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Globalization

The State of Globalization in 2021 by Steven A. Altman and Phillip Bastian

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The State of Globalization in 2021

by Steven A. Altman and Phillip Bastian Published on HBR.org / March 18, 2021 / Reprint H068OK

Suriyapong Thongsawang/Getty Images

Cross-border flows plummeted in 2020 as the Covid-19 pandemic swept

the world, reinforcing doubts about the future of globalization. As we

move into 2021, the latest data paint a clearer — and more hopeful —

picture. Global business is not going away, but the landscape is shifting,

with important implications for strategy and management.

The Covid-19 pandemic is not likely to send the world’s level of globalization below where it stood during the 2008-09 global financial

crisis (the worst setback for international trade and capital flows in

decades), according to the 2020 edition of the DHL Global Connectedness

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Index, which we released in December. The index measures globalization

based on more than 3.5 million data points on trade, capital, information,

and people flows.

The only part of the index showing an unprecedented collapse due to

Covid-19 is people flows. Trade has rebounded strongly, capital flows are

recovering, and digital information flows have surged. Consider the

business implications of developments in each of these four areas:

1. Trade Flows

The rebound of world trade has surpassed even the most optimistic early

forecasts. Trade in goods dropped faster in March and April 2020 than

during the Great Depression and the global financial crisis. But it started

growing again in June and rocketed all the way back to its pre-pandemic

level by November. Despite early disruptions, trade turned out to be a

lifeline for economies and health care systems. Trade in medical products

and electronics (for working from home) soared, as social distancing

shifted spending from local services (e.g. restaurants) to imported goods.

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The trade turnaround should put to rest the idea that Covid-19 is the last

straw for global supply chains. Many companies have already shelved

pandemic-era reshoring plans, recognizing that concentrating production

at home often raises costs without boosting resilience. Diversification

across efficient domestic and/or foreign production locations, along with

investments in technology and inventory, usually makes more sense, and

surveys show more companies embracing these strategies.

Expect supply chain shifts to accelerate when business travel opens up

again, but with most pre-pandemic trends, such as China plus one

sourcing, continuing. With trade still flowing, companies risk falling

behind competitively if they miss out on imported inputs or export sales.

So, efforts to boost resilience need to fit into broader supply-chain

strategies addressing shifts in demand and production costs across

countries, geopolitical tensions, and advances in automation and other

technologies.

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2. Capital Flows

Cross-border investment flows were hit even harder than trade by

Covid-19. Investors withdrew record amounts of portfolio capital from

emerging markets at the onset of the pandemic, but these flows quickly

stabilized and then rallied in late 2020. Bold fiscal and monetary policy

responses have, thus far, prevented the Covid-19 crisis from turning into

another global financial crisis.

International corporate investment, however, is still subdued going into

2021. Foreign direct investment (FDI) flows, which involve companies

buying, building, or reinvesting in operations abroad, fell 42% in 2020, to

a level last seen in the 1990s. Firms are understandably cautious about

investing in new “greenfield” expansion amid a fragile and uneven

economic recovery. However, international mergers and acquisitions

(M&A) started to show signs of a pickup in late 2020, and the

international share of M&A activity held steady last year. Corporate

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dealmakers do not appear to have become more averse specifically to

international transactions.

Prospects for international business investment should brighten as

pandemic-induced macroeconomic uncertainty, lockdowns, and travel

restrictions begin to lift. But tighter screening of foreign takeovers on

national security grounds will remain in place, and supply-chain

diversification and partial reshoring will boost prospects for some projects

while making others less attractive. The business case for investing in

foreign operations will still rest on traditional drivers, such as access to

markets and resources, but risk assessments should place greater emphasis

on geopolitical factors in the present context.

3. Information Flows

Before the pandemic, there were signs of a slowdown in the globalization

of information flows. The growth of international internet traffic, phone

calls, royalties, and scientific collaboration had all diminished. But then

digital flows surged as the pandemic sent work, play, and education online.

International internet traffic soared 48% from mid-2019 to mid-2020, and

international telephone call minutes rose 20% in March versus the same

month the previous year. According to one study, cross-border e-

commerce sales of discretionary goods spiked 53% in the second quarter of

2020. All that said, though, domestic data and calls have also grown

significantly during the pandemic. So, we cannot say yet whether

information flows have become more — or less — globalized in 2020.

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Looking forward, the growth of digital flows will slow down again as the

pandemic-induced spike fades. But the 2020 digital flows boom will have

accelerated two longer-run shifts in the business environment. First, it

expands possibilities for services trade. The Covid-19 crash course in

remote work is teaching companies ways of working that can enable them

to tap more into foreign talent pools. Second, the expansion of cross-

border e-commerce can help smaller companies go global, but it also

means that companies of all sizes need to be on the lookout for new

competitors riding this wave into their markets.

4. People Flows

While trade, capital, and information flows all had positive roles to play in

the pandemic response, personal mobility had to be restricted to curb

transmission of the virus, prompting this year’s unprecedented decline in

people flows. The number of people traveling to foreign countries fell 74%

in 2020. International travel is not expected to return to its pre-pandemic

level before 2023.

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Business trips were just 13% of international travel before the pandemic,

but they play key roles in facilitating trade, investment, and the

management of global corporations. Travel supporting companies’

external sales and business development agendas is expected to recover

before travel for internal company meetings and participation in

conferences and trade shows. This implies that managers in multinational

corporations should pay special attention over the medium-term to effects

of travel restrictions on internal team functioning and learning and

innovation. Remember that global teams are more vulnerable than

domestic teams to misunderstandings and breakdowns of trust, especially

after long periods without in-person contact.

• • •

So, the pandemic has not halted most types of international flows. Nor has

it clearly turned the tide toward deglobalization moving forward. The DHL

Global Connectedness Index 2020 report also looks for evidence of the

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global economy fracturing into rival blocs. U.S.-China decoupling has

advanced somewhat since the onset of the trade war in 2018, but these

economies remain highly intertwined. China’s share of U.S. trade spiked

during the pandemic, and American multinationals such as Walmart,

Tesla, Disney, and Starbucks continue to invest there. Moreover, the

average distance across which countries trade has been on a modest rising

trend since 2016. This casts doubt on the contention that we are seeing a

big shift from globalization to regionalization.

Many governments have also taken major steps to open markets over the

past year. The Regional Comprehensive Economic Partnership (RCEP) was

signed in November, promising to simplify trade across a swath of the

Asia-Pacific region that encompasses almost one-third of the global

economy. The US-Mexico-Canada agreement (USMCA) entered into force

in July, replacing the North American Free Trade Agreement (NAFTA).

And trading under the African Continental Free Trade Agreement

(AfCFTA) began on January 1, 2021.

These moves are supported by public opinion data. Majorities across

several countries want more international cooperation, and polling in the

U.S. shows record-high support for globalization in general and for

immigration specifically.

The bottom line for business is that Covid-19 has not knocked

globalization down to anywhere close to what would be required for

strategists to narrow their focus to their home countries or regions.

Corporate globalization was never easy, but if international opportunities

and competitive threats mattered for a company before the pandemic, they

will surely continue to matter in 2021 and beyond. And since countries

that connect more to global flows tend to grow faster, we need more rather

than less globalization to accelerate the recovery from Covid-19.

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Steven A. Altman is a senior research scholar at the NYU Stern School of Business, director of the DHL Initiative on Globalization at NYU Stern’s Center for the Future of Management, and an adjunct assistant professor in NYU Stern’s Department of Management and Organizations.

PB Phillip Bastian is a research scholar at the DHL Initiative on Globalization at the NYU Stern Center for the Future of Management.

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For the exclusive use of J. GRAHAM, 2021.

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