I still remember a TV interview a year ago in Mumbai where the first question I was asked—quite seriously or, should I say, flatly?—was why I still thought the world was round. Spouting such attitudes—the flattening of the world, the death of distance and the disappearance of differences across countries—seems to be considered a hallmark of global thinking. But I prefer to think of it as “globaloney.”

Why? Because most types of economic activity that could be carried out within or across national borders are actually still concentrated domestically. Not convinced? Ask yourself, of all the capital being invested around the world, how much is foreign direct investment by companies outside of their home countries? Maybe you’ve heard the globaloney about “investment knowing no boundaries,” and so on. The fact is, the ratio is generally less than 10% and, while it may be pushed higher by merger waves, has never reached 20%.

As the chart below demonstrates, the actual levels of globalization associated with telephone calls, long-term migration, university enrollment, stock investment, and trade as a fraction of gross domestic product (GDP)—look at the blue bars—resemble the data presented above: they fall much closer to 10% than the levels close to 100% that one would expect if one took the gurus of globaloney at their word.

Most people aren’t, of course, quite that credulous. But globaloney does seem to have influenced their perceptions. Thus, 400 respondents to a poll about globalization levels on HBR.org came up with the responses summarized in green in the chart below. Note the systematic tendency to overestimate globalization levels, and by a wide margin: the responses (the green bars) averaged 30% versus real values (the blue bars) that averaged 10%. And to aggravate matters, respondents with more than 10 years’ experience actually are farther off the mark than ones with less experience!

I find all this alarming. But how about you: do you think it's harmful that managers assume the world to be more globalized than it actually is? In my next post, I will explain why (I think) globaloney is bad for you.

Read Pankaj Ghemawat's next post, "Globalization Myths Versus Reality Continued"

HARVARD BUSINESS ONLINE RECOMMENDS:
Redefining Global Strategy: Crossing Borders in a World Where Differences Still Matter (Hardcover)
The Origin of Wealth: Evolution, Complexity, and the Radical Remaking of Economics (Paperback)
Marketing Across Borders: It's a Big, Big World (Book Chapter)

Some of the commentary on my last post took issue with my focus on levels of globalization, as embodied in my “10% presumption” chart— and suggested that I focus on trends instead. This is actually very useful to do because one of the standard evasions glommed on to by the purveyors of globaloney is that even if the world isn’t quite flat today, it will be tomorrow. In fact, I just heard Colin Powell say exactly that at an after-dinner talk.

So lets actually look at the trends on indicators of globalization—some of which I presented snapshots of in my last post. A number of indicators actually exhibit declines, depending on the time period employed. Thus, rough calculations suggest that the fraction of the world’s population accounted for by long-term international immigrants was slightly higher in 1900 -- the high-water mark of an earlier era of migration—than in 2005. The decline since 1900 in the size of net capital flows, measured by current account imbalances divided by gross domestic product, is even more marked. And while it would be nonsensical to look at the Internet over that long a time period, there is general agreement that localization/regionalization of Internet traffic has increased in the last decade, at the expense of true globalization, for reasons ranging from increasing peer-to-peer traffic to the development of alternatives to the U.S., which not that long ago, was the hub for virtually all international switching

For other indicators, new records are being set, but this has happened only relatively recently, and only after long periods of stagnation and reversal. For example, foreign direct investment (FDI) stocks divided by GDP peaked before World War I and didn’t get back to that level until the 1990s. In fact, based on such data as well as those presented above, some economists have argued that the most remarkable development over the last few centuries was the declining level of internationalization between the two World Wars, of which this is a particularly striking illustration.

And finally, while there are measures along which pre-World War I levels of integration were surpassed relatively early in the post-World War II period, e.g., trade, note that the trade-to-GDP ratio has increased from 20 percent in 1979 to 27 percent by 2004. Extrapolating over the next 25 years would imply a trade-to-GDP ratio of less than 35 percent by 2030 -- or perhaps closer to 30 percent, if one stripped out the effects of double-counting. Unprecedented yes, but hardly apocalyptic. Which is why international economists still focus on explaining shortfalls from complete integration rather than rapid progress towards that extreme state.

The broader point, then, is that the world is not only far from completely integrated today, but is likely to remain that way for the next few decades, at least. And for that reason, the question of whether globaloney is good or bad for you is of long-term rather than fleeting interest. So one more time—what’s your answer to that question?

Author’s note: These points on trends are backed up by my much more detailed review of the evidence in "Semiglobalization and International Business Strategy," Journal of International Business Studies 34, no. 2 (March 2003): 138-152.

HARVARD BUSINESS ONLINE RECOMMENDS:
Winning the Globalization Game (HBR Article Collection)
Dealing with Darwin: How Great Companies Cope with Globalization and Commoditization (BSR Article)
How Countries Compete: National Strategies for Globalization)