The new rules of globalization

In the past few years, Pfizer has encountered globalization’s new phase. As part of the Indian government’s efforts to make medicine accessible to as many people as possible, in February 2013 India’s Patent Office revoked Pfizer’s patent for the cancer drug Sutent and granted a domestic manufacturer, Cipla, the right to produce a cheaper generic version. India’s Intellectual Property Appellate Board has since set aside the decision and has directed the Patent Office to reassess the case. In China, meanwhile, the government has been slashing drug prices to reduce health care costs. Beijing established price ceilings on essential drugs in 2009 and lowered the ceiling by around 30% in 2011, and it has pledged to expand the list of essential drugs to more than 500 medications by 2014. Such moves pose major risks for a multinational company like Pfizer: Lower prices create disincentives for quality control, and China’s hospitals, which rely on drug sales for profits, are pushing inexpensive locally made products.

Until 2008 going global seemed to make sense for just about every company in the world. Western markets were extremely competitive, population expansion had slowed and incomes had flattened, and corporate operating costs were rising. Developing nations, by contrast, boasted population growth, rising salaries, relatively low wages, and a welcoming climate for foreign investment. As distances shrank because of modern transportation and communication technologies, chasing growth globally became universally logical, and trade and capital flows surged.

In the aftermath of the recent global recession, we’ve entered a different phase, which I call guarded globalization. Governments of developing nations have become wary of opening more industries to multinational companies and are zealously protecting local interests. They choose the countries or regions with which they want to do business, pick the sectors in which they will allow capital investment, and select the local, often state-owned, companies they wish to promote. That’s a very different flavor of globalization: slow-moving, selective, and with a heavy dash of nationalism and regionalism.

Several factors have contributed to this trend. One, many governments find it risky to continue opening industries to foreign competition, because local companies and consumers often attempt to block new entrants. Two, some countries have built large foreign exchange reserves and boosted exports, so they are no longer trying to attract large amounts of foreign investment. Three, governments are defining national security more broadly. As financial instability, cyber espionage, and increases in food prices, for instance, become global issues, the financial services, information technology, telecommunications, and food sectors have all been politicized.

Four, China, which will soon have the world’s largest economy, now establishes, rather than follows, international business rules and norms. Socialism with Chinese characteristics is casting a long shadow over globalization. Finally, and related, policy makers in developing countries are intervening to create uneven playing fields that give local players an advantage. The state perceives more and more sectors to be of strategic importance and deters foreign companies from entering them. Indeed, the rise of state capitalism in some of the world’s most important emerging markets has shifted the tectonic plates, as I will describe. Globalization now comes with new costs and risks.

In globalization’s heyday, strategic sectors—those in which governments take an active interest—and nonstrategic ones were easy to identify.

Multinational companies could enter some industries, such as soft drinks, all over the world; other sectors, such as aircraft manufacturing, were off-limits. That’s why Coca-Cola sells its products in more than 200 countries today, while Lockheed Martin generates 80% of its revenues from sales to the U.S. government and employs 95% of its workforce in the United States. In the new era of guarded globalization, however, any sector could prove to be strategic, depending on a government’s attitudes and policies.

Which Industries Will Matter in 2014?

Indeed, between the extremes of a Coca-Cola and a Lockheed Martin, numerous companies are drawing fresh levels of official scrutiny, and the state’s reach now extends well beyond traditionally key sectors such as arms. Companies must realize that these changes will have an impact on their strategies, but responding to those changes will not be easy.

The Rise of State Capitalism in Emerging Markets

State capitalism, which distorts the workings of free markets and thus considerably alters globalization, has become popular in emerging markets other than China, such as Russia, India, and Brazil. Leaders in those countries know from experience that the market is crucial to growing the economy and improving living standards—and therefore helps autocratic or corrupt governments stay in power. But they also realize that if they allow the market to decide which companies win, they risk losing political power, because they will no longer control job creation and their citizens’ living standards. They may also inadvertently enrich those citizens who would challenge their power. –Ian Bremmer, http://hbr.org/2014/01/the-new-rules-of-globalization/ar/1?utm_campaign=Socialflow&utm_source=Socialflow&utm_medium=Tweet