Globalization and new strategies for growth

Policy has become more important and less predictable

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Negative effects of protectionism

Should there be a rise in protectionism in the overseas markets in which you operate, which of the following areas of your business would be negatively affected?

Increasing complexity of international supply chains

Source: Globalization Index 2011

Note:Total base = 992; scores shown = percentage of respondents

Possible global scenarios

How likely do you think it is that the following scenarios will occur in the next 12 months?

Increasing complexity of international supply chains

Source: Globalization Index 2011

Note:Total base = 992; ratings on scale of 1 to 5 where 1 = very likely and 5 = not at all likely; scores shown = percentage of respondents rating 1 or 2

Impact of a recession on protectionism

If the global economy were to experience a double-dip recession, what impact would you expect this to have on the overall level of protectionism?

Impact of a recession on protectionism

Source: Globalization Index 2011

Note:Base = 992; scores shown = percentage of respondents

Business impact of protectionism

Which of the following statements most closely describes your company's view on the impact of protectionism?

Impact of a recession on protectionism

Source: Globalization Index 2011

Note:Base = 992; scores shown = percentage of respondents


Multinational companies may have global aspirations, but policy remains a local affair.

As they diversify their geographical footprint, companies must deal with bureaucratic and regulatory obligations. Governments also must balance the need to attract investment with unpopular measures that improve fiscal health.

Almost 90% of our respondents expect to see an increase in protectionist measures if the global economy slides into a double-dip recession.

Some governments also may be tempted to enact protectionist measures to shore up their domestic competitiveness. In the immediate wake of the financial crisis, world leaders resolved to resist a slide into protectionism.

"When you consider how much the US and European economies have suffered, the natural outcome should have been more protectionism, so it is very encouraging that this has not taken place overall," says Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore. "There seems to be an intellectual consensus that we will shoot ourselves in the foot if we begin to raise tariff barriers."

Increased levels of protectionism can have a major impact on business growth and competitiveness. More than half of our survey respondents say that an increase in protectionism could have a negative impact on their growth prospects, although only just over one-third would see it as a deterrent to overseas investment.
 

Negative effects of
protectionism

Robert Lawrence, Albert L. Williams Professor of International Trade and Investment at Harvard University, thinks that overall, countries have shown impressive restraint since the commitment at the G20 meeting to refrain from imposing new measures.

"If you look at border barrier protection and tariffs, for example, the performance from a global standpoint has been remarkable," he explains. "Clearly, there are examples where countries have raised barriers or done selective things but, at the same time, some countries have lowered their levels so, on average, they have remained consistent."

Will an increasingly bleak economic outlook weaken this resolve? Many governments are running out of policy options to deal with the current slowdown, and are facing mounting pressure from electorates to restore economies to health and tackle high levels of unemployment.

Among our respondents, more than half think that a deteriorating economic environment will cause a dramatic increase in tit-for-tat protectionism. Almost 90% of our respondents expect to see an increase in protectionist measures if the global economy slides into a double-dip recession.

Possible global
scenarios

Actions taken by governments now extend beyond traditional trade protectionist measures to include measures such as competitive currency devaluations. About half of our respondents think that policy-makers will intensify these devaluations.

Impact of a recession
on protectionism

 

Response: build a strategy for connecting with governments

1. Engage with policy-makers to make the right decisions.

Faced with a potential uptick in protectionism, many business leaders may conclude that the issue is out of their hands. Only 15% of companies say they are fully prepared for an increase in protectionism and have factored it into their strategic plans. This suggests that most simply hope that they will not be affected.


Business impact of
protectionism

Companies can take action to deal with protectionism. Firstly, business leaders should engage with governments and trade departments to prevent counterproductive measures.

"Often, government officials do not understand that globalization is a creator of jobs and that it actually enhances living standards of people in many different countries," says Daniel Brutto, President of the logistics firm UPS International. "We have to get government officials outside of their own environments to understand that the more we can increase trade around the world, the more high-end jobs we can create in the domestic market."

The second action is to correct misinformation among consumers.

"If you ask most Americans what percentage of US personal consumption expenditure is accounted for by expenditures and products officially made in China, you typically end up with estimates more than 10 times as high as the reality," explains Ghemawat.

"In a climate where the information is so clearly erroneous, and often so biased against globalization, there is considerable value in disseminating information that corrects these assumptions."

A third action is to work in partnership with governments on infrastructure, education or other development projects, thereby building rapport and gaining the clout to initiate effective dialogues on policy issues.

Wim Elfrink, Chief Globalization Officer at Cisco, points out that businesses must "play holistically" if they want to participate successfully in a market: "It is not just about selling products. You also have to develop government relations, build relevance and ensure that the investments are socially responsible."

 

2. Combine local knowledge with global coordination.

Fast-changing local policy can have a dramatic impact on the profitability and prospects for a cross-border investment. The global tax environment, for example, has never been so dynamic.

According to our 2011-12 Tax risk and controversy survey, 78% of the world's largest companies (with revenues of US$5b or more) say they are already experiencing greater risk or uncertainty around legislation, and this figure increases for those in rapid-growth markets.

Managing risks and meeting obligations requires companies to have a blend of local, on-the-ground knowledge and the ability to coordinate at a global level.

"Relationships with local legislators and regulators are important, but if you don't also have the broader perspective of the global strategy, operations and tax position of the company, then you won't be able to make good local decisions," says Mark Weinberger, Global Vice Chair for Tax at EY.

 

3. Build stronger relationships with tax administrations.

In some markets, companies are forming enhanced relationships and alternative dispute resolution mechanisms with tax administrations. Although approaches vary, a common thread is that there is a channel for taxpayers to interact with administrations and resolve issues or disputes without resorting to litigation.

Weinberger recommends having "adequate, easily accessible documentation that can be provided when challenged, as well as a transparent relationship with authorities so that issues can be addressed early rather than waiting for an audit or controversy further down the road."