Globalization: n. the irrational fear that someone in China will take your job
Summary
Greenwald and Kahn argue that globalisation is far less economically significant than both its advocates and its opponents claim, and that the important economic transformation of the period is the shift from manufacturing to services, which is inherently local.
Their evidence is the composition of advanced economies. Services account for the large majority of output and employment, most services must be produced where they are consumed, and international trade is concentrated in goods, which are a shrinking share of the economy. They document that trade as a share of GDP, correctly measured against the tradeable portion of the economy, has grown far less than headline figures suggest, and that most economic activity in developed countries is untouched by international competition.
They then apply Greenwald's competitive strategy framework, arguing that competitive advantage is almost always local, deriving from customer captivity, local economies of scale relative to a defined market, and regulatory position, and that global scale is rarely a source of advantage because the fixed costs it spreads are usually small relative to the coordination costs it adds. From this they argue that most global expansion strategies destroy value and that firms should dominate defined local markets instead.
The strategic argument is the stronger half and is consistent with Greenwald's other work. The macroeconomic argument understates the labour market effects of import competition, which subsequent research on the China shock documented as larger and more geographically concentrated than the book allows. The 2008 publication also predates the services trade growth of the following decade.
Key takeaways 7
- Services account for most output and employment in advanced economies and must largely be produced where they are consumed, which limits globalisation's reach.
- Trade measured against the tradeable portion of the economy has grown far less than headline trade-to-GDP figures suggest.
- Competitive advantage is almost always local, deriving from customer captivity and economies of scale relative to a defined market rather than from global size.
- Global scale rarely creates advantage because the fixed costs it spreads are small relative to the coordination costs it adds.
- Most international expansion by firms destroys value, because the firm enters markets where local competitors hold the advantages it holds at home.
- Dominating a defined local market produces higher returns than participating in a global one, since local dominance is defensible and global participation is not.
- The significant economic transformation of the period is the shift from manufacturing to services, not the increase in trade.
Who should read it
Operators and investors assessing international expansion strategies who want the case that competitive advantage is local.
About Bruce Greenwald
Robert Heilbrunn Professor Emeritus of Finance and Asset Management, Columbia Business School; former director of the Heilbrunn Center for Graham and Dodd Investing
Value Investing: From Graham to Buffett and Beyond is the canonical modern restatement of the Columbia value framework, and Competition Demystified is its standard companion on barriers to entry.
Columbia Business School, Heilbrunn Center for Graham and Dodd Investing
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