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Fracturing World

Localisation is the new globalisation

Many factors are disrupting the equilibrium multinationals have enjoyed for decades. In response, organisations must adapt both their strategies and their tactics.

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The decades following World War II saw a proliferation of multilateral organisations and alliances aimed at aligning interests for efficiency and the greater good: NATO for military and security affairs; the OECD and World Bank for taxation, regulation and finance; international trade organisations; and the World Health Organization. Countries and companies that embraced the order created by these global efforts have thrived. After years of impressive growth, exports now represent about a quarter of global output. Multinational corporations (MNCs) have placed global trade at the centre of their value creation strategies. From 2000 to 2018, US$6.7tn of the US$9.2tn in growth of assets of MNCs has come from foreign affiliates. The average MNC in the OECD is physically present in 28 countries and digitally present in 34.

Multinational companies have capitalised on globalisation by expanding rapidly outside their home markets in the last two decades.

Growth for UNCTAD’s top 100 non-financial multinational enterprises1

Foreign
Domestic

Assets, US$tn

2000 total: 6.3
Foreign: 2.6
Domestic: 3.7
2018 total: 15.5
Foreign: 9.2
Domestic: 6.3

Sales, US$tn

2000 total: 4.8
Foreign: 2.4
Domestic: 2.4
2018 total: 9.4
Foreign: 5.6
Domestic: 3.8

Employment,
millions of employees

2000 total: 14.3
Foreign: 7.149
Domestic: 7.149
2018 total: 17.5
Foreign: 7.9
Domestic: 9.6

Of course, the benefits of the global efforts haven’t been shared equally—within countries, within industries or within trading systems. In recent years, those inequities, combined with fundamental changes in the nature of goods and services traded, have led to a growing wave of international backlashes and conflicts over the distribution of value. And there’s more to come, as COVID-19 has sharply amplified the reaction. As we look to 2021 and beyond, it’s clear that companies will be reckoning with a host of territorial disputes surrounding taxation, trade, regulation of vital industries and supply chains. Is localisation the new globalisation?

Global disputes—whether they are physical military conflicts or clashes over trade and tax— have always inevitably been linked to value, from the wars fought by European powers over control of trade routes to the Americas in the 18th century to the so-called cod wars of the 1950s and 1960s waged over access to North Atlantic fishing grounds. The good news is that the predominant means of dispute has shifted from physical military confrontations over the control of resources to a more nuanced set of disputes surrounding data, information and other intangible assets.

It’s common to hear people say that data is the new oil. That’s true, and it also reflects a longer shift in value from tangible to intangible assets. In the 1970s and 1980s, the most valuable resources lay in the ground in specific geographic territories, and companies had to be physically present in order to extract value from them. In the 1990s and 2000s, fixed infrastructure networks, like telecommunications networks, became extraordinarily valuable. Again, generally speaking, telecom infrastructure was tied to particular geographic areas and had substantial physical plants.

Today, information, data and technology are the primary sources and stores of value. The most valuable companies in the world don’t really own much in the way of reserves or physical assets. They own intellectual property, patents, R&D and their brands. They distribute their products and services via the internet and mobile networks. Alibaba, Alphabet, Amazon, Apple, Facebook, Mastercard, Microsoft, Tencent and Visa all have immense revenues and cross-border business. A great deal of their vital infrastructure resides in the cloud or is distributed broadly. Consider one of the most valuable single products in the global marketplace: the iPhone, with annual sales of about 200m units. Trade statisticians treat the ubiquitous phone as a good. Most of its value, as we know, lies not in the metal, glass and silicon used to make it, but in the brand, IP, software and other intangibles. The two global superpowers in intangibles today are the US and China. So it’s no surprise they are clashing on a range of trade issues.

Sovereign states, whether they are democracies or authoritarian regimes, work to advance their self-interest on economic development, security and the environment. And with the rise of global trade in data and intangibles, we’re seeing a sharp increase in the measures that countries are taking to try to protect their citizens, their industries and their national security.

In the tax arena, for example, as the Tax Foundation has reported, “About half of all European OECD countries have either announced, proposed, or implemented a digital services tax (DST), which is a tax on selected gross revenue streams of large digital companies.” Such taxes tend to fall mostly on US-based companies.

In trade, fundamental conflicts between major trading powers seem to be the order of the day. The US and China, the two largest economies in the world by GDP, remain mired in a series of trade disputes that have involved tariffs, challenges to market access and bans on specific companies. The new administration of President Joe Biden has pledged to enact “buy American” programmes as part of its proposed investment programme.

Whether it was for Standard Oil in 1911 or AT&T in 1984, regulators have historically intervened to break up powerful companies that dominated vital technology industries. Today, regulators in many countries are weighing actions aimed at constraining the activities of the large platform companies. As they do so, they balance their desire to regulate the sector with the need to encourage the development of competitors that can compete against the dominant US- and China-based players. (It is an interesting question as to why Europe has not produced major technology platforms.)

When it comes to supply chains, localisation has taken on a different flavour. Due to the pandemic, countries have taken steps to build national stockpiles and encourage the domestic manufacture of critical goods such as medical supplies, PPE and ventilators—precisely so they won’t be dependent on international trade to fulfil basic requirements. Meanwhile, countries large and small have taken steps to secure adequate supplies of vaccines for their own citizens. The moves, while completely understandable and in most instances necessary, will have the effect of further reshaping established trade links and supply chains—not just those surrounding pharmaceuticals and healthcare, but also for energy and food. 

Taken together, the moves toward localisation are disrupting the equilibrium multinationals have come to enjoy in recent years. Localisation may not be with us to stay; as countries focus on promoting economic growth, they will likely return to globalisation as a path to prosperity. But in the interim, this is the new reality.

So what does this mean for leaders operating in a global context today?

A few things. Both strategies and tactics will have to evolve to be effective in the new realities. Don’t assume that the forces that have led your organisation to fantastic global growth in the past will propel similar growth in the future. The global economy is still expanding, and new relationships and markets are continually being forged. But leaders must be prepared to negotiate a world in which there are more local conflicts, considerations and barriers. Companies may have to evaluate carefully when it makes sense to shorten supply chains, even if some efficiencies may be lost temporarily. In this new world, leaders will have to dig in more deeply to develop the ecosystems that will enable localisation to succeed. That includes engaging with governments about the policies and structures that encourage resilience.

On what is an already crowded agenda, CEOs have to become more dialed in and attuned to regional and national changes in policy and their implications. And they may have to take a more selective approach to the appealing and vital imperative to break into new markets: they should invest internationally only if they have the acumen and capabilities to compete and thrive in a more geopolitically charged world.

Read more articles by Richard Oldfield on strategy+business.


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Tom Seymour

Tom Seymour

PwC Asia Pacific Vice Chairman ; Australia Chief Executive Officer, PwC Australia

Richard Oldfield

Richard Oldfield

Global Markets Leader, PwC United Kingdom