Globalization is the tendency of businesses, technologies, or philosophies to spread

throughout the world, or the process of making this happen. The global economy is
sometimes referred to as a globality, characterized as a totally interconnected
marketplace, unhampered by time zones or national boundaries.

It is the worldwide movement toward economic, financial, trade,

and communications integration.

Globalization implies the opening of local and nationalistic perspectives to a

broader outlook of an interconnected and interdependent world
with free transfer of capital, goods, and services across national frontiers.
However, it does not include unhindered movement of labor and, as
suggested by some economists, may hurt smaller or
fragile economies if applied indiscriminately.

One's perspective on globalization is based on the map that is used.

There is not one map of the world, but many different maps, each of which tells a
different story. There are geographic maps, which show land mass; maps that show the
populations of each country; and maps that show relative GDPs (which show that
wealth is not synonymous with population).

But perhaps the maps that best illustrate globalization are those that show transport
lanes—through which physical goods flow around the world—and maps of submarine
cables, through which information flows. It is the network of transport lanes and cables
that truly connects the world.

Globalization isn't new, but globalization today has both similarities to and
differences from 100 years ago.

When Harvard Business School was founded 100 years ago, there was in fact
globalization; it was an era of Anglo globalization as the British Empire governed
(directly or indirectly) about 25% of the world. Using sea lanes, there was significant
global trade, there was significant financial integration, and it was a wired world that was
connected by telegraph lines. In the late 1800s and early 1900s, the speed of moving
information increased dramatically, while the cost of moving information fell equally
dramatically.

Important similarities between globalization today and 100 years ago include:
– Free trade. Despite the restrictions that exist, there is trade of goods and services.

– Free capital markets. Then as now, the world is financially integrated and capital flows
around the globe.

– Migration of labor. Labor continues to move, often through mass migrations. However,
100 years ago, labor was moving away from Europe; today labor is migrating to Europe.

Important differences include:

– Dominant world power. As it was 100 years ago, the dominant power is English-
speaking: 100 years ago it was England; today it is the United States.

– Behavior of the dominant world power. England was a "saver" and the United States
is a spender/consumer. (England was viewed as the saver of last resort; the United
States is the consumer of last resort.)

– Currency. Money was gold 100 years ago. Today, there are currencies with floating
exchange rates.

– Foreign direct investment. FDI was less important 100 years ago, but is extremely
important today in how companies do business in international markets.

– Institutions. One hundred years ago, there was no global framework for international
trade. Today, there are entities such as the World Trade Organization and the World
Bank that work to facilitate global trade.

–Optimized global networks may be vulnerable to crises.

Overview
Globalization has a homogenizing effect on diverse national cultures. Its pressures
cause societies to become more alike, converging in business approaches, political and
economic systems, and even aesthetic attitudes. The results of convergence can be
hard for people and countries to support though, and over time can mount into an anti-
globalization backlash. Globalization today faces a legitimacy crisis that has been
unfolding for the past decade, a product largely of financial system convergence.

Context
The panelists shared insights, informed by history, of the convergence that globalization
promotes. Each focused on convergence from a different reference point: institutional
convergence (in financial systems), policy convergence (in China), and the convergence
of consumer preferences (with the beauty industry as an example).

Key Takeaways

Globalization creates convergence that threatens what is distinctive about

national societies.

The embrace of globalization over recent decades has led to the expectation that
cultural differences in business practice—how firms work, how rules are interpreted and
enforced—would wash away over time. Cultures and nations' distinctive brands of
capitalism would become homogenized as the world became one big global market.

That is an expectation with some truth to it, but societies seldom want to pay the price of
convergence for the market benefits of globalization.

Living with institutional convergence pressures casts doubt on the legitimacy of

globalization.

The era of globalization that collapsed early in the 20th century was destroyed, not just
by World Wars I and II but by the determination that free-flowing global markets serve
the purposes of business, not societies. After World War II, capital market systems were
intentionally designed not to be global but to be nationally bound; to preserve what was
distinctive about each country's capitalism and to prevent financial crises (such as the
crisis of the 1930s) from spreading across borders.

Subsequent decades saw many nations gradually embrace free trade in goods and
services as people began to feel that global commerce was safe as long as financial
systems remained separate. Over the past 15 years, the barriers to free-flowing capital
began to fall as the lessons of the past were forgotten.

National social purposes vary widely, compelling different versions of capitalism and
different societal structures (unions, anti-trust laws, welfare systems, etc.). But
globalization exerts considerable pressures to converge, pressures that can be
antithetical to national social purposes. Ideological convergence encourages nations to
adopt the “right” ways to organize societies, embracing free markets and limiting
government economic intervention.

A particularly profound and controversial form of convergence is that of financial

systems, which can occur when countries open themselves to cross-border capital
flows. Challenges associated with converging financial systems may include the
following:

– When foreigners can own firms, they make decisions that serve their priorities versus
those of the firm's home country.

– When countries commit to fix currencies' exchange rates to one another, monetary
authorities have more difficulty acting to address domestic needs. For example, cutting
interest rates to stimulate a domestic economy causes investment capital to flee that
country in search of higher rates, making currency promises harder to keep.

– National banking systems profoundly affect the types of companies an economy

grows. In Italy, small banks all with different accounting practices have traditionally lent
to small companies whose viability depended on this kind of banking relationship. Italy
did not easily succumb to the cross-border movement of capital that came with Europe's
unification. Italians mistrusted financial convergence as it threatened a long-entrenched
way of life.

These convergence pressures have created a legitimacy crisis for globalization that has
unfolded over the past decade. This crisis is more profound and broad than the current
financial system crisis, though the financial crisis may exacerbate it.

As a result, the United States is now experiencing a renaissance of the idea that
unregulated markets create dangers of both crisis containment and institutional
convergence. The conventional wisdom pendulum is likely to swing back to the view
that markets should not be unregulated at all times in all circumstances.

The current financial crisis and the series of previous crises over the past century raise
the question: Is globalization chronically crisis prone? Further, is a downside of
globalization that the market periodically blows up?

Over the past 100 years, there have been two major economic crises: the Great
Depression, from 1929 to 1937; and the stagflation of the 1970s. It appears that the
current financial crisis will be an equally significant and perhaps even greater crisis. In
addition, there have been other economic crises over the past 100 years, with a
significant crisis occurring every 10 to 20 years. (In the past 100 years, there have been
six years when the S&P index declined by more than 20%: 1917, 1930, 1931, 1937,
1974, and 2002; 2008 could be the 7th such year.)
It may be that as financial markets and global supply chains have been driven to
maximize efficiency, they have become more fragile. Author Nassim Nicholas Taleb has
written that "a flat world is over-optimized to maximum vulnerability." The
interconnected, globalized world may work well in normal, stable times. But because
this world has no slack, if/when the expected occurs—which it invariably does—crises
result.

Business and political leaders are often surprised by crises; they don't take a
long enough view of history.

Despite the fact that economic crises occur every 10 to 20 years, leaders seem to
always be taken by surprise.

One reason may be attributed to a "black swan" way of thinking. Because most people
have never personally seen a black swan, they have a tough time actually believing that
such a swan even exists. So too is the case with financial crises: people have a difficult
time imagining events that they have not experienced personally.

However, people's personal experiences are limited. Take, for example, the duration of
the careers of today's Wall Street CEOs, which are 25 years on average. This means
that, on average, these individuals began their careers in 1983. Their world view is
based on those 25 years, during which time minor, but not major, financial crises
occurred. Even experts such as former chairman of the Federal Reserve Alan
Greenspan and current chairman Ben Bernanke made statements in recent years about
decreased economic volatility—statements based on a short-term, not a long-term,
perspective.

Nowhere was this failure to take a long-term view more acute than in the models used
by those on Wall Street. Such models often used just five years of data, and made
assumptions that eliminated rare low-probability/high-risk events—providing an
inaccurate and overly optimistic perspective.

The reality is that when looking at 100 years of data, there have been nine months
during that time when the monthly return of the Dow Jones Industrial Average was more
than four standard deviations from the mean. This longer view of the data shows that
crises do occur with some degree of regularity. It is impossible to predict when a
financial crisis will occur and what its magnitude will be, but it is not impossible to
predict that there will be another major financial crisis in the next 10 to 20 years.
For those who see economic history as a waste of time, Professor Ferguson suggested
creating models with 100 or 200 years of data, which will help leaders and their
organizations be prepared for black swans.

Biological evolution is a metaphor for the financial system, with a few key
differences.

When most people and firms think about financial evolution, they see it as
concentration. For example, Citigroup was previously hundreds of smaller entities that
"evolved" into the behemoth it is today. But concentration from many small entities into
one large entity distorts the term evolution. In biological evolution, there is one common
root that branches out and creates multiple different results. Evolution is about the
creation of new species that use the same resources and compete to survive; some
species adapt and flourish while others go extinct.

The concept of biological evolution is a good metaphor for financial evolution, with the
following important differences:

– Conscious mutation. In the natural world, mutation is random, but in the financial
world, mutation—through means such as innovation and M&A—is controlled.

– Endogenous change. In the natural world, evolution is often triggered by external

events, such as an asteroid hitting the earth. ("The environmental factors that affected
dinosaurs weren't the dinosaurs' fault.") However, the disasters that affect the financial
system are endogenous; they are caused by the financial system.

– Intelligent design. In the theory of biological evolution, there is no intelligent design;

evolution doesn't involve divine intervention or moral judgments. But in the financial
world, there are regulators who are supposedly intervening to intelligently design the
system. These regulators are torn: If they don't regulate at all, there will be crises that
have negative consequences. But when they do regulate, they are usually regulating to
address the last crisis, not prevent the next one, and the nature of regulation creates a
moral hazard and stymies innovation. Intelligent design impedes natural selection.

Considering biological evolution as a metaphor for financial evolution brings to mind

Joseph Schumpeter's concept of "creative destruction." In a capitalistic system, as in
biology, the companies that don't adapt will fail. This reality revolutionizes the world's
economic structure by destroying the old and creating the new.

All Videos on: Globalization

 http://www.hbs.edu/centennial/businesssummit/globalization/globalization.html

Historical Roots of Globalization

A breakout session with Professor Geoffrey G. JonesMonday, October 13, 2008

Panelists share insights, informed by history, of the convergence that globalization

promotes. They each focus on convergence from a different reference point: institutional
convergence (in financial systems), policy convergence (in China), and the convergence
of consumer preferences (with the beauty industry as an example).

Rawi E. AbdelalJoseph C. Wilson Professor of Business AdministrationWilliam C.

KirbySpangler Family Professor of Business Administration, T. M. Chang Professor of
China Studies

Executive Summary

 Print Executive Summary

 Download PDF
China is no island: Its history is one of internationalization; its political policy
came from convergence.

Despite the perception of many in the West that China existed in isolation prior to
opening up in 1979, China has a long history of internationalization, shaped by
interaction and intersection with other cultures via trade and invasion.

When the People's Republic of China was established in 1911, it was recognized that
ancient Chinese traditionswere not designed for success in the 20th century. In
response China borrowed its university model from Germany, its industry model and
military ethic from America and Great Britain, and its political model from the Soviet
Union.

The Sino/Soviet alliance during the 1950s aligned China's political structures and
policies with the Soviet Union's in ways that still define the nature of China. Without
China's convergence with the Soviet Union (or arguably emulation of it), there would be
no Chinese Communist Party or People's Republic of China.

When China isolated itself from the West in the 1960s and early 1970s, it was by its
own design. Even as China has become more open economically, Chinese leaders
remain staunchly opposed to Western democracy. The Communist Party has no
intention of loosening its political control. The state will not be embracing democracy or
the American version of capitalism even as China has allowed its socialist economic
model to take on shades of capitalism.

Professor Kirby has a message for Americans doing business in China: "Don't believe
that the State, the government, and the Party don't matter, critically."

The history of the beauty industry shows how consumer attitudes can converge
across the globe.

Historically, beauty and medicine were the same. People drank perfumes to make them
feel better, and used herbs to cure and make themselves more attractive.

That changed during the 19th century when chemistry and marketing transformed a
craft linked to medicine; entrepreneurs altered both people's images of human beauty
and the acceptability of making oneself more attractive. For example, soap wasn't
broadly used in the West until the mid-19 century when marketers started to equate its
use with hygiene. Use then grew in the late 19th century as marketers linked soap with
beauty. When soap became linked to aspirations, consumption soared.

Throughout most of history, images of beauty have varied dramatically by culture. In

early 19th-century Japan, blackened teeth, shaved eyebrows, narrowed eyes, and white
faces were deemed beautiful. During the 20th century, globalizing beauty companies
and the media spurred convergence of female beauty standards around the world—
Western standards. This could be seen through the use of Western models in Asian
countries.

In recent decades a new trend has emerged: Western perceptions of beauty have
expanded beyond traditional borders, and over the past ten years, the industry's
globalization has promoted increasing diversity of beauty standards. Global brands are
"spreading out" and taking local identities. Global cosmetics companies are now using
local models in each market. Standards of beauty are diverging again.

This growing divergence—versus convergence—might imply pressure against

globalization. Alternatively, large global companies may have simply hit on a way to
globalize without the convergence that threatens legitimacy.

Other Important Points

  Russian tailors. Even though Shanghai was regarded as having the finest
tailors in the world, the desire of Chinese leaders to emulate Soviet leaders led
the Politburo of China to have all of their clothes made in Moscow.

 The (not so) Great Wall. Professor Kirby pointed out that the Great Wall never
kept anyone out of China who truly wanted to enter.

 Addictive commodities. The two most significant global commodities of the late
18th and early 19th centuries were tea and opium. They were enormous
businesses with global consequences. Of these commodities, the British were
addicted to tea (and the taxes on it, which comprised 20-30% of the revenues for
the British Treasury) and the Chinese were addicted to opium.

Globalization
Scope Note: Refers to the changes in societies and the world economy that result from
dramatically increased international trade and cultural exchange. It describes the
increase of trade and investing due to the falling of barriers and the interdependence of
countries.
Source:http://www.globaworks.com/globalization/Globalization.php
Local Sites:

Globalization and State Capacity: The Philippines

http://dirp4.pids.gov.ph/ris/dps/pidsdps0320.pdf
[Retrieved June 17, 2007]

"Reviews and analyzes Philippine practices and experiences to determine the state's
readiness for globalization."
Globalization and Employment: The Impact of Trade on Employment Level and
Structure in the Philippines.
http://dirp3.pids.gov.ph/ris/dps/pidsdps0204.pdf
[Retrieved June 17, 2007]

"Presents few empirical estimates of the impact of globalization on employment level

and structure using Philippine data."
Globalization, Redemocratization and the Philippine Bureaucracy.
http://http://dirp4.pids.gov.ph/ris/dps/pidsdps0509.pdf
[Retrieved June 17, 2007:]
"Looks into the impact of globalization on the Philippine bureaucracy in a
redemocratizing context."
Globalization (part 1)
http://www.apmforum.com/columns/orientseas14.htm
[Retrieved June 18, 2007]

"Discusses the Philippine economy, e-commerce, the economics or poverty and

inequality, the socio-historical context, land control policies, the stagnant agricultural
sector, the export sector, impoverished public sector and accumulation of debt."
Globalization (part 2)
http://www.apmforum.com/columns/orientseas15.htm
[Retrieved June 18, 2007]

"Focuses the effects of globalization on Asian and Philippines policy, business

development, and economic development. It also discussed the historical background of
globalization, rooted in neo-liberalism and free market ideology, and the arguments of
pro- and anti- globalization adherents."
Globalization of Food Security: Policy Reforms in the Philippines
http://www3.pids.gov.ph/ris/pjd/pidspjd02-2foodsecurity.pdf
[Retrieved June 19, 2007]

"Describes the forces that have come to bear on the shaping of food security policy in
the Philippines in recent years, and the government's responses to the emerging
challenges."
Foreign Sites:

Assessing Globalization's Critics: "Talkers are no Good Doers???."

http://www.iie.com/publications/wp/02-5.pdf
[Retrieved June 12, 2007]

"Criticizes the "doers" of globalization."

Development and Globalization: facts and figures
http://www.unctad.org/en/docs/gdscsir20041_en.pdf
[Retrieved June 12, 2007]

"Presents overview of UNCTAD's work to identify the best policies and practices for
developing countries to adopt in their quest for efficient economic and social progress
and well-being."
Development Strategies in a Globalizing World
http://www.unctad.org/en/docs/gdsmdpbmisc15_en.pdf
[Retrieved June 13, 2007]

"Provides a synthesis of the work done in the past 10 years by the DGDS on
development strategies."
Effects of Financial Globalization on Developing Countries: Some Empirical
Evidence.
http://www.imf.org/external/np/res/docs/2003/031703.pdf
[Retrieved June 9, 2007]

"Reviews recent empirical evidence, including some new research, on the effects of
financial globalization for developing economies."
The Emerging Politics of Globalization
http://www.dlc.org/documents/Penn_Globalization_121306.pdf
[Retrieved June 12, 2007]

"Surveys American voters and includes a special emphasis on over sampled data from
the fastest growing areas of the United States, analyzes how voters view globalization's
costs and benefits, as well as their attitudes toward public policies that are possible
responses to globalization.
Globalization: threat or opportunity?
http://www.imf.org/external/np/exr/ib/2000/041200.htm
[Retrieved June 9, 2007]

"Overviews of some aspects of globalization and identify which countries can tap the
gains of this process, while remaining realistic about its potential and its risks."
Globalization and the Changing Logic of Collective Action
http://www.mtholyoke.edu/acad/intrel/cerny.htm
[Retrieved June 9, 2007]

"Focuses on the development of particular historical matrices or patterns of imbrications

between economic-organizational and political-institutional structures."
Globalization, Aggregate Productivity, and Inflation
http://dallasfed.org/research/staff/2007/staff0701.pdf
[Retrieved June 9, 2007]

"Investigates the effects of globalization on aggregate productivity, output growth, and

inflation."
Globalization and Growth in the Twentieth Century
http://http://www.imf.org/external/pubs/ft/wp/2000/wp0044.pdf
[Retrieved June 12, 2007]

"Reviews the experience of economic growth during the twentieth century with a view to
highlighting implications for both growth economists and policy maker."
Globalization Reloaded: An UNCTAD Perspective
http://www.unctad.org/en/docs/osgdp20041_en.pdf
[Retrieved June 12, 2007]

"Rejects the characterization of globalization as an autonomous and irresistible process

driven by the impersonal forces of the market and technical progress."
GLobalization and the South: Some Critical Issues
http://www.unctad.org/en/docs/dp_147.en.pdf
[Retrieved June 12, 2007]

"Examines the implications of some of the main features of the globalization process for
developing countries."
Globalization and Economic Convergence: An Assessment
http://www.unctad.org/en/docs/dp_131.en.pdf
[Retrieved June 13, 2007]

"Surveys a strong globalization thesis that predicts a direct link from more open trade
and investment regimes to faster economic growth in developing countries and income
convergence across the global economy."
Globalization, Neoliberalism, and Labour
http://www.unctad.org/en/docs/osgdp20047_en.pdf
[Retrieved June 13, 2007]

"Discusses the issue of globalization from the perspective of employment and labour."
Globalization of R&D and Developing Countries
http://www.unctad.org/en/docs/dp_147.en.pdf
[Retrieved June 13, 2007]

"Elaborates key issues related to the trends towards globalization of research and
development and their implications for developing countries."
Globalization and Development Revisited in the Light of Asian Experience
http://www.unctad.org/en/docs/poedmm135.en.pdf
[Retrieved June 13, 2007]
"Analyzes the benefits and risks of participation in the globalization process in light of
the development experience of selected countries of East/South-East Asia (Indonesia,
Malaysia, the Philippines, the Republic of Korea and Thailand)."
Globalization, Liberalization and Sustainable Human Development: Analytical
Perspective
http://www.unctad.org/en/docs/poedmm125.en.pdf
[Retrieved June 13, 2007]

"Discusses the interrelationship between three complementary policy spheres:

integration into the global economy and the liberalization of markets; the promotion of
fast economic growth; and sustainable human development."
Poverty in an Age of Globalization
http://www1.worldbank.org/economicpolicy/globalization/documents/poverty
globalization.pdf
[Retrieved June 9, 2007]

"Reviews empirical evidence on the impact of globalization on poverty, income

distribution and vulnerability"

Should you have comments or suggestions on this pathfinders, please call us at these
telephone numbers, 536-0244, 524-4611 local 620 or email us through "Ask LORA".

Speaker Biographies
Geoffrey G. Jones (Moderator)

Isidor Straus Professor of Business History, Director of Research

Geoffrey Jones is the Isidor Straus Professor of Business History and director of
Research at HBS. He holds BA, MA, and Ph.D. degrees from Cambridge University and
an honorary doctorate in economics and business administration from Copenhagen
Business School. He taught at the London School of Economics and at Cambridge and
Reading Universities in England. He was the Thomas Henry Carroll Ford Foundation
Visiting Professor at HBS between 2000 and 2002 and has also held visiting
professorships at Gakushuin University, Tokyo, and Erasmus University, Rotterdam.

Jones researches the history of global business. He has written extensively on the
evolution of international entrepreneurship and multinational corporations, specializing
in consumer products and services such as banking and trading.

His books include British Multinational Banking 1830–1990 (1993), The Evolution of
International Business (1996), Merchants to Multinationals (2000), and (edited with
Franco Amatori) Business History around the World (2003). He has also
published Multinationals and Global Capitalism: From the Nineteenth to Twenty-First
Century (2005) andRenewing Unilever: Transformation and Tradition (2005). Jones is
coeditor of the Oxford Handbook of Business History (2008). He is now researching the
globalization of the beauty industry.

Rawi E. Abdelal

Professor of Business Administration

RawiAbdelal is a professor at HBS in the Business, Government, and International

Economy unit. His main area of expertise is the international political economy, and he
is a faculty associate of Harvard's Davis Center for Russian and Eurasian Studies and
WeatherheadCenter for International Affairs.

Abdelal's first book, National Purpose in the World Economy, won the 2002 Shulman
Prize as the outstanding book on the international relations of Eastern Europe and the
former Soviet Union. His second book, Capital Rules, explains the evolution of the
international financial system's social norms and legal rules. Abdelal is now at work on
The Price of Power, a book that explores the relationships among political leadership,
state-building, foreign investment, and geopolitics in the Russian energy sector.

In 1999 Abdelal earned a Ph.D. in government from Cornell University, where he had
received an MA in 1997. At Cornell Abdelal's dissertation won the Kahin Prize in
International Relations and the Esman Prize. He was a President's Scholar at the
Georgia Institute of Technology, where he received a BS with highest honors in
economics in 1993. His recent honors include HBS's Robert F. Greenhill Award and the
Student Association's Faculty Award for outstanding teaching in the required curriculum.
William C. Kirby

Spangler Family Professor of Business Administration, HBS;

T.M. Chang Professor of China Studies, Harvard University

William Kirby is the Spangler Family Professor of Business Administration at HBS and
the T.M. Chang Professor of China Studies at Harvard University. He is a Harvard
University Distinguished Service Professor. He serves as director of the Fairbank
Center for Chinese Studies and chairman of the Harvard China Fund.

A historian of modern China, Kirby examines China's business, economic, and political
development in an international context. He has written on the evolution of modern
Chinese business (state-owned and private); Chinese corporate law and company
structure; the history of freedom in China; China's environmental challenges; relations
across the Taiwan Strait; and China's relations with Europe and America. His current
projects include case studies of contemporary Chinese businesses and a comparative
study of higher education in China and the United States. He is an honorary visiting
professor at Peking University, Nanjing University, Chongqing University, and Fudan
University.

Kirby has also held appointments as visiting professor at the University of Heidelberg
and the Free University of Berlin. Before coming to Harvard in 1992, he was professor
of history, director of Asian studies, and dean of University College at Washington
University in St. Louis. At Harvard, he has served as chair of the History Department,
director of the Asia Center, and, most recently, dean of the Faculty of Arts and Sciences.
As dean of Harvard's largest school from 2002 to 2006, he initiated major reforms in
undergraduate education in Harvard College; enhanced Harvard's international studies
at home and abroad; substantially increased financial aid in the College and the
Graduate School of Arts and Sciences; supported the growth of the Division (now
School) of Engineering and Applied Sciences; and oversaw the construction of major
new buildings in the life sciences, engineering, and the arts. During his tenure the
faculty expanded at its most rapid rate since the 1960s.

Kirby holds degrees from Dartmouth College and Harvard University, and an honorary
doctorate from the Free University of Berlin. He is a fellow of the American Academy of
Arts and Sciences.

All Videos on: Globalization

http://www.hbs.edu/centennial/businesssummit/globalization/historical-roots-of-
globalization.html

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