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The future of the global economy: Local-global or global-local?

The future of the global economy: Local-global or global-local?

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David Kunsch, left, and Pouya Seifzadeh
David Kunsch, left, and Pouya Seifzadeh

The emergence of COVID-19 has served a major blow to industrial and economic infrastructure worldwide. While the spread of the disease did not happen suddenly and in a uniform way across countries, it started to have an immediate impact in almost every industry sector. The lack of supply flowing out of China crippled the value chain of production in an unprecedented way. Consequently, there have been voices that have blamed these negative consequences and the now-inevitable economic downturn on a globalized economy with overreliance on concentrated overseas production and manufacturing. On the other hand, the chain reactions to respond to the virus outbreak and the resilience of the global economy have been credited to the more expansive presence of globalization, increased access to resources, and more powerful global actors with a global presence. It is difficult to argue that today we stand at a historical crossroad in the global economy. The question is, will we continue on the path of further building up local-global economies, where local actors are mainly global competitors, or will this COVID-19 disruption lead to the resurgence of the global-local economy, where across the globe, there is a greater emphasis on local actors in each geographic area?

Pouya: It is difficult to argue against the fact that our reliance on Chinese supply has impacted many of our industries and our economy. But I hardly see this as overreliance. I’d like to imagine them as growing pains, which in this case happen to be very painful. If years ago, a contagion breakout in China would have not affected, for example, the economy of Rochester in New York, it shouldn’t be interpreted as us having been better off back then. The magnitude of economic benefits that we have gained over the years far outweighs this — hopefully temporary — setback. Since the 1970s, the US economy has grown tremendously because global redistribution of manufacturing activities has allowed many other high-value-added industry sectors to thrive. While the share of manufacturing in the US economy has gone from 24% in 1970 down to around 12% in 2018, the total GDP has grown multiple times in technology, health care, finance, and services sectors. Regardless of what we see going on today, I think that in the long run, we will continue to observe a growth in having a local-global economy, where main actors in our local everyday markets will increasingly consist of major global competitors.

David: I agree with you that the trend since World War II has been an increasing reliance on the local-global (global firms acting locally) but I maintain we may have seen “peak local-global.” There are many reasons for the expansion of this type of globalization, not the least has been a reduction in costs of goods sold. I believe the pandemic is teaching us a valuable lesson in the lower cost of goods sold is not the whole of the story. I believe in a global-local framework, where we consumers — both retail and B2B — begin to shift to more localized suppliers. One of the main reasons for this is the adaptability to local conditions. We are in a phase where consumers want products and services that are tailored to their individual needs and global firms have a difficult time with that, almost by definition. If the goal of your firm is lower cost of goods sold, then this drive to reduce costs inevitably comes from reducing differentiation (increasing economies of scale) and hence the adaptability of local firms will increasingly be seen to be a benefit by consumers and hence reverse the last 75 years of increasing power to global firms.

Pouya: Of course, who can disagree that there should be a better emphasis on differentiation and tailoring of products and services to customers with local-specific needs? What I don’t agree with is the claims that a local-global economy is unable to respond to this need. We are living in the age of data and analytics. Thanks to technology companies we have gained the ability to learn about specific consumer needs in not just every location, but in every profile category. We have also come a long way from operating inflexible manufacturing processes. These days, companies are able to mass produce their products on the same production line, while making very specific adjustments based on consumer orders. Think about Dell computers for a moment. Three decades ago, who would have imagined a company to grow as much as Dell did while pursuing mass-customization? I understand that there is still a legitimate argument on the risk of overreliance and lack of diversification across the supply chain. I just think that we are heading in a direction that 1) larger corporate entities will take steps to diversify their own value chains, and, 2) we will see new global competitors emerging in other geographies. What I worry about is that the severe impact we currently wrestle with may grant further legitimacy to isolationist policies and raise the barriers for global trade.

David: Your concern about tariffs etc. to manipulate the local versus global supplier is a valid one in my opinion. I would be against these artificial inducements to influence where something is produced or delivered and think that tariffs or other barriers to global trade are not necessary for locally produced products and services to be competitive with global giants—even with global giants increasingly efficient in customization. I believe going local has the benefit of a shorter supply chain (try waiting for four weeks for something to arrive in quantity from China), smaller volumes to allow for (hopefully) quicker customization, a local responsive network and increasingly a buy local flavor. I also think the localization provides for a more resilient business relationship because you can always go with mass produced global company products and services in a pinch if for some reason the local alternative runs into a problem. I think that the pandemic will have business people value more highly a diversified and increasingly local supply chain. Even though it is hard to cost that out in a financial statement, think of it as insurance for the seemingly inevitable black swan.

Pouya: Having a local supply chain certainly has its benefits; no quarrel there. But when you are a larger corporation with lots of resources that help you overcome the distance barrier, then it is only a matter of time before your operations regress toward operational procedures that maximize short-term efficiencies. As long as investors are interested in quarterly returns, then any long-term risk mitigation approach by management will lack the incentive to pursue. It is like a classic “diversification discount” scenario where investors are interested in buying stocks of companies that are less unrelated diversified and hence are more vulnerable against volatility, at the same time that they diversify their investment portfolio. Here, unless the global-local approach holds high market fragmentation and emergence of numerous competitors, I have a hard time to see it happening, unless through regulation. But I also can’t ignore that to some extent I agree with your take on the benefits of the global-local economy paradigm, but my skepticism once again stems from pressures from investors and financial markets.

David: I agree that, left to a perfect market and rational managers and executives, production efficiencies will eventually win out and large global firms will dominate until theoretically there is only one global firm per product or service. Left to a perfect market and rational managers. Maybe I have more faith in the regular intellectual and emotional biases we all have based upon behavioral economics and that humans are many times not rational and markets are not efficient. If we rely on recency bias then the pandemic will loom large in most major production and supply chain decisions of managers — which I assert favors local production. Also, the market has frictions in it which also are exacerbated by the pandemic, again, I believe favoring local production. But, as the memory of the pandemic fades, so too will these biases until the drive for efficiency gains the upper hand — favoring global firms. I am not sure how to adequately alter this wavering unless we are able to successfully fight this recency bias — and our inherent irrationality.

Pouya: Really good points. What I think we are both in agreement is that this may be a tipping point that could define the future of our economy, and that of the world’s. It will be interesting to see how things play out.

David Kunsch is an Associate Professor of Strategy at St. John Fisher College. Pouya Seifzadeh is an Assistant Professor of Strategy at State University of New York at Geneseo.