Furthermore, the global internet infrastructure has opened tremendous opportunities for smaller companies (SMEs) to access international markets from which they were excluded in the past, facilitated by ‘new economy’ companies creating their own global, virtual marketplaces, including Alibaba, Amazon, eBay, Etsy, Facebook and The Hut Group. Consider the following observation from Jack Ma, the co-founder and former executive chairman of Chinese company Alibaba:
e-commerce is not for big companies or developed countries. It’s for developing countries, young people and small businesses. We should not let world global trade be controlled by 60,000 big companies. We should make technologies and policies to encourage six million, 16 million or 60 million businesses. Alibaba will make it happen.
In the next section of this chapter, I briefly introduce the research of Professor Pankaj Ghemawat of Stern School of Business, New York. He has taken a contrarian view on globalization by focusing on the practical challenges of conducting business strategy in the context of the new world order of international free trade described thus far.
Specifically, he questions the ‘fashionable’ lexicon of words and phrases such as ‘glocalisation’, ‘shrinking world’, ‘think global, act local’ etc., which, he claims, excessively trivialise complex phenomena.
Ghemawat argues from a business strategy perspective that his ‘laws’ of ‘semiglobalization’ and ‘distance’ more closely reflect the real world of international business and strategy than is generally acknowledged in the mainstream debate:
semiglobalization opens up far more interesting strategic opportunities for firms than would be available in a world where globalization is either negligible or complete.
His research amongst executives revealed that multinational companies typically overestimate the extent of globalization and therefore exaggerate the attractiveness of foreign markets. They also underestimate the challenges and costs involved in foreign ventures, mainly because of a failure to understand ‘distance factors’, some of which are obvious (e.g. language), others less so (e.g. ‘soft’ governmental influences).
Ghemawat’s research output is unusual in the mainstream literature because it relies heavily on a statistical analysis of historical data that most managers wouldn’t understand (or care about) and makes extensive use of acronyms and simplified linguistics that managers like but which many academics treat as trivial. His CAGE framework considers four dimensions that can explain differences (‘distance’) between two countries: Cultural; Administrative; Geographic, Economic.
The CAGE framework works well as one of several processes in determining foreign market attractiveness and opportunity potential, a key element of risk assessment (see below) in international business strategy development.
To summarise, business strategy is not conducted in a vacuum, hence the importance of understanding its context with reference to political economy and the principles of international free trade I have discussed in this Introduction to Ten Years.
Exploring Uncertainty, Risk and Knowledge
Uncertainty and risk permeate all aspects of politics, economics, and society. They relate directly to the dynamic nature of the globalization forces and interruptions that I explore in this book. The developing pace of global business environment change and the increasing complexity of this for political and business strategy decision-making have given a high profile to the importance of accounting for risk amongst policymakers and company executives.
Probabilities, possibilities and uncertainties.
As the causes and effects of risk and uncertainty have become more significant to decision-making, more complex models have been advanced for their analysis. Many such models have proved hopelessly inadequate, mainly because their sophisticated mathematics is complicated to understand or apply. Despite this, the challenge of knowledge acquisition remains one of fundamental importance if sensible political and business policies/strategies are to be created and implemented.
The full complexities underpinning the principles of risk analysis are beyond the scope of this book. Still, it is worth mentioning the unique challenges of two critical problems encountered in the practice of risk assessment:
- At the outset, there is a need to recognise that the ability to see the future in any detail is limited to only certain foreseeable events.
- There is every reason to expect that other events, unforeseeable at present, have a high likelihood of occurring in an unknowable future.
These factors will affect the cognitive expectations and outcome perceptions of decision-makers, and these, in turn, will be dependent upon three sources of uncertainty:
- Uncertainties in the estimation of results.
- Uncertainties in projecting the dynamics of the current international business environment into the future.
- Uncertainties in anticipating competitive reactions (countries in geopolitics, companies in business strategy), particularly in turbulent times.
Similarly, Nassim Nicolas Taleb, who introduced us to the idea of black swans in his 2007 global bestseller The Black Swan: The Impact of the Highly Improbable, challenges the overblown symmetry of cognitive behaviours and criticises an excessive reliance on naïve empiricism:
I am saying that a series of corroborative facts is not necessarily evidence. Seeing white swans does not confirm the nonexistence of black swans.
Political policymakers and business executives tend to seek solace in hard data and measurable probabilities. But for intelligence creation and successful decision-making, we should also acknowledge the need to ‘expect the unexpected’ or, as Taleb advises us in the subtitle of his book, to prepare for the impact of the highly improbable.
The implications of risk and uncertainty for decision-making at the political policy and business strategy level indicate the importance of forecasting the variables that affect the global business environment (risk assessment) and taking appropriate actions to address them (risk mitigation).
It is essential to understand the “degree of changeability” in the environment, which can be understood as levels of environmental turbulence. In this broader context, it is difficult to resist citing former US Defence Secretary Donald Rumsfeld’s cerebral observations on the nature of uncertainty:
There are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also ‘known unknowns’ – the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tend to be the difficult ones.
Does God Play Dice?
In this section, I will drop a couple of names of very famous ‘pure’ scientists before reverting to the ‘dismal science’ of economics and its companions from the ‘social’ sciences, including history, sociology, psychology and political economy. These latter disciplines provide the substance of Ten Years.
The pure and the social sciences share a joint endeavour and a common query: to what extent it is possible to predict the future and how are such forecasted outcomes determined by current and past events? In a famous 1999 lecture on determinism (from which this section borrows its title), ‘Does God Play Dice?’, Professor Stephen Hawking effectively explains pure science with reference to popular culture and is worth quoting here at length:
This lecture is about whether we can predict the future, or whether it is arbitrary and random … The idea that the state of the universe at one time determines the state at all other times [is] a central tenet of science… It implies that we can predict the future, in principle at least. In practice, however, our ability to predict the future is severely limited by the complexity of the equations, and the fact that they often have a property called chaos. As those who have seen Jurassic Park will know, this means a tiny disturbance in one place, can cause a major change in another. A butterfly flapping its wings can cause rain in Central Park, New York. The trouble is, it is not repeatable. The next time the butterfly flaps its wings, a host of other things will be different, which will also influence the weather. That is why weather forecasts are so unreliable.
Prof. Hawking’s lecture addressed the concerns held by Albert Einstein relating to quantum mechanics, who famously observed that “God does not play dice”, a defence of ‘determinism’, a view that all events are determined entirely by previously existing causes rather than apparently random chance occurrences.
Radical Uncertainty, Tumbling Dice and Decision-making
In 2021 Sir John Kay, an economist and business strategy professor, and Lord Mervyn King, a former Governor of the Bank of England, published Radical Uncertainty: Decision-making for an unknowable future. In the context of the discussion presented thus far, the authors’ short description of the wide-ranging scenarios that define the scope of their book is helpful:
We are emphasising the vast range of possibilities that lie in between the world of unlikely events which can nevertheless be described with the aid of probability distributions, and the world of the unimaginable.
Considering this range as a spectrum, their notion of ‘radical uncertainty’ deals with the realm of the unimaginable, and the diversity of situations they assess is broad.
Crucially, they link these scenarios to what they describe as ‘adaptation’ and ‘embracing’ strategies, i.e. coping behaviours that lead to better decision-making whether in politics, business or amongst individuals.
The authors are not remotely suggesting that the absence of information or knowledge should foster defeatism or a ‘do nothing’ attitude, nor should it justify procrastination:
Acknowledging radical uncertainty does not mean that anything goes.
This brief statement aligns perfectly with the purpose of the twelve chapters that describe and explain events and historical processes in globalization dynamics during the decade we examine in Ten Years. It also implicitly suggests that analysing decision-making and events lies on a spectrum of explanation (hindsight) and prediction (foresight), a subject we briefly address in the Epilogue.
In studying many decisions that have been taken in politics, economics, finance and business, one is frequently incredulous at how crass they seemed to be given the knowledge base that does exist and is universally accepted.
Despite the existence of this ‘knowledge base’, it often appears that a decision has been made based on the outcome of a spin of a roulette wheel or the roll of a dice, i.e. it has been taken in a game of chance without any recourse to scholarship.
With the benefit of hindsight and looking at it objectively, the decision taken seems absurd. But the real point is that, given the existence of an accepted body of evidence-derived knowledge, why was a particular decision taken without intelligent aforethought?
In 1971 a best-selling novel was published which created a cult following worldwide that exists to the present day. The Dice Man: This book will change your life, by Luke Rhinehart, features a bored psychiatrist who one dull evening decides to add an element of chance to his daily life choices:
I became ablaze at the thought: I am right. I must always obey the dice. Lead where they will, I must follow. All power to the die! Excited and proud, I stood for a moment on my own personal Rubicon. And then I stepped across. I established in my mind at that moment and for all time, the never-to-be-questioned principle that what the die dictates, I will perform.
The protagonist in the novel, Luke himself, would write six options on a piece of paper, ranging from the mundane (go to bed, browse magazines at the news stand, read a particular book) to violent behaviours (rape the neighbour — Luke’s best friend’s wife). Whatever the decision taken, the odds were stacked heavily against it at the outset (1 in 6) and, “If I played with two dice, the subtleties in probability were much greater”. As the novel unfolds, chaos abounds and multiplies as each dice-decision increasingly randomises Luke’s life. And death.
In the following chapters, I explore the apparent randomness of globalization dynamics and the uncertainties this creates. But I contend that higher-quality decisions can be taken with reference to established knowledge rather than a simple reliance upon rolling dice in the manner of Luke Rhinehart.
I acknowledge that ‘pure’ science is not superior to the social sciences, but it is different. So, for example, in the pure sciences, if you break the rule, you change the rule, but to achieve acceptance of this will require multiple replications under intense scrutiny. In contrast, social sciences can accommodate exceptions to the rule and, crucially, can typically explain these with reference to the same knowledge base that created it.
I use a simple graphic featuring tumbling dice on the front cover of Ten Years and throughout its pages. The purpose is to emphasise that even in conditions of radical uncertainty or extreme randomness, our constant pursuit of knowledge, combined with endeavour, perseverance and ingenuity, can lead us towards intelligent interpretations of the globalization dynamics we explore in our chaotic and complex decade. As Prof. Ian Stewart in argues his influential 1997 book, Does God Play Dice: The New Mathematics of Chaos:
the question is not so much whether God plays dice, but how God plays dice.
And, in the book’s one sentence Epilogue, Dicing with the diety, he concludes:
If God played dice … he’d win.
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All content © Colin Edward Egan, 2022