Globalization

The
2022 State of Globalization in
by Steven A. Altman and Caroline R. Bastian
April 12, 2022

David Malan/Getty Images

Summary. As companies contemplate adjustments to their global strategies, it is

important to recognize how much continuity there still is even in a period of
wrenching change. The idea of a world where economic efficiency alone drives
patterns of international flows was always... more

Russia’s invasion of Ukraine has led to a new round of predictions

that the end of globalization is nigh, much like we saw at the
beginning of the Covid-19 pandemic. However, global cross-
border flows have rebounded strongly since the early part of the
pandemic. In our view, the war will likely reduce many types of
international business activity and cause some shifts in their
geography, but it will not lead to a collapse of international flows.
To understand why — and to help you think through
consequences for your company — it’s essential to start with a
baseline of how global flows were trending before the war. The
DHL Global Connectedness Index, which our team develops at the
NYU Stern Center for the Future of Management, measures
globalization based on international flows of trade, capital,
information, and people. We look here at the latest trends across
those four categories of flows — and consider early signals of how
the war might alter their trajectories moving forward.

1. Trade Flows
After plummeting at the onset of the pandemic, world trade in
goods bounced back to above pre-pandemic levels before the end
of 2020, and was setting new records by early 2021. The main
reason trade roared back so decisively, despite disruptions to
global supply chains, was a surge in demand for traded goods.

See more HBR charts in Data & Visuals 

In the U.S., real personal consumption of physical goods rose 17%
from 2019 to 2021. The last time U.S. purchases of physical goods
grew so quickly was during the recovery from World War II. In
contrast, consumer spending on services (many of which require
in-person contact and are less tradable than goods) was down 2%
over the last two years. Until 2020, there had never been a year
when U.S. spending on goods rose while spending on services
declined (according to data going all the way back to 1929).

Surging demand for goods could only translate into more trade
and more consumption to the extent that supply could rise to
fulfill it. Supply did expand, but it was constrained both by
normal limits on how quickly capacity can be increased and by
the unique circumstances of the pandemic, including large shifts
in which products were in demand, sudden plant and port
closures, labor shortages, and shipping delays. Without supply
constraints, global trade in goods might have grown several
percentage points more than it actually did in 2021.

The war in Ukraine is exacerbating supply constraints and

boosting inflation. The consequences are especially severe for
food and fuels, key exports from Russia and Ukraine. Countries
are racing to reduce their reliance on essential imports from
geopolitical rivals, but a wider retreat from international trade —
which would further increase inflation — is unlikely. Several
countries are actually cutting tariffs to combat inflation. The
imperative to preserve cooperation with allied countries should
also reduce the risk of a wider spiral of escalating protectionism.

Before the war, trade was expected to grow strongly in 2022 and
2023. The amount of goods traded (world trade volume) is still
likely to expand this year, but at a slower pace than previously
forecast — not only because of the war but also because of Covid-
19 outbreaks in Asia. If demand shifts back from goods to services,
that would also reduce trade growth. Meanwhile, expect faster
growth in the dollar value of world trade, which is boosted by high
commodity prices. Japan’s latest imports data illustrate this
pattern: The country imported less in February 2022, but the cost
of its imports rose sharply.
2. Capital Flows
Much like trade, international capital flows also plummeted at the
beginning of the pandemic, and they have also recovered. In 2020,
foreign direct investment (FDI) flows (which reflect companies
buying, building, or reinvesting in operations abroad) fell below
$1 trillion for the first time since 2005. Record levels of economic
uncertainty, unsurprisingly, prompted firms to hold off on
committing to new investments.

See more HBR charts in Data & Visuals 

FDI surged back to above its pre-pandemic level in 2021, and the
UN Conference on Trade and Development reported a positive
outlook for FDI growth as of January 2022. However, international
investment in new manufacturing capacity remained weak,
signaling ongoing doubts about future prospects for global value
chains.
The war in Ukraine has prompted the withdrawal of more than
400 foreign firms from Russia, although this has not yet resulted
in a wave of actual divestments of assets, which would reduce
FDI. Since Russia hosts only 1% of the world’s inward FDI stocks,
the main effects of the war on international corporate investment
are likely to result from its negative macroeconomic
consequences. The war could cut global GDP growth over the next
year by more than one percentage point, and FDI tends to suffer
during periods of slower growth, as companies focus on
defending their current markets rather than expanding into new
ones.

Portfolio investment constitutes another important part of

international capital flows. It links financial markets but (unlike
FDI) does not involve control over foreign business entities.
Portfolio flows plummeted and recovered even faster than FDI at
the beginning of the pandemic. But the war in Ukraine has caused
a predictable — but still modest — pullback of portfolio
investment from emerging markets.

3. Information Flows
International data flows surged as the pandemic sent in-person
interactions online. The annual growth rate of international
internet traffic roughly doubled in 2020. But that was just a one-
time spike. International data flows are still growing, but they
grew more slowly in 2021 than in 2019.
 See more HBR charts in Data & Visuals 

That fits with a broader pattern of slowing growth across other

information flow measures. The growth of international scientific
collaboration (as measured by the proportion of scholarly articles
with co-authors in different countries) and international voice
call minutes has slowed, and international payments for the use
of intellectual property declined in 2020.

Looking forward, the globalization of information flows is

clouded with an especially high level of uncertainty. Major
economies are adopting very different approaches to regulating
international data flows, with the potential to add substantial
frictions. And as international data flows surged during the
pandemic, so did cybersecurity threats. Cybercrime complaints to
the U.S. FBI roughly doubled from 2019 to 2021. The war in
Ukraine further increases cybersecurity risks, and it has also led
to new restrictions on international information flows via social
media platforms, with access to Facebook, Twitter, and Instagram
blocked or limited in Russia.
4. People Flows
International flows of people have been restricted severely during
the Covid-19 pandemic, due to their potential to transmit the
virus and its variants. The number of people traveling to foreign
countries fell 73% in 2020 and was still down 71% versus pre-
pandemic levels in 2021. The pandemic reversed three decades of
growth of international travel, and the war will slow the recovery,
especially in Europe.

See more HBR charts in Data & Visuals 

Beyond impacts on the tourism industry and tourism-dependent

economies, the main challenge these trends have posed for
companies has involved restrictions on business travel. Business
travel normally plays important roles in both the internal
management of multinational firms and the development of their
external business relationships. Without travel restrictions, the
trade and FDI recoveries might have been even stronger. Business
travel is not expected to recover fully until 2025, so managers will
need to continue devoting substantial attention to nurturing
internal and external relationships from a distance.
Looking beyond travel, the pandemic slowed but did not reverse
the growth of international migration. The number of people
living outside their birth countries increased by about two million
in 2020, but that was 27% less growth than the UN projected
before the pandemic. The war has caused a spike in people
moving across national borders involuntarily, with more than
three million refugees escaping from Ukraine during just the first
three weeks of military action (the largest refugee crisis in Europe
since World War II).

What to Watch For

The trends we have looked at thus far highlight the resilience of
global connectedness during the pandemic. Record levels of
international trade and strong rebounds for most other types of
international activity hardly endorse the idea that the war in
Ukraine might be the last straw for an era of globalization already
hobbled by the pandemic, the U.S.-China trade war, and the UK’s
exit from the EU. The war does imply a setback for the growth of
international flows, but nothing close to a retreat to a world of
self-contained national economies.

Could the war, nonetheless, have a large effect on the geography

of international flows? Yes, but the pivotal country to watch in
this context will be China, not Russia. To gain some perspective,
consider how much of the world’s trade — and other flows —
takes place between countries on different sides of the current
conflict.
See more HBR charts in Data & Visuals 
On March 2, 2022, the United Nations General Assembly voted on
a resolution condemning the invasion and demanding the
withdrawal of Russian troops from Ukraine. The 141 countries that
voted in favor of the resolution (plus Taiwan, which is not a UN
member but has aligned with the countries voting in favor)
conducted 61% of world merchandise trade among themselves in
2020, and 70% of the world’s combined trade, capital,
information, and people flows took place within this group of
countries. The high proportion of international flows among this
set of countries, which includes the U.S., EU, Japan, and South
Korea, suggests some limits on the extent to which this conflict
itself could reshape the geography of globalization.

Of the 39% of world trade that was not between countries that
voted for the UN resolution condemning the invasion, the
majority was with China:

23% of world trade was between China and countries that voted
for the resolution
2% was between Russia and countries that voted for the
resolution
9% was between other countries that did not vote for the
resolution (such as India and Vietnam) and countries that did
vote for the resolution
Just 5% was among countries that did not vote for the
resolution (including trade between China, Russia, India, and
all others in that category)

Looking at globalization more broadly — based on trade, capital,

information, and people flows — the patterns are fairly similar,
with China dominating the flows among countries that did not
support the UN resolution. (The same message also comes
through, though to a lesser extent, if countries are classified based
on sanctions policies rather than their UN votes.)

These data highlight China’s pivotal role in the extent to which

the geography of globalization will shift moving forward.
Relations between China and its geopolitical rivals have been
deteriorating for several years, and the war is likely to accelerate
that trend. Two key developments to watch are 1) how far the
decoupling trend broadens beyond the strategic technology
sectors where it is already apparent and 2) whether it continues to
advance gradually or if a crisis causes a sudden break. The
gradual scenario is still much more likely, but the war in Ukraine
provides a vivid illustration of how quickly individual countries
can disconnect in the face of extreme threats.

...
As companies contemplate adjustments to their global strategies,
it is important to recognize how much continuity there still is
even in a period of wrenching change. The idea of a world where
economic efficiency alone drives patterns of international flows
was always a myth. Globalization has always been an uneven
process, with cross-country differences and international
conflicts significantly dampening international flows. That’s a big
part of why — even before the present crisis — only about 20% of
global economic output ended up in a different country from
where it was produced.

The growth and geographic reach of international flows can rise

and fall over time, but the fundamental drivers of success in
global strategy remain unchanged. The similarities and
differences between countries define the landscape for
international value creation, and the task of the global strategist is
to navigate the opportunities and threats presented by both the
bridges and the barriers between markets. As the landscape shifts,
global strategies must be updated, but managers should avoid the
costly overreactions that tend to follow major shocks to
globalization.

Steven A. Altman is a senior research scholar,

adjunct assistant professor, and director of the
DHL Initiative on Globalization at the NYU
Stern Center for the Future of Management.
 CB
Caroline R. Bastian is a research scholar at
the DHL Initiative on Globalization.

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