Today Global Tension and Its Impact on the Future

World economies continue to grow throughout history, but the way its grow and the balance of power that drive it is constantly shifting. From the ancient of Egypt and Greece to nowadays western advanced civilization, the balance is moved towards those who have advantages on Science, Technology, Art, Commerce, and Economical transactions. No wonder every country trying hard to own those capabilities either internally or externally.

In an effort to that competitive edge, China declared its “Made in China 2025” in 2015. It was an ongoing initiative to gain global powerhouse country by leading several high-tech industries such as robotic, aviation, AI, and new energy vehicle. The plan was aiming to replace China’s dependency on imported technology from developed countries through extensive knowledge transfer and build their own capability. The efforts seem paid well for China, as they continuously enjoy high GDP growth driven by the large scale of long-term capital investment and productivity

Their close neighbor, India, also announced the same through “Make in India” project powered by their low-cost but high-quality manpower capability, particularly in tech service industry. India successfully attracting foreign investment through a combination of relaxed regulation and market attractiveness. The investment thus speeds up the capacity building process. The initiative drives the country’s GDP to become one of the highest economic growths, just second to China.

But the developed countries also not just standstill to witness these phenomena. Sparked by a large trade deficit and acquired Intellectual property mainly by China, the US announced “American first” policy. The policy aims to bring back the favor to their side by introducing several trade barriers to induce local manufacturing and preventing offshore activities. The “fight back” materialized by several moves such as increasing import tariffs and stricter work visa permits which both aim to bring back manufacturing and services to the US. The tensions heating up as both countries retaliate against each other, while the rest of the world gets the slowing down effect due to this event.

The stalemate discouraged global trade activities, not only for those who directly involved but also for other countries since nowadays the economies are well connected. International trade supposed to bring more benefits for any countries involved because each nation can further focus on what they best at, instead of chasing things that they struggle to produce. However, due to several reasons such as Diffused benefit, low understanding of trade gain and risk of first-mover advantage, every country tends to bias towards the favor and prefer to procure everything “in-house”.

The escalation of tension then raises questions about the future of the world economy. Is it moving towards bipolar block as it happened during the cold war era? Will it be US block against China? or it is just a temporary phenomenon that will return to its initial state eventually?

The writer believed that the current tension will significantly impact the new world economies’ balance in the future. Many articles wrote that the fight will not end anytime soon, especially with new Covid accusations. However, I believed it will not be escalated to the level cold-war (block) era because of several reasons below:

  1. Both countries’ economies nowadays are much more connected and dependent on each other. The United States needs China as one of the largest big markets for their agricultural product and cheap labor to make their company more efficient. On the other way around, China needs the US to sell their product plus their source of technology transfer. Retaliation will bring more harm than good. For example, instead of bringing back industries to US, the high tariff just make company shift their operation from China to Vietnam.
  2. Other Countries learned, in a hard way, that choosing the block is not bringing anything good in the past. Present-day, many countries are preferring to have a neutral position to encourage global cooperation and mutual respects.
  3. Most of the countries already experienced the great benefits of global cooperation. One of the examples is how world scientists collaborate fighting the current Covid-19 crisis by sharing the genome sequence for developing vaccines. The co-work come to fruitful with many vaccines already in the final phase of trial.

Considering above reasons, I rather hold the view that in the future, we are entering a multi-polar world, where power resides in spheres, rather than the view of one great power replacing a declining power. The world balance will be more distributed among traditional developed countries and “the emergings”, which in the end will create better balance compared with previous US-western dominated.

Swim or Sink: How Firms Should React Towards Future World Economy

We expecting to see world economy to be more “distributed” in the future than what happen now. More countries will participate for the new world balance order and more of them become new member of developed club. This condition will provide both new opportunities for any firm whether its local company to spreads their wing globally or any global company to further expanding their international presences. However, in the other side of coin, the changes also become challenge even a threat if firms cannot anticipate and adopt towards those movement. There are several changes that writer expect to happen and how it will influence how company should operate.

First, Firm can expect that several emerging countries like Vietnam, Brazil, Indonesia, India and some other countries, will become more significant source of growth in the future. Businesses need to adopt flexible, dynamic, and patient strategies to navigate these rapidly evolving emerging markets. These will arise as these economies progress into new industries, engage with world markets and as their populations – which will also be more youthful on average than in advanced nations – get richer. They will become more attractive places to do business and live, attracting investment and talent. So, for any company that do not want to mis that opportunity have to start analyzing which country / location to be prioritized and which entry mode to be chosen.

Second, as every nation start to build their own capability, we should also expect a local player will give stronger competition due to its accumulated knowledge and technology. Any international firm should really focus to emphasize they competitive edge either by doing more resource aggregation to achieve better economy of scale, or through local cooperation to minimize risk of foreign liability.

Third, there will be more demand for any countries related to technology/capability transfer. Every government will give more preference to firms that able to contribute to nation building capabilities rather than just exploiting their big market. The other way to show contribution is by touching countries Bottom of pyramid and giving them access to our product or through CSR. And finally, every company must prepare at some extent, to transfer some of knowledge and technology to the destinated country while at the same time protecting company competitive edge.

Fourth, global brand will be less relevant than before. As every country promoting “made in-house”, consumers will slowly but sure to be skewed to use home brand. Businesses should be prepared to adjust their brand and market positions to suit differing and often more nuanced local preferences. An in-depth understanding of the local market and consumers will be crucial, which will often involve working with local partners. It is also important for global company to consider launching local brand which more sounds to consumers.

Fifth, corporate organization will be getting more decentralized so that able to react faster and agile towards business dynamic. Thus, it is important for any firm to adjust their global organization structure to adapt with the trends. The structures also need to be filled up by credible talent with proper knowledge of global business environment so that minimize risk of conflict with the subsidiaries. On top of that, it is also important to also develop their local talents to fill strategic position as it will help companies to match local needs.

Sixth, it is expected more companies in emerging country to go global (including that which initially local company in emerging countries). This will rise demand of global talent that have deep understanding of global operation such as cross border evaluation and managing currency risk. Having them inside of organization will become handy to minimize the risk of being foreigner in the targeted expansion market.

Becoming Global: Knowledge, Skillset and Capability Required

Being Global is not just the matter of cross-border geography, but the main important is about the mindset. None of firm can avoid the impact of globalization whether its run locally or multi-nationals. The influence even become more crucial in the future as impact of the new balance of world economies. In order to survive its inevitable for any companies to acquire relevant knowledge, skill set and capability of global business. Some of the most important to be acquired are:

Determine and Develop company competitive Edge, it could be one of the most important first step. Whether you plan to keep local of going global, the threat already came. Identify your company “Right to Win” is the ultimate weapon to survive. The mix use of 3A framework (Adaptation, Aggregate or Arbitrage) will come to handy to decide the right balance of which need to be centralized for cost effectivity, and which need to decentralize for better relevance for local consumers. Example, for Food FMCG companies, its mandatory to not only ensure that our products have the high level of end consumers satisfaction but also at the same time own Right positioning through bulls-eye communications to local’s market perception.

Ability to analyze and prioritize which market to enter. Everymarket has their own level of opportunity and challenge. The ability to prioritize which market to be penetrated will be crucial for company long term global presence, because once we took the wrong market and failed in initial stage, it will impact company confidence to expand globally. When it come to prioritizing, its also advised to look not only to the size of market, but also towards our chance to success there. Applying CAGE framework (Cultural, Administrative, Geographical and Environment) will help a lot, as so many evidences said that the more similarity with home country the higher chance to success. Example, for Indonesian food FMCG companies, it always tempting to enter big market such as China with its huge population. However, there are a lot of differences such as distribution structure which is totally different since mostly dominated with modern trade such as supermarket and minimarket which operate in quite different way with traditional market which dominant in Indonesia. So, it may be better to start with other countries which share relatively similar such as South East Asia or India.

Decide which Entry mode to use. Depend on the degree of risk and controls, there are several modes of entry that firm can do to start exploring overseas market such as JV, wholly owned subsidiaries, Direct export etc. If the risk is high, it advised to start small through direct export to test the market acceptance. However, if it’s getting big (or the risk is low), company should decide whether to held Join Venture or Whole owned to establish entity in foreign market. It’s also wise to consider their culture, whether they need to have full control or willing to share it to minimize the risk. I remembered that owner of my previous company once said, “We don’t do joint venture, simply because we don’t want to be controlled by other”.

Optimize organization structure. Finding the right balance between central and local team is recipe for failing if not manage it carefully. In natural, the local team always trying to propose for adaptation and customization, while the same time put in doubt for central team for lack of local understanding. Its substantial to have local team that understand about global context and the same time own central team that have deep understand towards local needs.

In summary, the future or world economies predicted to become more distributed among nations. Current emerging countries are predicted to become top five GDP in next 20-30 years. As for firm, preparing organization for being global is noteworthy to face these changes. Not only company should have the right products or services, but also capable human resources that understand International business. Those preparations will help firm to reduce their risk on process of going global while also optimizing the opportunity with it.