“Common sense is what tells you that the world is flat.” — Bertrand Russell
What a difference a few weeks makes. When I visited East Asia two months ago, the sentiment was that the financial crisis was America’s problem and that Asia would motor on quite nicely despite America’s malaise. This view suggested that America’s financial distress was decoupled from the big growth engines in the world.
Last week, I visited Europe and South America and heard a very different message: like it or not, all countries have been dragged into this mess. The shock and apprehension Americans felt in September is now global. Iceland nearly defaulted on its external debt and was saved last week by an emergency loan from the IMF. Earlier this month, Korea negotiated a $30 billion currency swap with the U.S. Fed; the Fed cut similar deals with the central banks of Brazil, Mexico, and Singapore. Argentina has nationalized its private pensions, which many fear is a step toward using the pension assets of private citizens for political purposes. China has pledged a stimulus package of $584 billion to boost its growth. And the European Union, which had managed its financial affairs rather conservatively, seems to be ahead of other regions into recession.
The political fallout seems to be spreading globally as well. Like the Republicans who were sacked in the U.S. elections earlier this month, incumbents around the world find themselves on tottering seats of power. In countries as different as India, Israel, South Africa, Germany, and Spain, voters seem to be lining up for change. Following the recent G20 conference, the Financial Times published a survey among voters in Europe and the U.S. revealing a sharp negative swing in judgment of their governments’ response to the crisis. All financial crises have geopolitical consequences.
This is “contagion,” the spread of a shock from one country to the next. Such movement certainly seems consistent with the conventional wisdom that the world is “flat.” The thesis advanced by Thomas Friedman’s ubiquitous book is that information technology and free trade have eliminated frictions and leveled business differences across borders so that competition has evened out between established firms in developed countries and the upstart companies in emerging countries. In the U.S., we understand this well: offshoring, outsourcing, and the hollowing-out of American manufacturing testify to the global fluidity of business.
But hold on. The spread of the financial crisis offers some clues that the world is not as flat as Friedman argues. Not all countries are affected equally; nor can all countries fight the crisis equally. Size matters. Having a reserve currency (like the U.S.) matters. Having liquid reserves matters, in the form of savings and powerful sovereign wealth funds—this is a telling point in David Smick’s The World is Curved: Hidden Dangers to the Global Economy. Economic advantages are sprinkled unequally among nations and shape the exposure of countries to the crisis. These advantages include natural resources (Brazil and Australia), low manufacturing cost (China, Vietnam), low cost business process services (India), and special know-how in financial services (U.K., U.S., Singapore). The greater is the curvature of the world (the disparity among countries), the more difficult will be the challenge to coordinate a response to the crisis.
My colleague, Alan Beckenstein, gave an interview in New Zealand that emphasized the inherent instability of market economies. We have had bubbles in the past and will have them in the future. Given the connectivity of markets and communications, it seems likely that contagion will be a feature of the future busts as well. But the fact remains that countries such as New Zealand, China, India, and the U.S. respond to these crises in very different ways. Though globalization is a fact of life, it hardly seems that the flat world has arrived.
I have talked about the financial crisis using a metaphor that suggests the relevance of business topography; the metaphor is the game of pool: banks and countries are scattered like balls around the table. Then a shock occurs sending the white ball ricocheting around the system, destabilizing the balls and sending some into the pockets. In a flat world, the table would be flat and the balls would be of equal size. In a curvy world, the table is not flat and the balls are of uneven size and may not even be spherical. The crisis affects nations and companies differently.
The extent to which the world is flat has been on my mind lately—both with respect to the global financial crisis and to the globalization of management education. Your view of the global topography as flat or curved has huge implications for the way you organize businesses, plot strategy, use technology, brand products, hire talent, or just about anything. Fighting the global crisis is increasingly a matter of coordination among central banks and finance ministries. By now, I doubt that anyone questions the need for coordination. But how they coordinate is the key question—it should be tailored to the topography. Management education should adapt as well to the topography of global business. ((I’m chairing a task force on the globalization of management education for AACSB (Association for the Advancement of Collegiate Schools of Business). The task force has been charged with studying the current state of global business education and recommending actions to AACSB. The members represent management education on six continents. We want to elevate the achievement of business schools in producing graduates who are capable of succeeding in, and adapting within, a global business environment. Ideally, the findings of our study will enhance awareness of effective collaboration opportunities between business schools and accelerate adoption of, and innovation of, effective mechanisms that support the globalization of business education. Many business schools are entering unfamiliar territory (literally and figuratively) as they strive to serve as a global market, teach global perspectives, and engage in globally relevant research and outreach.))
A recent book by Pankaj Ghemawat, Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter, offers some insights about globalization that are relevant to helping crisis fighters and management educators think about the curvature of the world. He argued that four factors produce a world that is curved.
- Cultural distance. The reality is that language and history dramatically affect the choice of business partners. Anglo-Saxon heritage, Romance languages, the Diaspora of Chinese and Hindus, and ethnic ties the world over have influenced trading patterns.
- Geographic distance. Your neighbor is more likely to be your major trading partner and your competitor—think of Canada and the U.S.
- Economic distance. The gulf between developed and developing economies induces wide disparities of business behavior. Economic distance is reflected in differences in the use of special know-how, advanced technology, infrastructure, and capital markets.
- Administrative distance. Legal, political, and tax systems, transparency, and respect for the rights of investors can generate distance among countries and markets.
Ghemawat marshals a range of measures to argue that business activity has not achieved the level of global integration as to justify the claim that the world is flat. He says the world is “semi-globalized”—maybe it is heading toward a flat competitive field, but the world has a long way to go. If you take Ghemawat’s view, then national and regional differences still really matter for fighting the global financial crisis, for setting business strategy, and for making a host of business decisions.
Management education is not devoid of concerns about whether the world is flat or curved. The topography of the world raises at least five big questions for management education:
- For what do we prepare our students? Is it “anytime, anywhere” performance? This may be possible in a flat world. Those who believe in a very curvy world would argue that domain knowledge really matters—local or regional practices and customs.
- What is the canon of ideas that we impart? Is there a canon? Perhaps the tools and concepts of business are not everywhere and equally applicable. Business schools certify their graduates as Master of Business Administration—is the mastery of ideas contingent on location?
- Does leadership development depend on world topography? The stronger the localization, the greater the need for leadership development that is locally-oriented.
- What is the language of business? The rise of English as the global commercial language during the post-World War II era is one of Thomas Friedman’s proofs of the flattening of the world. But surely Chinese and Spanish would qualify for major commercial languages as well, given the sheer size of populations that speak those languages.
- How shall we teach management globally? Answers to the foregoing questions may suggest an answer to this final question. The discussion method of instruction, using case studies and other teaching materials, is consistent with certain cultural settings.
Answers to questions such as these are not straightforward. But one can connect several dots here. The difficulties of doing business across borders, coordinating the fight against the global financial crisis, and educating MBAs for a world of global competition all arise because of the persistence of local differences. Bertrand Russell’s comment, “Common sense is what tells you that the world is flat,” is ironic: he is challenging the reader to think beyond what common sense might suggest. We would be well-advised to do the same.