The End of Globalization?

Multinational corporations are more vulnerable than you think

July/August 2002 Issue

By Michael Shuman

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Globalization, argues New York Times columnist Tom Friedman, is "making it possible for . . . corporations to reach farther, faster, cheaper, and deeper around the world" and is fostering "a flowering of both wealth and technological innovation the likes of which the world has never before seen." To David Korten, a former Ford Foundation official and now a prominent globalization critic, it is "market tyranny . . . extending its reach across the planet like a cancer, colonizing ever more of the planet’s living spaces, destroying livelihoods, displacing people, rendering democratic institutions impotent, and feeding on life in an insatiable quest for money." The careful listener to this by-now-familiar debate can actually discern a striking point of agreement: Both sides assume, one with euphoria and the other with fear, that global-scale business is the wave of the future. Yet there’s mounting evidence that multinational firms may be less capable of delivering competitive products than national or local firms.AT&T stunned financial analysts in October 2000 when it announced that it was carving itself up into four, more versatile, companies. In May 2001, British Telecom unveiled a plan to spin off its wholesale arm, part of its wireless business, and numerous assets in Asia. Other self-initiated split-ups and slim-downs seem likely to follow. These developments are important reminders of a point all but forgotten in the globalization debate: Scale matters.Any first-year economics student learns that firms can lower average costs by expanding, but only up to a point. Beyond that point (according to the law of diminishing returns to scale), complexities, breakdowns, and inefficiencies begin to drive average costs back up. The collapse of massive state-owned enterprises in the old Soviet Union and the bankruptcies of Chrysler and New York City are notable reminders of a lesson we should have absorbed from the dinosaur: Bigger is not always better.A telling example in economic life is commercial banking. Despite all the headlines about mergers, researchers at the Federal Reserve in Minneapolis have concluded that "after banks reach a fairly modest size [about $100 million in assets], there is no cost advantage to further expansion. Some evidence even suggests diseconomies of scale for very large banks." The Financial Markets Center, a financial research and education organization, has found that, compared to banks with far-flung portfolios, those that concentrate lending in a geographic region were typically twice as profitable and wind up with fewer bad loans. While the press has diligently reported national and global mergers, it has largely ignored the recent proliferation of community banks, credit unions, and microloan funds.

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The End of Globalization?

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