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Why the World Isn't Flat

Author(s): Pankaj Ghemawat
Source: Foreign Policy, No. 159 (Mar. - Apr., 2007), pp. 54-60
Published by: Washingtonpost.Newsweek Interactive, LLC
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 I SN 'T F LAT
hasboundpeople,countries,
Globalization andmarketscloserthanever,
nationalborders
rendering ofa b)goneera-or sowe'retold.
relics But a close
lookat thedata reveals
a worldthat's
justa fraction
as integrated
as theone
we thought
we knew.Infact,more than90 percent
of allphonecalls,Web
and investment
traffic, is local.What'smore,eventhissmalllevelof
couldstillslipaway. IBy Pankaj Ghemawat
globalization

I deas will spread faster,leaping borders. most prominent proponents of globalization, is

Poor countrieswill have immediateaccess increasingly wired, informed, and,well, "flat."
to informationthatwas once restrictedto It's an attractiveidea.And ifpublishing trends
the industrial world and traveled only slow are any indication,globalization ismore than just
ly,ifat all, beyond it.Entire electorateswill learn a powerfuleconomic and political transformation;
things that once only a few bureaucrats knew. it's a booming cottage industry. According to the
Small companieswill offerservicesthatpreviously U.S. Library of Congress's catalog, in the 1990s,
onlygiantscould provide.In all theseways, thecom about 500 books were published on globalization.
munications revolution is profoundlydemocratic Between 2000 and 2004, therewere more than
and liberating,levelingtheimbalancebetween large 4,000. In fact,between themid-1990s and 2003,
and small, richand poor." The global vision that the rate of increase in globalization-related titles
FrancesCairncross predicted inherDeath ofDis more thandoubled every18 months.
tanceappears to be upon us.We seem to live in a Amid all thisclutter,severalbooks on thesubject
world that is no longer a collection of isolated, havemanaged toattractsignificant attention.
During
"local" nations, effectivelyseparated by high tar a recentTV interview, thefirst
questionIwas asked
walls, poor communicationsnetworksandmutu
iff quite earnestly-was why I still thoughttheworld
al suspicion. It's a world that, ifyou believe the was round.The interviewer was referringof course
to the thesisof New York Times columnistThomas a:

Pankaj Ghemawat is theAnselmo Rubiralta professor of
global strategyat IESE Business School and theJaime and
JosefinaChua Tiampo professor of business administration
at Harvard Business School. His new book isRedefining
Global Strategy (Boston: Harvard Business School Press,
September 2007).
54 FOREIGN POLICY
L. Friedman's bestsellingbook The World Is Flat.
2
Friedman asserts that 10 forces-most of which
enable connectivityand collaboration at a dis cn
tance-are "flattening" theEarth and levelinga
playing fieldof global competitiveness,the likesof
which theworld has never before seen.

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 ?, 7
gr:?77,4

o4,

?
oft

10

----------

41

Or

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 Why the World Isn't Flat i

It sounds compelling enough. But Friedman's examine thenumbers,thepicture isone of extreme

assertionsare simplythe latest in a seriesof exag connectivityat the local level, not a flatworld.
geratedvisions thatalso includethe"end ofhistory" What do such statisticsreveal?Most typesof eco
and the "convergenceof tastes." Some writers in nomic activitythatcould be conductedeitherwithin
thisvein view globalization as a good thing-an or across borders turnout to stillbe quite domes
escape fromtheancienttribalriftsthathave divided ticallyconcentrated.
humans, or an opportunity to sell the same thing One favorite mantra fromglobalization cham
to everyoneon Earth. Others lament itscancerous pions is how "investmentknows no boundaries."
spread, a process
at the end of
which everyone
will be eating the The io Percent Presumption
same fast food.
Their arguments (toPopulation)
Immigrabon U l j l
aremostly charac Phone
CallRevenues_
terized by emo ManagementResearch
_
tional ratherthan
DirectInvestment
_ l
cerebral appeals,
a reliance on Private
Charity j lI
prophecy,semiotic ManagementCases lj
arousal (that is, /
Patents _
treatingeverything Porfolio
Investment
as a sign), a focus i
Trade_
on technology as
the driver of
10% 40%.60% .
change,an empha 20% 80%
10%
sis on education Levels of
Internationalization Across Industries
thatcreates"new"
people,andperhaps
above all, a clamor
forattention.But theyall have one thingincommon: But how much of all the capital being invested
They'rewrong. around theworld isconductedbycompaniesoutside
In truth,theworld is not nearly as connected of theirhome countries? The factis,thetotalamount
as thesewriterswould have us believe.Despite talk of theworld's capital formationthat is generated
of a new,wired world where information,ideas, fromforeigndirect investment(FDI) has been less
money, and people can move around the planet than 10 percent for the last threeyears forwhich
fasterthanever before, just a fractionofwhat we data are available (2003-05). Inotherwords,more
consider globalization actually exists. The por than90 percentof thefixedinvestment around the
trait that emerges from a hard look at theway world is stilldomestic.And thoughmergerwaves
companies, people, and states interactis a world can push theratiohigher,ithas neverreached20 per
that'sonly beginningto realize thepotentialof true cent. In a thoroughlyglobalized environment,one
global integration.And what thesetrend'sbackers would expect thisnumber to be much higher
won't tellyou is thatglobalization's futureismore about 90 percent,bymy calculation.And FDI isn't
fragilethanyou know. an odd or unrepresentative example.
As thechart above demonstrates, the levelsof
internationalizationassociated with cross-border
THE 10 PERCENT PRESUMPTION migration, telephonecalls,management research
The fewcities thatdominate internationalfinan and education,privatecharitablegiving,patenting,
cial activity-Frankfurt, Hong Kong, London, stock investment,and trade,as a fractionof gross
New York-are at the height of modern global domestic product (GDP), all standmuch closer to
integration;which is to say, theyare all relatively 10 percentthan100 percent.The biggestexception
well connectedwith one another.But when you in absolute terms-the trade-to-GDPratio shown
56 FOREIGN POLICY

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at the bottom of the
chart-recedes most
of theway back down
toward 20 percent if
you adjust forcertain
kinds of double
counting. So ifsome
one askedme toguess
the internationaliza I
tion level of some
activityaboutwhich I
had no particular
information,I would
guess it to be much
closer to 10 percent
the average for the
nine categoriesof data
in the chart-than to
100 percent.I call this
the "10 Percent Pre
sumption."
More broadly,these
and other data on
cross-border integra
tion suggest a semi
globalized world, in
which neither the
bridgesnor thebarriers
betweencountriescan
be ignored.From this
perspective, themost
astonishing aspect of
various writings on
globalization is the
extentof exaggeration
involved.In short,the
levels of internation
alization in theworld today are roughlyan order in1999, and it isnow approaching zero forvoice
ofmagnitude lower than those impliedby global over-Internettelephony.And the Internetitselfis
izationproponents. justone ofmany newer formsof connectivitythat
have progressed several timesfasterthanplain old
telephone service.This pace of improvementhas
A STRONG NATIONAL DEFENSE inspiredexcited proclamations about thepace of
If you buy into themore extreme views of the global integration.But it'sa huge leap to go from
globalizationtriumphalists,
youwould expect to see predictingsuch changes to assertingthatdeclining
a world where national borders are irrelevant,
and communication costswill obliterate the effectsof
where citizens increasinglyview themselves as distance. Although the barriers at borders have
members of ever broader political entities.True, declined significantly,theyhaven't disappeared.
communications technologieshave improveddra To seewhy, consider the Indian softwareindus
matically during thepast 100 years.The cost of a try-a favoriteof Friedman and others.Friedman
three-minutetelephone call fromNew York to citesNandan Nilekani, theCEO of thesecond-largest
London fellfrom$350 in 1930 to about 40 cents such firm,Infosys,as hismuse forthenotionof a flat
MARCH IAPRIL 2007 57

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 I Why the World Isn't Flat 1

world. Butwhat Nilekani has pointedout privatelyis Trade flows certainly bear that theoryout.
thatwhile Indian softwareprogrammerscan now Consider Canadian-U.S. trade,the largestbilateral
servetheUnited States fromIndia,access isassured, relationshipof itskind in theworld. In 1988, before
inpart,byU.S. capitalbeinginvested-quiteliterally theNorth AmericanFreeTradeAgreement(NAFTA)
in thatoutcome. In otherwords, the successof the merchandisetradelevelsbetweenCanadian
tookeffect,
IndianIT industryisnotexemptfrompoliticaland geo provinces-thatis,within thecountry-wereestimat
graphicconstraints.The countryof originmatters ed to be 20 timesas largeas theirtradewith simi
even forcapital,which is oftenconsideredstateless. larlysized and similarlydistantU.S. states.In other
Or considerthelargestIndiansoftwarefirm, Tata words, therewas a built-in"home bias." Although
ConsultancyServices (TCS).Friedmanhaswrittenat NAFTAhelped reducethisratioof domesticto inter
least two columns in theNew York Times on TCS's national trade-the home bias-to 10 to 1 by the
mid-1990s, it stillexceeds 5
to 1 today.And theseratios
are justformerchandise;for
services,theratio is stillsev
Clearly,the
eral timeslarger.
borders in our seemingly
"borderless world" still
matter tomost people.
Geographicalboundaries
are so pervasive, they even
extendtocyberspace.Ifthere
were one realm in which
borders should be rendered
meaningless and theglobal
izationproponentsshouldbe
correct in theiroverlyopti
mistic models, it should be
theInternet.YetWeb traffic
withincountriesand regions
has increasedfarfasterthan
between them.Justas
traffic
in the realworld, Internet
links decay with distance.
dn' mttr People across theworldmay
gug,addstne be gettingmore connected,
but theyaren't connecting
with each other.The average
Latin American operations: "[I]n today's world, South Korean Web usermay be spending several
having an Indian company led by a Hungarian hours a day online-connected to the restof the
Uruguayan servicing American banks with Monte world in theory-but he is probably chattingwith
videan engineersmanaged by Indian technologists who friendsacross townand e-mailingfamilyacross the
have learned to eatUruguayan veggie is j'ustthenew nor countryratherthanmeeting a fellowsurferinLos
mal," Friedman writes. Perhaps. But the real question Angeles.We're more wired, but no more "global."
iswhy the company established those operations in Just look at Google, which boasts of sup
the firstplace. Having worked as a strategy advisor to portingmore than 100 languages and, partly as
TCS since 2000, I can testifythat reasons related to the a result,has recentlybeen rated themost global
tyrnnyof ime zones languages,and theneed for izedWeb site. But Google's operation inRussia
proximity to clients' local operations loomed large in (cofounderSergeyBrin's native country) reaches
that decision. This is a far cry from globalization pro only 28 percentof themarket there,versus64 per
pf"Onens orft-citeJd1 worldNAin which1Ageog'%raphy,1K Ilan cent fortheRussian market leader in search serv
ices,Yandex,and53 percentforRambler.
58 FOREIGN POLICY

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 Indeed, thesetwo local competitorsaccount for
91 percentof theRussian market foronline ads
linkedtoWeb searches. What has stymied Google's
expansion into theRussian market? The biggest
reason is thedifficultyof designinga searchengine
tohandle the linguisticcomplexitiesof theRussian
language. In addition, these local competitorsare
more in tunewith theRussianmarket, forexample,
developing paymentmethods throughtraditional
banks to compensate forthedearthof creditcards.
And, thoughGoogle has doubled its reach since
2003, it'shad to setup aMoscow officeinRussia
and hireRussian softwareengineers,underlining
thecontinuedimportanceof physicallocation.Even
now, borders between countriesdefine-and con
strain-our movements more than globalization
breaks themdown.
TURNING BACK THE CLOCK
Ifglobalization isan inadequatetermforthecurrent
state of integration,there'san obvious rejoinder:
Even if theworld isn'tquite flat today, itwill be
tomorrow.To respond,we have to look at trends,
ratherthan levelsof integrationat one point in time.
The resultsare telling.Along a few dimensions,
integration reacheditsall-timehighmany yearsago.
For example, rough calculations suggest that the
numberof long-term migrantsamount
international
ed to 3 percentof theworld's population in1900
thehigh-water mark of an earlierera ofmigration
versus2.9 percent in2005.
Along other dimensions, it's true that new
records are being set. But thisgrowth has hap
pened only relatively
recently, and only after
longperiods of stagnation
and reversal.For example, Wehavetoentertain
thepossibility
that
FDI stocksdividedbyGDP
peaked before WorldWar I be incompatible
withnational
and didn't return to that
leveluntil the 1990s. Sev given
voters'tendency
tosupport
eral economists have
argued that the most
remarkabledevelopmentover the long term was the
declining levelof internationalization between the
twoWorld Wars. And despite the records being
set,thecurrentlevelof tradeintensity fallsfarshort
of completeness,as theCanadian-U.S. tradedata
suggest. In fact,when trade economists look at
these figures,theyare amazed not at how much
trade thereis,but how little.
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It's also useful to examine the considerable
momentumthatglobalizationproponentsattributeto
the constellationof policy changes that ledmany
countries-particularly China, India,and theformer
SovietUnion-to engagemore extensively with the
international economy.One of thebetter-researched
descriptionsof thesepolicychangesand theirimpli
cations isprovidedby economistsJeffrey Sachs and
AndrewWarner:
"The yearsbetween1970 and 1995, and especially
thelastdecade, havewitnessed themost remarkable
institutionalharmonizationand economicintegration
among nations inworld history. While economic
integration was increasingthroughoutthe1970s and
1980s, the extentof integrationhas come sharply
into focus only since thecollapse of communism
in 1989. In 1995, one dominant global economic
systemisemerging."
Yes, suchpolicyopenings are important. But to
paint themas a sea change is inaccurate at best.
Remember the 10 PercentPresumption,and that
integration is only beginning.The policies that
we ficklehumans enact are surprisinglyreversible.
Thus, Francis Fukuyama's The End ofHistory, in
which liberaldemocracyand technologicallydriv
en capitalism were supposed to have triumphed
over other ideologies, seems quite quaint today.
In thewake of Sept. 11, 2001, SamuelHuntington's
Clash of Civilizations looks at leasta bitmore pre
scient.But even ifyou stayon theeconomic plane,
as Sachs andWarner mostly do, you quickly see
counterevidence to the supposed decisiveness of
policy openings. The so-calledWashington Con
sensus around market-friendlypolicies ran up
globalization
may
sovereignty-especially
moreprotectionism.
against the1997 Asian currencycrisisand has since
frayedsubstantially-for example, in the swing
towardneopopulismacrossmuch ofLatinAmerica.
In termsof economic outcomes, the number of
countries-in Latin America, coastal Africa, and
the formerSovietUnion-that have dropped out
of the "convergence club" (defined in termsof
narrowingproductivity and structural
gaps vis-a-vis
MARCH IAPRIL 2007 59
 the World Isn't Flat i
i Why

theadvanced industrializedcountries) is at least popular vote in theU.S., itwould lose." And even
as impressive as the number of countries that ifcross-borderintegrationcontinueson itsupward
have joined theclub.At amultilaterallevel,thesus path, the road fromhere to thereis unlikely to be
pension of theDoha round of trade talks in the eithersmoothor straight.Therewill be shocksand
summer of 2006-prompting The Economist to cycles, in all likelihood,and maybe even another
runa cover titled"The FutureofGlobalization" and period of stagnationor reversalthatwill endure for
depictinga beachedwreck-is no promisingomen. decades. Itwouldn't be unprecedented.
In addition,therecent wave of cross-border mergers The champions of globalization are describing
and acquisitions seems to be encounteringmore a world thatdoesn't exist. It's a finestrategyto sell
protectionism,ina broader rangeof countries,than books and even describe a potential environment
did thepreviouswave in the late 1990s. thatmay someday exist.Because such episodes of
Of course,giventhatsentimentsin theserespects mass delusion tend to be relatively short-lived
have shiftedin thepast 10 yearsor so, thereis a fair evenwhen theydo achieve broad currency,one
chance that theymay shiftyet again in thenext might simply be tempted towait thisone out as
decade. The point is, it'snot only possible to turn well. But thestakes are fartoo high for that.Gov
back the clock on globalization-friendly policies, ernmentsthatbuy into the flatworld are likelyto
it'srelativelyeasy to imagineithappening.Specifi pay toomuch attentionto the"golden straitjacket"
cally,we have to entertainthepossibilitythatdeep thatFriedman emphasized inhis earlierbook, The
international may be inherently Lexus and theOlive Tree, which is supposed to
economic integration
incompatible with national sovereignty-especially ensure that economics matters more and more
given the tendencyof voters inmany countries, and politics lessand less.Buying into thisversion
includingadvanced ones, to supportmore protec of an integrated
world-or worse, using itas a basis
tionism,ratherthan less.As JeffImmelt,CEO ofGE, forpolicymaking-is not only unproductive. It is
put it in late 2006, "If you put globalization to a dangerous. E9

[ Want to Know More?

Formore of Pankaj Ghemawat's writingson thestateof global integrationand business strategy,

see hisWeb site,Ghemawat.org. His book Global Strategies in a World ofDifferences (Boston:
Harvard Business School Press) isdue to be published inSeptember.

For a glimpseintotheworldviewofglobalizationproponents,there's no betterstand-inforthegenre

thanThomas L. Friedman'sTheWorld Is Flat: A BriefHistory of theTwenty-First Century (New
York: Farrar,Straus and Giroux, 2005), or his PulitzerPrize-winningforeignaffairscolumn in the
New York Times. To readmore on the inevitability of technologicaladvancement, see Frances
Cairncross'sThe Death ofDistance: How theCommunicationsRevolutionWill Change Our Lives
(Boston:Harvard Business School Press, 1997).

The Economist offersa harshcritiqueofFriedman'sanalysis in "ConfusingColumbus" (March

31, 2005), and Richard Florida offershis takeon thestateof globalization in "TheWorld Is Spiky"
(TheAtlantic,October 2005).

For the latestinstallmentof FOREIGN POLICY andA.T. Kearney'smeasurementof theworld's

most integrated nations, see thesixthannual "Globalization Index" (November/December 2006).
In "How Globalization Went Bad" (FOREIGN POLICY, January/February 2007), StevenWeber,
Naazneen Barma,Matthew Kroenig, and ElyRatner explore thehiddendangersof a world whose
integrationrelieson a singlesuperpower.

>>For links to relevant

Web sites,access to theFP Archive, and a comprehensiveindexof related
FOREIGN POLICY articles,go towww.ForeignPolicy.com.

60 FOREIGN POLICY

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