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– analyze the factors that influence free trade.

– Do countries have the right to act in their own strategic interests? What about their security interests?

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• Who are legitimate advocates for free trade – governments, companies, and/or NGOs?

• Who determines what is free trade? Do governments have the right? Do citizens have a right to have a say in this debate?

• What are the rules for state-run companies? Are they different from public companies run for the benefit of their shareholders?

MBA 200: Who is U.S.?

Drake University Online Programs 1

Assignment: Who’s Afraid of China Inc.? Paper

Assignment Objective

In this assignment, you will analyze the factors that influence free trade.

Overview

For this assignment, you will write a 5-page paper. Answer the following questions. Support your answers with sources from this week’s readings and other research performed on your own.

• Do countries have the right to act in their own strategic interests? What about their security interests?

• Who are legitimate advocates for free trade – governments, companies, and/or NGOs?

• Who determines what is free trade? Do governments have the right? Do citizens have a right to have a say in this debate?

• What are the rules for state-run companies? Are they different from public companies run for the benefit of their shareholders?

Requirements

Ensure your paper meets the following requirements.

• Is 5 pages in length, not including title page and references. • Follows current APA style and format guidelines.

o Feel free to use the attached template, which includes APA style reminders. o Refer to Other Resources, accessible from course menu in Blackboard, for APA

Resources. • Includes at least 3 references.

9/8/2020 Who’s Afraid of China Inc.? – The New York Times

https://www.nytimes.com/2005/07/24/business/yourmoney/whos-afraid-of-china-inc.html 1/5

By Steve Lohr

July 24, 2005

WILLIAM A. REINSCH, an avowed free trader, welcomes China’s rising stature in the international economy. After all, he is the president of the National Foreign Trade Council, an organization founded in 1914 to promote an “open world trading system.” Indeed, when he was a senior trade official in the Clinton administration, Mr. Reinsch was chided by some security analysts who said he was being soft on China by placing matters of commerce ahead of national security.

But even Mr. Reinsch is uneasy about China’s attempt to buy Unocal, a midsize American oil company. The outcome of the takeover contest for Unocal is uncertain, and last week its board embraced an improved offer from Chevron. Yet Cnooc, a government-backed Chinese oil company, still has the higher offer — and it could up the ante.

If the Chinese bid proceeds, Mr. Reinsch wants to see a thorough national security review of the deal, one that goes beyond the usual focus on weapons technology to include energy security. “Our Army, Navy and Air Force run on oil,” he explained.

Oil is the ultimate geopolitical commodity — it is “The Prize,” as Daniel Yergin titled his epic history of petroleum and international politics. And even if Cnooc fails to grab Unocal, the pursuit has pushed the two sides of the Chinese challenge together and into the spotlight of public debate. For China is both an engine of economic globalization and an emerging military power. In symbolic shorthand, it is Wal-Mart with an army.

The two sides aren’t neatly divided. But those who focus on economics tend to see partnership, cooperation and reasons for optimism despite tensions, while security experts are more pessimistic and anticipate strategic conflict as the likely future for two political systems that are so different.

In China, there are also two camps — the security hawks and the economic modernists, according to China analysts. The modernists see China joining the United States as the second great economic power of the 21st century, and the two nations sharing the gains from increased trade ties and global growth. The hawks regard that view as naïve, and fret that American policy is to remain the world’s only superpower and to curb China’s rise. So China’s response, the hawks say, is to try to erode United States hegemony and reduce America’s power to hold China down.

Who’s Afraid of China Inc.?https://www.nytimes.com/by/steve-lohrhttps://www.nytimes.com/

9/8/2020 Who’s Afraid of China Inc.? – The New York Times

https://www.nytimes.com/2005/07/24/business/yourmoney/whos-afraid-of-china-inc.html 2/5

Both faces of China have been evident recently. Two weeks ago, a senior Chinese military official, Maj. Gen. Zhu Chenghu, said China should use nuclear weapons against the United States if the American military intervenes in any conflict over Taiwan. Then, bowing to pressure from the United States and other trading partners, China announced last Thursday that it would no longer peg its currency tightly to the dollar. It is a measured step, and it will not do much to moderate China’s huge trade surplus with the United States anytime soon. But the move is a sign of flexibility and accommodation.

“Do we see each other inevitably as antagonists, or do we see a world of globalization from which both sides benefit? That is the big issue,” said Kenneth Lieberthal, a senior official in the National Security Council during the Clinton administration.

“And that framework, one way or another,” added Mr. Lieberthal, a China analyst and a professor at the University of Michigan business school, “will drive an enormous number of policy decisions.”

So that is the China question: Is it an opportunity or a threat? If nothing else, the Cnooc bid for Unocal has shown how unsettled American thinking is on China and how deep the anxieties run, both in matters of national security and trade.

It is easy to dismiss Washington as a hot-air factory, but the scope of the outcry in Congress is significant. Resolutions and legislative proposals, all critical of Cnooc’s takeover bid, have piled up in the House and Senate, from Republicans and Democrats. A resolution presented last month by Representative Richard W. Pombo, a California Republican, declared that permitting the Chinese company to buy Unocal would “threaten to impair the national security of the United States.” It passed, 398 to 15.

Senator Byron Dorgan, a North Dakota Democrat, has drafted three pieces of anti-Cnooc legislation that range from calling for a six-month Congressional inquiry into the bid to a bill that would prohibit the deal. Mr. Dorgan objects to the Chinese move on fair-trade grounds. The Chinese government, he says, would not allow an American company to buy a Chinese oil company. “So why on earth should they be able to buy an American oil company?” Mr. Dorgan said.

Yet the Chinese takeover bid taps into a deeper concern about trade and globalization for Mr. Dorgan. He talks of manufacturing jobs lost to China, intellectual-property pirates in China illegally copying American movies and software, and a trade deficit with China that is rising astronomically with no end in sight. “Trade should be mutually beneficial, and it is certainly not with China,” Mr. Dorgan said.

9/8/2020 Who’s Afraid of China Inc.? – The New York Times

https://www.nytimes.com/2005/07/24/business/yourmoney/whos-afraid-of-china-inc.html 3/5

The tempest in Congress has increased the political risks surrounding the Cnooc bid. At $18.5 billion, the bid remains higher than Chevron’s sweetened offer of $17 billion. But Wall Street analysts say Cnooc will have to go higher to have a chance to win, offering a sizable premium over the Chevron bid to compensate for delays of a government review of the Chinese offer or even the possibility that Washington may block a Chinese deal.

It would be an extreme step, but Congress has the power to “regulate commerce with foreign nations,” under Article I, Section 8 of the Constitution. “My sense is that Congress is not going to stand still for a Cnooc takeover being approved,” said C. Richard D’Amato, chairman of the United States-China Economic and Security Review Commission, an advisory group to Congress. “That is the political reality.”

Cnooc and its advisers misread the political environment in Washington. Fu Chengyu, the Cnooc chairman who earned a graduate degree from the University of Southern California, has said he was surprised by the intensity of political criticism. Cnooc’s path would have been smoother if it had joined with an American oil company as a partner in its bid, an option that was considered briefly but rejected, according to a person close to the company.

The idea, the person said, would have been that the American company would acquire Unocal’s assets in the United States, while Cnooc took the main prize in the deal — Unocal’s offshore natural gas fields in Asia and its expertise in offshore exploration and production. The gas reserves and skill are considered strategic to China’s goal of moving away from coal and generating 20 percent of the nation’s electricity from natural gas by 2020. “It would have been better to have not made this big move a head-on attack, to have linked up with an American partner so the deal would have been less threatening and less a lightning rod for China politics in the United States,” the person said.

Perhaps, but many economists and trade specialists contend that the American angst over the Cnooc bid says more about the United States than it does about China or Cnooc’s tactics. “All this really points to the anxieties about globalization in our own society,” said Clyde V. Prestowitz, a trade official in the Reagan administration and president of the Economic Strategy Institute in Washington. “We are so economically interdependent with China now and we chose that path.”

Washington pushed for China’s integration into the international economy and its entry into the World Trade Organization in 2001. American companies have farmed out much of their manufacturing to Chinese factories. American consumers have been on a Chinese shopping spree for years, buying everything from clothes to computers made there. That is why the United States had a record $162 billion trade deficit with China last year. China sits on $700

9/8/2020 Who’s Afraid of China Inc.? – The New York Times

https://www.nytimes.com/2005/07/24/business/yourmoney/whos-afraid-of-china-inc.html 4/5

billion in foreign exchange reserves, mostly in dollars. It recycles those funds in good part by investing in United States Treasury bonds; that keeps American interest rates low, fueling the real estate boom.

“We handed China the money they are using to try to buy Unocal,” said Mr. Prestowitz, author of a new book on the shift of wealth and power to Asia, “Three Billion New Capitalists” (Basic Books, 2005). “And now we’re telling the Chinese, please keep investing in our bonds but you can’t invest what amounts to a sliver of their surplus in an oil company. That’s really confused and hypocritical on our part.”

Where others see muddle, R. James Woolsey, director of the Central Intelligence Agency in the Clinton administration, sees strategic clarity in challenging the Cnooc bid. Oil is a globally traded commodity, Mr. Woolsey concedes, but it is also a strategic resource in a market that is tightening because of rising demand from fast-growing nations like China and India. That, Mr. Woolsey says, is before one begins thinking of the possible impact of, say, an act of terrorist sabotage in a crucial Middle East oil field.

“China is realistically assuming there may be a shortage of oil,” said Mr. Woolsey, a vice president in the Booz Allen Hamilton consulting firm.

In China, Mr. Woolsey sees a nation with military ambitions to challenge the United States, and a political system with little regard for human rights and free speech. Cnooc, in Mr. Woolsey’s view, is the corporate vehicle of “a Communist dictatorship.”

The Cnooc move, according to Frank Gaffney Jr., a senior Defense Department official in the Reagan administration, is a step to ensure that China has the resources for its overarching national design. “China’s strategy is to supplant the United States as the premier economic power in the world and, should it become necessary, defeat us militarily,” said Mr. Gaffney, president of the Center for Security Policy.

The strategic concern was much narrower at William Blair & Company. Until recently, William Blair, the investment firm in Chicago, was the largest outside shareholder in Cnooc, which is majority-owned by the Chinese government. But William Blair sold off its stake, worth about $160 million, in recent weeks because of worries that Cnooc was behaving too much like a state-owned company and not enough like a capitalist enterprise trying to maximize returns to shareholders, explained David Merjan, a fund manager at the firm.

The pricey bid for Unocal, Mr. Merjan said, raised doubts about how independent Cnooc really was from the Chinese government. “If China is going to sell shares in a company like Cnooc to outside shareholders, it should not be run for the benefit of Chinese economic policy,” Mr. Merjan said.

9/8/2020 Who’s Afraid of China Inc.? – The New York Times

https://www.nytimes.com/2005/07/24/business/yourmoney/whos-afraid-of-china-inc.html 5/5

CNOOC and its pursuit of Unocal, it seems, are part of China’s evolutionary path. Cnooc is playing its hand with plenty of government help, about $7 billion in loans on terms Western oil companies could not hope to get. Accordingly, Cnooc may be willing and able to overpay. Yes, China is hunting for oil and gas assets around the world as a national priority. Still, that is happening in a nation that is drifting steadily toward a market economy, though one with more central control than Americans view as a free-market economy.

The Chinese Communist Party, with 60 million members — more than the population of France — does guide the economy, if less and less over time. “But think of it as the Chinese bureaucratic capitalist party,” said Mr. Lieberthal of the University of Michigan. “It has nothing really to do with Communism.”

Mr. Lieberthal counts himself as among the optimists on China. Globalization, he says, and continued integration of the Chinese and American economies can work to mutual benefit. The spread of middle-class affluence and education across more of the Chinese population should eventually be a force for democratic liberalization, following the pattern of Taiwan and South Korea.

“Am I a hundred percent sure I’m right? No, but that’s the long-term bet I’d make,” Mr. Lieberthal said. “And if you let the pessimists — the people who believe that the U.S. and China will inevitably be enemies — drive policy, then the outcome will be the one they predict.”

T

he New Rules of Globalization As more countries rethink their priorities, multinationals must proceed with caution. by Ian Bremmer

The Globe

In the past few years, Pfizer has encoun-tered 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 Intel- lectual 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 ceil- ings on essential drugs in 2009 and low- ered the ceiling by around 30% in 2011, and

it has pledged to expand the list of essen- tial 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 con- trol, and China’s hospitals, which rely on drug sales for profits, are pushing inexpen- sive 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 cor- porate operating costs were rising. Devel- oping nations, by contrast, boasted popu- lation growth, rising salaries, relatively low wages, and a welcoming climate for foreign Ph

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January–February 2014 harvard business review 103

investment. As distances shrank because of modern transportation and communica­ tion 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. Govern­ ments of developing nations have become wary of opening more industries to multi­ national companies and are zealously pro­ tecting 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 state­owned, compa­ nies they wish to promote. That’s a very dif­ ferent flavor of globalization: slow­moving, selective, and with a heavy dash of nation­ alism and regionalism.

Several factors have contributed to this trend. One, many governments find it risky to continue opening industries to foreign competition, because local com­ panies 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 de­ fining national security more broadly. As financial instability, cyber espionage, and increases in food prices, for instance, be­ come global issues, the financial services, information technology, telecommuni­ cations, 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 de­ scribe. Globalization now comes with new costs and risks.

In globalization’s heyday, strategic sec­ tors—those in which governments take an active interest—and nonstrategic ones were easy to identify. Multinational com­ panies could enter some industries, such as soft drinks, all over the world; other sectors, such as aircraft manufacturing, were off­limits. That’s why Coca­Cola 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 work­ force 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.

Indeed, between the extremes of a Coca­Cola and a Lockheed Martin, numer­ ous companies are drawing fresh levels of official scrutiny, and the state’s reach now extends well beyond traditionally key sec­ tors 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 work­ ings 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 de­ cide which companies win, they risk losing political power, because they will no longer control job creation and their citizens’ liv­ ing standards. They may also inadvertently enrich those citizens who would challenge their power.

The objective of state capitalism is to control the wealth that markets gener­ ate by allowing the government to play a

dominant role through public­sector com­ panies and politically loyal corporations. Whereas the free market system’s motive of maximizing profits and growth is eco­ nomic, state capitalism’s goal is political: to control economic development and thereby maximize the incumbent regime’s chances of survival. It isn’t a coherent phi­ losophy but a set of techniques peculiar to each country.

The extent of state capitalism differs from country to country. In China, state­ run companies and their affiliates now ac­ count for more than half the country’s GDP and jobs, and of the 73 Chinese companies listed in the 2012 Fortune Global 500, 65 are state­owned. Similarly, Russia’s state­ owned enterprises account for over half the Moscow Exchange’s value, and more than 50% of Russians rely on the government for salaries or social benefits—nearly double the percentage in the United States. In the United Arab Emirates, national oil compa­ nies and sovereign wealth funds dominate the economy.

In other countries, the state’s economic reach is more modest. In Brazil, state­ owned firms such as Petrobras, the national oil company, account for just 38% of the

To identify their globalization options, Western multinationals must assess the strategic importance of their industries at home and in the countries they wish to enter. For example, Western retailers may face challenges in India, where the industry is considered relatively strategic, even though it is not strategically important at home.

Map Your Industry

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retail (India)

renewable energy (eU)

104  harvard Business review January–February 2014

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use its understanding of how the host and home governments may prescribe its op- portunities to develop the right approach. To avoid conflict, it could find ways to align its strategy with the prevailing policies. It could offer only products that are of little interest to the state. The company could also decide to stay home.

Strategies to Manage Guarded Globalization The multinational corporations likely to be affected most by the changes in globaliza- tion must pinpoint strategies for managing the risks.

Companies in industries that are strate- gically important to the home government can consider the following approaches:

Stay home. While the importance of keeping out of foreign countries is obvious for companies in the defense industry, the strategy is spreading to other sectors, such as retail, which has become politically sensitive in many emerging markets. If a company enters a strategic sector in a for- eign country, it should develop a playbook that maps the policy changes that would force it to leave and describes the possible exit options.

value of the BM&FBOVESPA, the largest exchange in Latin America. In South Africa, the state-run telecommunications com- pany, electric utility, airline, and railway system face plenty of competition from the private sector.

Western companies looking to do business in emerging markets must often compete with companies that have the fi- nancial and political support of their home governments. China’s national energy companies, for example, can afford to over- pay domestic suppliers for the oil and gas the country needs to power the economy. Although the system lends state-backed companies advantages that often deter foreign competitors, there’s a limit to how much the former can contribute to growth. Officials can’t allocate resources as well as the market can, so state capitalist econo- mies quickly become less innovative and less transparent.

But state capitalism is not necessarily just a developing-world phenomenon. For example, as controversy swells over the U.S. government’s spying on foreign gov- ernments and citizens, doubts about the nature of American capitalism will grow. Citizens of many countries, particularly those who suspect that the U.S. govern- ment has always used Google, Facebook, and Yahoo to read their e-mail, will per- ceive U.S. companies to be instruments of a peculiarly American form of state capitalism, which focuses on gathering data rather than making profits. American information technology, telecommunica- tions, and internet-based companies are bound to face greater scrutiny abroad as a result, and foreign governments will be in- clined to support local companies, further inhibiting globalization.

Mapping the Global Landscape CEOs of multinationals must understand the ways in which governments in devel- oping countries are redefining their inter- ests and drawing up new policies to further them. At one extreme, sticking close to home may ensure lower political risk, but

it could also mean ceding market share to global competitors. At the other extreme, pursuing a strategy without considering geopolitical dynamics could boost growth in the short term but heighten the risk that politics could fatally undermine business operations in the future.

To factor globalization’s new risks into strategy, executives must ask two ques- tions: Is our industry strategically impor- tant to the government of the country we wish to enter? Is our industry strategically important to our home government?

Visualizing the answers in a two-by-two matrix can help a company determine its position on the globalization landscape. Two “no” answers place a company in the upper-right quadrant, where a global- ization strategy generates little friction at home or abroad (à la Coke). Two “yes” answers land it in the lower-left quadrant, where national security concerns dominate its industry (Lockheed Martin’s reality).

Divergent answers to the two questions indicate that the company must make some nuanced decisions; managers are likely to be exposed to political constraints and geopolitical maneuvering from host governments or at home. The company can

It used to be easy to figure out which industries were of national strategic importance: The consumer products industry, for instance, wasn’t, and arms manufacturing was. In the new era of guarded globalization, however, any sector could prove to be strategic. Here’s how six industries will stack up in four emerging markets in 2014.

Which Industries Will Matter in 2014?

StrateGIc Not StrateGIc to the hoMe GoverNMeNt to the hoMe GoverNMeNt

Communications Technology

Energy/ Natural Resources

Financial Services

Infrastructure

Pharmaceuticals/ Health Care

Retail

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THIS ExHIbIT SHowS THE RElaTIvE STRaTEgIC ImPoRTaNCE oF SECToRS wITHIN a CouNTRy; IT IS NoT mEaNT To dEPICT CRoSS-CouNTRy ComPaRISoNS.

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January–February 2014 Harvard business Review 105

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Become more “strategic” at home. Some companies choose to boost their value to their home government instead of looking to create value abroad. They campaign for the state to view their sec- tor or products as strategic so that they can keep out foreign competition or boost profits by striking a closer relationship with the government. Ever since allega- tions surfaced last year that the U.S. Na- tional Security Agency has been spying on Europeans, some French and German telecommunications companies have started emphasizing their strategic value to local governments and consumers. Two of Germany’s internet giants announced a project in August 2013 called E-Mail Made in Germany, which automatically encrypts e-mail that goes through their servers. As Neelie Kroes, the vice president of the Eu- ropean Commission, explained recently,

“If European cloud customers cannot trust the U.S. government…maybe they won’t trust U.S. cloud providers either….there are multibillion-euro consequences [of spying] for American companies.”

Use the state to fight other states. Some companies may have the means to use government-to-government relations to sort out problems. BP, which has oper- ated in the United Arab Emirates since 1931, ran into trouble in 2012, when British politicians and officials publicly criticized the UAE for closing the offices of prode- mocracy groups and arresting political ac- tivists. The dispute undoubtedly contrib-

uted to the July 2012 decision by the UAE government to exclude BP from the 2014 licensing round of the largest onshore oil concession.

During a damage-control trip to the UAE in November 2012, Britain’s prime minister, David Cameron, offered to dispatch RAF fighters to a base in Abu Dhabi—a sign that his government understood the threats that Iran posed to the UAE’s security and that it was willing to ignore public criticism of this offer of help. A month later, Abu Dhabi quietly invited BP to bid for another onshore oil concession. Such strategies will become more important as politicians capitalize on public resentment in order to score points at the expense of foreign companies.

Companies in industries that are strate- gically important to host governments face a different set of challenges. Many of them have discovered that there’s no such thing as free market entry anymore. Choosing which carrot to offer the host government is what matters.

Strike alliances. Although joint ven- tures haven’t been popular for some years, many companies will need to partner—and share profits—with local players in return for safe passage. Partnerships can help in many industries. Consider movies. China has become too big a market for Western filmmakers to ignore, but the Chinese gov- ernment allows a limited number of foreign films into the country every year; in 2012 it increased the number of foreign-made

movies that could be shown on the main- land from 20 to 34.

A partnership with a Chinese film company can help shed the foreign label. Cloud Atlas, a German-made movie, was launched as a locally produced movie in China because 20% of the funding came from local investors. Of course, when the product involves intellectual and artistic content, the state pays close attention. In China, the government ensures that all scripts for radio, film, and television con- tain messages that are in harmony with state directives and don’t “tempt the peo- ple’s degeneration.” Local investors can also help Western producers navigate the corridors of power.

To overcome its many challenges in China, Pfizer is taking a three-pronged ap- proach to alliances. It has teamed up with a local company, Zhejiang Hisun, to tap into low-cost manufacturing capabilities and a generic drugs portfolio. It has also allied with China’s Jointown Pharmaceuti- cal Group to extend its reach to hospitals in the countryside. And Pfizer has invested $50 million in Shanghai Pharmaceutical Industry, which has vast R&D capabilities. This strategy has helped Pfizer become the largest multinational pharmaceutical com- pany in China.

Add value to the state. A single- product company must often find a new way to add value in the host country. Just a few years after entering China, IMAX vol- unteered to help China’s state-run media

Governments monitor and dictate prices in key indus- tries. The government of the United Arab Emirates, eager to assure people that the staples of everyday life will remain affordable, sets price ceilings for manufacturers and retailers. Several consumer goods manufacturers, such as Unilever and Kraft, reported that some vendors stopped supplying them when state- imposed prices rendered their businesses unviable.

Many emerging market governments, worried about the flow of information, keep tech companies under their thumb. Edward Snowden’s ac- cusation that U.S. intelligence officials use data gathered by tech companies to spy on users has helped the Chinese govern- ment justify efforts to protect consumers from American technology firms.

Telecommunications is seen as a highly strategic industry. In some Arab coun-

tries, technology providers must make available data that governments deem relevant for national security in return for market access. In 2010 the UAE and Saudi Arabia threat- ened Canadian firm Research in Motion (RIM) with a ban because they were unable to monitor messages sent on its BlackBerry Messenger system. Eventually, RIM negotiated an agreement with state- controlled telecom operators and government regulators.

Many countries rely on the domestic banking system to finance budget deficits, so they fear deregulation will have a destabilizing effect. In Indonesia, less than 30% of the country’s 240 million people have access to banks. Yet officials have pressured the central bank to restrict the activities of foreign banks, and new policies may require them to become locally incorpo- rated entities.

The New Risks

106  Harvard Business Review January–February 2014

The Globe

achieve global production values. It’s hard to imagine that Beijing doesn’t remember that assistance when deciding which for- eign films can enter China and how many new theaters IMAX can open. Avatar, a movie in which IMAX was involved, was a huge success in the country. And IMAX has more than 150 theaters in China and another 400 in the works.

Become too diversified to fail. Many developing countries offer so many op- portunities that a multibusiness strategy can be compelling for multinationals. GE, for example, has dozens of investments in China, spanning different sectors and time horizons. In some instances, it is trading away its intellectual property; the company knows it can sell certain products in China only if it allows local partners to “adopt” its technologies. The company has no il- lusions: It makes new investments as old ones become less attractive. Even if alarm bells go off in one sector, or for a specific in- vestment, constant diversification ensures that China remains one of GE’s most lucra- tive markets.

Build it so that you can stay. Fast- expanding sub-Saharan African countries such as Nigeria, Ghana, and Kenya, which continually deal with traffic congestion, blackouts, and other infrastructure fail- ures, work hard to attract private invest- ment into infrastructure sectors. (Nigeria has almost as many citizens as Brazil but produces just 5% as much electricity.) Many African governments have launched

nology sector, the new policy stipulated, only if domestic state-owned companies were allowed to absorb their technologies. However, the policy’s success will help the Chinese government stay in power, so it’s unlikely that the state will forget the for- eign companies that invest—and those that don’t—in the industry.

AnticipAting risks in foreign markets and developing creative strategies to manage them will become increasingly important capabilities over the next decade. The pressures created by rapid social change and the failure of governments to keep pace with the demand for a more secure way of life and higher living standards help explain why protests over a commercial development in central Istanbul quickly became a national crisis in Turkey in 2013, and why a nine-cent bus fare hike in São Paulo sent a million angry Brazilians spill- ing into the streets across the country. Sure, multinational companies will continue to find opportunities for expansion and will face new obstacles to the sustainability of their investments. In this era of guarded globalization, however, both are likely to be moving targets that will require con- stant strategic adaptation.

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flagship projects with well-known foreign companies, which have aligned their op- erations to match government priorities.

Public-private infrastructure partner- ships usually adhere to the build-operate- transfer model, and so they generate prof- its for Western corporations only when projects require a level of technical exper- tise that local competitors can’t provide. Multinational companies would therefore do well to offer their best technologies in such partnerships.

Capitalize on state capitalism. An- other useful strategy to withstand new lev- els of scrutiny by host states is to commit to hiring local workers and using local ma- terials. In many emerging markets, that has already become a requirement. The Brazil- ian government expects large projects to source components from local producers as much as possible, and it favors domestic manufacturers in public procurement bids. In Africa, there are less stringent bench- marks for local jobs and sourcing, but countries across the continent want their citizens to share in the gains from foreign investment.

A government’s skewed priorities can create business opportunities. Fac- ing mounting social pressure to deal with China’s environmental crisis, Beijing an- nounced in July 2013 that the energy effi- ciency sector would receive greater fiscal and political support so that it could meet the country’s environmental goals. Foreign companies could enter China’s green tech-

ian Bremmer is the president of Eurasia Group, a global political risk research and

consulting firm based in New York. He is the author of Every Nation for Itself: Winners and Losers in a G-Zero World (Portfolio, 2012).

The New Risks Politicians may try to use

multinationals to promote personal agendas or to deflect public anger. Foreign participation in India’s retail sector is highly politicized because of the large number of people employed in mom- and-pop stores. The govern- ment announced in 2011 that it would allow foreign investment in multibrand retailing, but a backlash forced a policy rever- sal a month later. In Septem- ber 2012 the government did

another backflip and opened up the sector. Fierce political opposition will intensify in 2014, an election year.

Challenges to foreign companies can now come from state-backed investiga- tive journalists. A report filed in December 2012 by CCTV, China’s state-owned television network, claimed that chicken sold in China by Kentucky Fried Chicken was loaded with antibiotics. A public outcry reverberated through China’s

social media, and in January 2013 KFC’s month-on-month sales fell by more than 40%. Volkswagen, McDonald’s, and Carrefour have received the same treatment, as have Mead Johnson, Danone, and Nestlé for allegedly fixing the price of baby formula.

The developed world poses similar risks. Chinese compa- nies often complain about the hurdles they face overseas. Telecom giant Huawei’s bids to acquire U.S. companies 3Com

in 2008 and 3Leaf Systems in 2011 were turned down. And when Shuanghui International, a Chinese food company, made a bid (which ultimately suc- ceeded) for Smithfield Foods, U.S. politicians urged Con- gress’s Committee on Foreign Investment in the United States (CFIUS) to treat food supplies as “critical infrastructure” while evaluating the takeover.

HbR.oRG

January–February 2014 Harvard business Review 107

GLOBAL DSM: TRADE AND INVESTMENT STRATEGY

The Global Cities Initiative, a joint project of Brookings and JPMorgan Chase.

TABLE OF CONTENTS DSM USA’S IMPERATIVE FOR GLOBAL ENGAGEMENT

DSM USA’S RESPONSE TO THE CHANGING GLOBAL ECONOMY

THE INTERSECTION OF EXPORTS AND FOREIGN DIRECT INVESTMENT

KEY FINDINGS FROM THE MARKET ASSESSMENT

FOREIGN DIRECT INVESTMENT

EXPORTS

GOAL, OBJECTIVES, STRATEGIES

IMPLEMENTATION PLAN SUMMARY

POLICY SUMMARY

ACKNOWLEDGMENTS AND BIBLIOGRAPHY

This report was developed by the Greater Des Moines Partnership through the collaboration of political, business and civic leaders of Greater Des Moines. The conclusions and recommendations of this report are solely those of its authors and do not reflect the views of the Brookings Institution or JPMorgan Chase. The Brookings Institution is a private non-profit organization. Its mission is to conduct high-quality, independent research and, based on that research, to provide innovative, practical recommendations for policymakers and the public. Brookings recognizes that the value it provides is in its absolute commitment to quality, independence and impact, and makes all final determinations of its own scholarly activities in the Global Cities Initiative, including the research agenda and products. The Global Cities Initiative is a joint project of the Brookings Institution and JPMorgan Chase designed to help metropolitan leaders advance and grow their regional economies by strengthening international connections and competitiveness on key economic indicators such as advanced manufacturing, exports, foreign direct investment and traded sectors. GCI activities include producing data and research to guide decisions, fostering practice and policy innovations and facilitating a peer-learning network. The Global Cities Initiative is chaired by Richard M. Daley, former mayor of Chicago and senior advisor to JPMorgan Chase. It is directed by Amy Liu, vice president and director of the Brookings Metropolitan Policy Program.

For more information, see brookings.edu/projects/global-cities.aspx or jpmorganchase.com/globalcities.

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Acknowledging that the 21st century economy is changing, the region must work to build a stronger global presence. Greater Des Moines’ strategic economic development plan, Capital Crossroads, was launched in the fall of 2011. This multi-faceted economic development road map charted an aggressive path for the region. A key part of this plan was to enhance the region’s global connectivity through trade development, foreign direct investment and international talent recruitment.

While Greater Des Moines has had significant success marketing the region on a national level and working closely with economic development partners to attract domestic investment, the existing effort to attract foreign direct investment has been primarily

reactionary. There is no existing strategy to determine which global regions have synergies with Greater Des Moines that could lead to increased trade and investment. Trade Missions are conducted annually by the Iowa Economic Development Authority. However, they focus on opportunities for the entire state rather than the Central Iowa region. While this has led to some opportunities for Greater Des Moines, a deliberate approach based on improved

market intelligence is needed to better maximize these efforts. Key performance indicators must also be developed to determine the effectiveness of global engagement strategies and to track progress.

In the spring of 2014, the Greater Des Moines Partnership (The Partnership), Ames Chamber of Commerce/Economic Development Commission and other partners announced the creation of the Cultivation Corridor, a newly-branded agriculture bioscience corridor in Central Iowa. Throughout the Corridor, public and private partners are working with institutions of higher learning to cultivate innovation and accelerate growth in the agbioscience, biorenewables, biotechnology and advanced manufacturing industries. With a goal of further developing and marketing its world-renowned bioeconomy, the Cultivation Corridor is building on a rich history of innovation to enhance environmental sustainability and accelerate business development by attracting companies, talent and capital from across the globe. With an emphasis on scientific discovery and research, companies and institutions in the Cultivation Corridor are forging new pathways to energy independence, sustainable food sources and innovative products made from renewable resources.

In addition, since spring 2014, Des Moines has hosted the inaugural Global Insurance Symposium which attracts insurance executives from around the world. Insurance and financial services is another significant business sector for Greater Des Moines, and the Global Insurance Symposium serves as a high-profile way to introduce Des Moines to potential global investors.

As the marketplace becomes more globally connected, a metropolitan region’s ability to compete for global trade and investment is more important than ever before. Currently, 95 percent of the world’s consumers live outside of the United States and 80 percent of global economic growth is projected to occur somewhere other than the U.S. from 2015 to 2020. Seventy- five percent of the world’s purchasing power is outside our nation’s borders. Exports increase the growth of jobs and wealth; according to the International Trade Administration (ITA), every $1 billion in export value creates 5,400 new jobs. The ITA also attributes 12 million U.S. jobs to employment by foreign-owned firms. Greater Des Moines must leverage exports and foreign direct investment in order to remain competitive; enhancing the region’s global identity is an integral part of that mission.

Greater Des Moines has achieved economic development success in the domestic market in recent years, including significant investments from Microsoft, Facebook, Principal, DuPont Pioneer, Wells Fargo and Kemin. These projects have helped catapult Greater Des Moines into the national spotlight with numerous national rankings and accolades from publications including Forbes, POLICOM and Fortune. The regional economy remained relatively stable during the Great Recession and the

unemployment rate is among the nation’s lowest. While the recent success has generated positive momentum for the region, Greater Des Moines’ long-term success is far from assured in a rapidly changing and more competitive global economy. One of the primary challenges facing Central Iowa will be to stay competitive and maintain future economic success. To achieve long-term success, Greater Des Moines will need to be more focused about global engagement in order to capture opportunities that exist beyond the marketplace in the United States.

Greater Des Moines lags behind many U.S. cities in attracting foreign investment. In 2011 (the latest year available), the Des Moines MSA ranked 81st in jobs in foreign-owned enterprises (FOEs). While the total share of private employment in FOEs continues to increase, Central Iowa is still below the national average. Greater Des Moines regularly competes with larger metro areas for domestic business opportunities. Many of these metros have extensive resources and capabilities to attract foreign direct investment and global talent to their markets, giving them a significant advantage in the long term. The global companies that compete against businesses in Greater Des Moines present challenges. Many of these companies have established themselves in the global marketplace and are better positioned for growth.

DSM USA’S IMPERATIVE FOR GLOBAL ENGAGEMENT

“The world economy remains adrift in choppy waters.”

— Brookings Institution

DSM USA’S RESPONSE TO THE CHANGING GLOBAL ECONOMY

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Another key insurance initiative is the Global Insurance Accelerator (GIA), launched in 2015. This accelerator enables startup companies to create products and services specifically for the insurance industry in a controlled environment with on-site mentors. In the last two years, the GIA has attracted companies from Brazil, Australia, Silicon Valley, Omaha, Canada, Ireland, Silicon Valley, New York, St. Louis, Madison and Des Moines. Des Moines has been contacted by London to learn more about the program, as there is consideration to create a similar initiative in the United Kingdom.

Workforce development was also a key work platform in the Capital Crossroads plan. In 2015, The Partnership launched the Des Moines Immigration Initiative in conjunction with the Partnership for a New American Economy.

State and regional leaders have been working with the Republic of Kosovo since 2012. This relationship emanated from the Iowa National Guard’s training of the country’s peacekeeping force. Due to these strong ties and many diplomatic exchanges, Kosovo opened its Midwest consulate office in Downtown Des Moines on January 29, 2016. The consulate office further connects Greater Des Moines to the global community and could open the door for other nations with agricultural-based economies to consider Greater Des Moines for a consulate.

Although Greater Des Moines does not currently have a targeted approach to attract and retain foreign direct investment in the marketplace, the region’s leaders are committed to taking it to the next level. Greater Des Moines began its participation in the Global Cities Initiative (GCI) in 2012 when the Brookings Institution selected Des Moines for the Metropolitan Export Exchange. The GCI was created by JPMorgan Chase and the Brookings Institution to help provide metros with resources and guidance to create specific plans to capitalize on global opportunities and become more competitive in global trade and investment.

Immersion in the Metropolitan Export Initiative has been pivotal for Greater Des Moines to identify key assets and leadership to create a blueprint for success. The process has been led by a Core Team and Steering Committee comprised of key public, private and education leaders who all have a stake in increasing global connectivity to keep Central Iowa competitive over the long term. Increased collaboration and a more unified effort among stakeholders has provided businesses with the resources they need to succeed in the global marketplace. Greater Des Moines published a regional export plan in 2013 which has served as the foundation of the Global DSM: Trade and Investment Strategy.

Finally, The Partnership has created an International Council to oversee the implementation of the Greater Des Moines Regional Export Plan and the Global DSM: Trade and Investment Strategy. The International Council is comprised of business, government and academic leaders who provide thought leadership and guidance on international initiatives which demonstrate the region’s focus on increasing global engagement.

THE INTERSECTION OF EXPORTS AND FOREIGN DIRECT INVESTMENT

Greater Des Moines began working on the Global Cities Initiative in 2012 and has conducted market assessments in both exports and foreign direct investment. The body of research on trade and foreign direct investment that was shared by the Brookings Institution, combined with 37 in-depth interviews with regional companies, provided a baseline for understanding the advantages and challenges faced by global businesses. Research indicates exports and foreign direct investment are interrelated and mutually reinforcing.

AGRICULTURE BIOSCIENCE IS A KEY INDUSTRY CLUSTER WITH GLOBAL POTENTIAL.

Companies in this cluster make up a significant part of the economy in Greater Des Moines and their future competitiveness is crucial to the economic success and vitality of the region. A significant portion of companies in this cluster are engaged in exporting activities and rely on global markets for continuing growth, including DuPont Pioneer, Kemin Industries, John Deere, Vermeer, Monsanto and Hy-Line International. Agbioscience companies represent significant Foreign Direct Investment (FDI) opportunities, primarily through mergers and acquisitions (M&A) activity as global firms have sought to acquire genetic strains (Hy-Line, Choice Genetics), technologies and access to inputs (land, water, feedstock). Existing examples of FDI in this cluster include Syngenta, BASF, Danfoss, Boehringer Ingelheim, Barilla and DSM Nutritional Products. Iowa State University is one of the nation’s premier agbioscience and research institutions offering access to emerging technology, facilities, business incubation and consulting for companies. Greater Des Moines has recognized the economic importance of agbioscience and has created a major initiative (Cultivation Corridor) to position the region as a global leader.

GLOBAL ENGAGEMENT PRESENTS SIGNIFICANT GROWTH OPPORTUNITIES FOR EXISTING COMPANIES.

Exports lead to additional sales which increase a firm’s capability to expand and hire new employees. Foreign-owned enterprises (FOEs) rely on additional investment from the parent company in order to expand locally while competing with other company-owned facilities. Small and medium-sized firms often are not aware of available resources to assist with exports or attracting additional foreign investment.

EXPORTS AND FDI SUPPORT JOBS FOR IOWA’S WORKERS.

In 2013, a total of 3,420 companies exported from Iowa locations. Of those, 2,845 (83.2 percent) were small and medium- sized enterprises with fewer than 500 employees. Foreign-controlled companies employed 54,800 Iowa workers and were responsible for 4.2 percent of the state’s total private-industry employment. According to the Brookings Institution, foreign-owned firms also invest more in research and development (R&D), which equates to five percent of employment but 19 percent of corporate R&D spending.

LOCAL COMPANIES ARE ENCOURAGED TO EXPORT BY THEIR FOREIGN-BASED PARENTS.

The majority of interviews with regional FOEs conducted in 2015 showed that exporting is a natural and expected part of doing business. Interviewees attributed as much as fifty percent of total sales to exports. In addition, Brookings’ underlying trade data documented robust importing activity.

Increased collaboration and a more unified effort amongst stakeholders has provided

businesses with the resources they need to succeed in the

global marketplace.

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FOREIGN DIRECT INVESTMENT

“… for every direct job attributable to FDI an additional job is indirectly attributable.”

— Stefan M. Selig U.S. Under Secretary of Commerce for International Trade

The Brookings Institution provided cohort members a custom, comprehensive set of export and foreign direct investment (FDI) data from which to evaluate metro areas, counties and the United States. The county data is especially important to regions like Greater Des Moines, where data must be aggregated to evaluate a wider regional geography than a standard Metropolitan Statistical Area (MSA). Export data from 2003 to 2014 resulted from a different methodology, revised for the entire time period and not directly comparable to figures used in the original export plan. The Brookings Institution was able to provide custom FDI data

as well, which covers the time period from 1991 to 2011. These datasets were assembled over a two-year period using the Dun & Bradstreet NETS database. Generally, the FDI portion of the study is based on job counts and firm counts, and not on monetary values. However, the additional information on FDI source countries, regions and companies lent further insight on Greater Des Moines’ state of globalization. The Core Team and Steering Committee members added their market knowledge to personal interviews with companies, survey data and numerous research documents to develop the key findings.

DSM is a recognized leader in insurance — but not on the global stage. The Des Moines metro is home to 81 insurance headquarter locations (nearly 60 percent of those in Iowa), has the highest concentration of insurance employment among U.S. metros at more than three times the national average and is recognized domestically as a major insurance hub. Even so, Greater Des Moines has not yet expanded this recognition to a worldwide level. Two big acquisitions were announced recently: Symetra Life was purchased by a Japanese company and Fidelity & Guaranty Life was a Chinese purchase. Both are expected to yield positive results. Greater Des Moines offers a low cost of doing business structure for insurance companies to enter the U.S. market including a one percent insurance premium tax, no sales tax on computers used for data processing and no premium taxes on the sales of annuities, qualified insurance plans or surtaxes on insurance carriers.

DSM underperforms in foreign direct investment on multiple measures.

Despite success in generating domestic investment, Greater Des Moines ranks low in jobs and share of employment in FOEs. For example, the Des Moines MSA ranks 19th among its 20 peer metros in total FDI employment. Among the 100 largest MSAs, Des Moines ranks 81st in jobs and 78th in share of employment in FOEs. Growth in the number of firms in the region has slowed in the past decade. The International Trade Administration reports that 4.2 percent of Iowa’s private employment is supported by foreign investment (2013). Nationally, the average is 5.5 percent and the Des Moines metro is 3.4 percent. The region’s 13,820 FOEs jobs claim just one percent of the Midwest total, according to the Brookings Institution.

Greater Des Moines has the opportunity to be more deliberate about attracting FDI to the region. The current approach relies on the Iowa Economic Development Authority and other external partners who represent the entire state of Iowa. As a result, trade missions, marketing efforts, etc., are not always focused on the inherent strengths and key industry clusters that make the region successful. Greater Des Moines must become more intentional with efforts to attract FDI and connect strategies and efforts to partner initiatives.

DSM USA REGION

BOONE STORY MARSHALL

GUTHRIE DALLAS POLK JASPER POWESHIEK

MADISON WARREN MARION

KEY FINDINGS FROM THE MARKET ASSESSMENT

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Mergers and acquisitions represent the majority of FDI, but firms receive little attention after entering the DSM market.

The Baker & McKenzie Global Transactions Forecast projects global M&A activity to continue to rise from $2.7 trillion in 2015, $3 trillion in 2016 and $3.4 trillion in 2017. The report asserts that many U.S. and European companies have large cash balances available for acquiring new businesses. Des Moines will undoubtedly see its share of the M&A action (considering the region’s affinity for European connections), but no program is in place to reach out to firms to address their needs and embrace the change. Existing business retention and expansion (BRE) efforts are not designed to engage local firms following such transactions. The existing BRE program does not emphasize the importance of helping firms, either quickly or over the long term, following transactions to ensure the new parent company has access to state and local government leaders, regional and local economic development contacts, workforce development resources and initiatives and local policies or business climate concerns.

Workforce availability is a challenge for existing FOEs, inhibiting competitiveness and the ability to attract more investment from parent firms.

While the workforce in Greater Des Moines is highly skilled and trained, the unemployment rate is extremely low (less than four percent), creating the need to attract more skilled workers to the region. During personal interviews, FOEs cited the inability to find skilled workers as one of their biggest challenges when trying to expand local operations. This is a national trend. However, it is exacerbated in Greater Des Moines by low unemployment and Iowa’s stagnant population growth. A consistently low unemployment rate and low state population limit the ability to quickly fill workforce needs. Immigration and H1B Visa reform have stalled, preventing international students/talent from filling gaps in the workforce that must be filled.

FDI SOURCES FOR THE DSM USA REGION RANKED BY NUMBER OF JOBS IN 2011:

Regional investment comes from 48 metro areas in 22

foreign countries.

TOP 5 COUNTRIES

ENGLAND

IRELAND

FRANCE

JAPAN

CANADA

TOP 5 CITY-REGIONS

DUBLIN

PARIS

TOKYO

LONDON

COPENHAGEN

Source: Brookings analysis of BEA, National Establishment Time-Series and Dun & Bradstreet data

1991: 109 FIRMS Nearly all stock was established by 1991.

91% 6% 4%

Pre-1991 Stock

Greenfield

M&A

Firms: 10-year Snapshots Mode of Entry for FOEs in the Region

31%

Pre-1991 Stock

Greenfield

M&A

26%

43%

2011: 246 FIRMS Slower growth; Mode of entry on-trend as the largest share of FOEs resulted from mergers and acquisitions.

Pre-1991 Stock

Greenfield

M&A

23%

37%

40%

2001: 220 FIRMS Ten years later, the number of FOEs in the region had doubled.

Source: Brookings Institution

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Goods and Services Exports: Trend in the Region

* Intensity is exports share of Gross Regional Product Source: Export Nation, 2015, Brookings Institution

2014 Export Intensity*

2014 Real Exports

5.1 BILLION

2003 Export Intensity*

7.5%

2003 Real Exports

$ 3.1 BILLION

9.9%

United States

Region

34% Services 66% Goods

Goods and Services Exports: National and Regional Comparison, 2014

Service sector clusters are prime targets to achieve gains in the value of exports.

In 2014, the Des Moines region logged $1.8 billion of the state of Iowa’s $5.1 billion total exports through the delivery of services. In the Des Moines MSA, Insurance Carriers took the first spot among the top five industries in real exports, which consists of insurance, credit and manufacturing sectors. Data from the measure of concentration called the location quotient (LQ) reveals the metro’s export industry edge over that of the nation’s. For example, Insurance Carriers has a hefty 17.4 LQ — 17 times more concentrated than the nation as a whole.

A 2013 online survey with local companies indicated that companies do not necessarily know their services are exportable. The Kiplinger Letter (February 22, 2013) states the potential for growth is enormous and “global markets clamor for the skilled services in which the U.S. excels…” Central Iowa companies will continue to discover that their service strengths are exportable, along with their goods. The nature of some services, such as education and healthcare, allows customers to consume their export here.

Marion

Marshall

Jasper

Guthrie

Poweshiek

Madison

Story

Boone

Warren

Dallas

Polk

17.0%

17.0%

8.5%

11.0%

11.4%

12.9%

16.7%

Export Intensity In Regional Counties: 2014

17.6%

23.3%

26.9%

7.2%

DSM mirrors the U.S. ratio of goods and services exports valuation.

In 2014, Export Nation data from the Brookings Institution estimates U.S. exports at 66 percent in goods and 34 percent in services; the 11-county Greater Des Moines region matches almost exactly with 35 percent in services exports. The five-county Des Moines MSA has a larger share of services exports, primarily due to Polk County’s effect on statistics for the smaller number of counties. Polk County logged about 53 percent of its exports in services in 2014; no other county comes close to that share. Rural and/or smaller counties in Central Iowa have the highest industry share of exports in goods. Guthrie, Madison, Marshall and Marion counties have 92 percent or higher in goods exports.

65% Goods 35% Services

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An abundance of local exporters were either selected by a foreign customer or had other foreign relationships that prompted their first exports.

The survey and interviews conducted for the Market Assessment document provided a mix of both proactive and reactive reasons that illustrate the complexity of the decision to export. In 2013, at least 450 companies had been identified as exporters in the region and, given the $5.1 billion in goods and services exports in 2014, it is possible for both service and goods providers to succeed in the international arena. Enhanced export education offerings and other support are becoming mainstream tools in economic development programming, better preparing small- and medium-sized enterprises for the first unprompted sale.

Companies are forthright about their challenges and obstacles to fill participation in export activity, as well as policy changes and infrastructure they feel would benefit the overall export environment.

Company representatives were able to express the challenges and obstacles inherent in international business. Smaller companies especially mentioned financial concern — that is, that there are startup costs to export. Although some of the challenges are non-economic in nature, such as insufficient knowledge of another culture or language, economic concerns regarding bureaucracy, costs, competition and regulation are among the list of issues to be addressed. Government involvement likely will be required to improve many of these concerns over the long term.

TOP IOWA MERCHANDISE EXPORT MARKETS 2015

#2 MEXICO

#5 GERMANY

#1 CANADA

#4 JAPAN #3 CHINA

(Regional Data Not Available) Source: International Trade Administration

$5.1 Billion in Real Exports in Region (2014, in millions of current dollars)

Ma nu

fac tur

ing

Fin an

ce an

d I ns

ura nc

e

Ag ric

ult ure

, F ore

str y a

nd Fi

sh ing

Ed uc

ati on

, H ea

lth ca

re an

d T ou

ris m

Inf orm

ati on

an d T

ech no

log y

En gin

eer ing

an d H

ea vy

Ind us

try

Ge ne

ral Bu

sin ess

Se rvi

ces

Mi nin

g, Oil

an d G

as Ex

tra cti

on

$2,655.3

$698.3 $620.8

$395.6$363.2

$216.2 $119.3

$6.2

Source: Export Nation, 2015, Brookings Institution

In 2014:

Direct Jobs

In 2003:

Jobs Supported By Regional Exporting Activity

11,495

16,700

Direct Jobs Direct and Indirect Jobs 23,653

34,747 Direct and Indirect Jobs

Source: Brookings Institution

Twenty Countries Will Generate 85% of Global GDP

Growth Through 2016

COUNTRY NOMINAL GDP, 2015($BILLIONS)

SHARE OF GLOBAL GDP GROWTH 2014-2016

(%)

China 11,212 30.3 United States 18,125 21.7

India 2,308 6.5 United Kingdom 2,853 3.1

Germany 3,413 2.7 Indonesia 896 2.2

South Korea 1,435 2.0 Australia 1,252 2.0 Canada 1,615 1.9 Mexico 1,232 1.6

Japan 4,210 1.6

Nigeria 515 1.3 France 2,470 1.2 Spain 1,230 1.2 Turkey 753 1.2

Saudi Arabia 649 1.0 Poland 528 0.9

Philippines 491 0.8 Malaysia 308 0.8 Colombia 328 0.8

Source: International Monetary Fund, World Economic Outlook Database

COUNTRY NOMINAL GDP, 2015 ($BILLIONS)

SHARE OF GLOBAL GDP GROWTH 2014 – 2016

(%)

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GOAL, OBJECTIVES, STRATEGIES

GOAL:

Maximize Greater Des Moines’ long term economic competitiveness by accelerating the growth of key advanced industry clusters through global engagement.

OBJECTIVES:

Grow exports and foreign direct investment by aligning economic development efforts around key industry clusters and global markets.

Build the region’s economic competitive advantage with clear focus on the opportunities and impacts of globalization.

Strengthen the global mindset in the region through the creation of a strong local export and FDI culture and the attraction of international talent.

STRATEGIES:

1. GLOBAL LEADER IN AGRICULTURE BIOSCIENCE

Utilize the Cultivation Corridor to elevate Greater Des Moines as a global leader in agriculture bioscience. Incorporate the Cultivation Corridor into existing global strategies to increase brand awareness and position Greater Des Moines as the global center of excellence in agriculture and bioscience.

Tactics:

• The Cultivation Corridor is directly engaged with partners and governments in the countries of Israel, Australia, Germany and New Zealand in order to improve ties and attract FDI. The Corridor is also working with Iowa Economic Development Authority on a potential Corridor-led trade mission to Israel in 2017.

• The Cultivation Corridor will represent The Partnership in global activities in the agbioscience cluster through attending tradeshows including the World Bio Markets Congress and Exhibition, World Ag Expo, European Forum for Industrial Biotechnology and the Bio International Convention.

• The Cultivation Corridor will become the primary intake for FDI inquiries in agbioscience cluster and will take the lead on greenfield assistance and M&A rapid response, etc.

• The Cultivation Corridor will connect agribusiness companies throughout Central Iowa with qualified export partners, including private sector logistics consultants as well as public and public/private exporting resources.

• Leverage Iowa State University’s expertise and resources to help attract agbioscience firms to Central Iowa. Iowa State University will provide campus experts, tours and information about university resources to assist recruiting efforts.

• Launch an Ag Tech Accelerator to assist Ag Tech startups. The focus will be on big data, farmer productivity, etc. The accelerator is expected to strengthen the Ag Tech ecosystem, gain exposure and create stronger companies.

2. MARKET THE REGION AS A GLOBAL INSURANCE HUB

Increase the region’s global identity through the insurance and financial services key industry cluster. Utilize Greater Des Moines’ position as a U.S. leader in insurance/financial services and position the region as a global leader in the cluster.

Tactics:

• Continue attracting international insurance executives to Des Moines through the annual Global Insurance Symposium (GIS). The GIS brings together leaders from around the globe to discuss the latest insurance industry trends. Speakers include state insurance commissioners, industry leaders, regulatory representatives and insurance experts from around the world.

• Recruit international entrepreneurs to participate in the Global Insurance Accelerator through direct email marketing campaigns, attending conferences and meeting with consulate offices. The concept is global and therefore efforts are focused on entrepreneurs rather than specific countries.

• Participate in global trade shows and industry events to sell the advantages Greater Des Moines has to offer to the insurance industry.

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Tactics:

• Deliver targeted BRE program focusing on global companies and address global competitiveness issues.

» Connect exporters and FOEs with all available resource partners to ensure their needs are supported.

» Collaborate with partners at the Iowa Economic Development Authority, International Traders of Iowa and the U.S. Department of Commerce/Commercial Service to provide meaningful education/training seminars for both exporters and FOEs based on company feedback.

» Educate local economic development practitioners on global competitiveness issues including increasing exports and FDI and resources available for businesses.

• Respond to M&A transactions swiftly and over the long-term.

» Utilize M&A tracking features provided in subscription company databases, such as Hoover’s and Corporate Affiliations.

» Meet with local company contacts immediately when M&A transactions or announcements of intentions occur and address any challenges they expect to encounter during the transition.

» Engage high ranking political leadership (Governor, etc.) to meet with executives of parent company to reinforce the importance of their location and to offer assistance.

» Remain engaged with local company contacts and periodically follow up to offer assistance with the transition however possible.

» Create a clearinghouse for M&A activity at the Iowa Economic Development Authority.

• Expand export reach through existing industry call program in partnership with local economic development practitioners.

» Utilize Synchronist Business Information System to collect export data from local firms to gain knowledge of export markets, obstacles, need for assistance and desire to expand into additional markets.

» Provide ongoing training opportunities for staff on export resources available at the federal and state levels to assist firms who are new to export (NTE) and small- and medium-size exporters (SME) in the region.

» Define roles in the service delivery process for economic development organizations such as the Iowa Economic Development Authority Trade Office, U.S. Department of Commerce and Small Business Association (SBA).

» Develop target lists of companies to be contacted in the region.

4. ATTRACT GLOBAL TALENT

Aggressively recruit and retain talent in Greater Des Moines. Utilize talent recruitment and development initiatives to attract global talent and train existing workforce to meet the needs of global firms.

Tactics:

• Launched Des Moines Immigration Integration Initiative in conjunction with the Partnership for a New American Economy. The Initiative includes government, business and community leaders that put forth policy recommendations for Greater Des Moines that draw on experience of other cities with such initiatives and partnerships around the country. Findings raise awareness about immigration’s positive effects on the local and state economy and guide the process for recruitment and retention of immigrant talent in the region via Global DSM: International Talent Strategy.

• Push for H1B Visa reform to allow international talent with the desire to stay in Greater Des Moines the opportunity to do so.

• Exhibit at 50 college career fairs annually to attract students to Greater Des Moines.

• Capitalize on the launch of the Education Drives our Greater Economy (EDGE) initiative and its “75×25” campaign to build skills of existing residents. EDGE is a community initiative to build a sustainable cradle through career talent pipeline for Central Iowa. EDGE launched a “75×25” campaign to ensure that 75 percent of Central Iowa adults have postsecondary certificates, credentials or degrees by 2025 that align with workforce needs. This “75×25” campaign goal was formed with input by 140 private and public partners who recognize the role education and business play in developing our region’s talent pool. It is focused on aligning existing programs to ensure they are working toward the same overarching goal. Industries such as finance, healthcare, advanced manufacturing and others report being unable to find a sufficient number of qualified workers to fill open positions. EDGE is designed to address the critical need to solving the skills gap facing Central Iowa employers and it is committed to improving the educational pipeline that is crucial to achieving a skilled workforce and human talent pipeline.

• For more information on Global DSM: International Talent Strategy, visit DSmpartnership.com/globalDSM

The successful implementation of the Global DSM: Trade and Investment Strategy will require collaboration and coordination with partner organizations including the Iowa Economic Development Authority, International Trade Administration/U.S. Department of Commerce, SBA, Cultivation Corridor and the International Traders of Iowa organization. The Partnership has developed an International Council comprised of business, government and academic leaders to achieve the following:

• Oversee the implementation of the goals and objectives from the Global DSM: Trade and Investment Strategy.

• Provide updates on issues facing global businesses in the region and provide thought leadership on how they can potentially be addressed through collaboration.

• Provide support when visits occur from trade delegations and foreign dignitaries.

• Support educational offerings and programming related to international trade and investment.

The Partnership has taken the lead on the staffing and convening of the International Council, which meets quarterly. The Partnership will also serve as the lead organization for the implementation of the Greater Des Moines Global Trade and Investment Strategy and will coordinate the strategies/tactics outlined in the plan with regional business, civic, government and academic partners. The Partnership will also lead the effort to work with economic development partners on the globalization of the BRE strategy and delineating specific roles and responsibilities as required when projects arise.

The success of this initiative will not be dependent on creating a new organization or program. The desired outcomes will be achieved by enhancing economic development initiatives to be more deliberate about increasing trade development and positioning Greater Des Moines as a global insurance hub and world leader in agriculture/bioscience.

IMPLEMENTATION PLAN SUMMARY

3. GLOBALIZE BUSINESS RETENTION EXPANSION PROGRAM

Emphasize global competitiveness in BRE efforts. Greater Des Moines will implement a BRE program targeting global companies to better understand their needs and provide assistance and resources. Existing BRE efforts are primarily focused on local business climate issues including industry, workforce, technology and satisfaction with municipal services. Following the creation of the Regional Export Plan in 2013, updates were made to the BRE program to address export activity and local economic development practitioners were trained on why helping businesses increase exports matters. Existing BRE strategy does not presently address the needs of greenfield expansions or mergers and acquisitions from FOEs. These locations often report to an overseas parent and compete for investment with other company locations.

20 21GREATER DES MOINES PARTNERSHIP20 21GREATER DES MOINES PARTNERSHIP

POLICY SUMMARY

The United States economy, now more than ever, needs skilled workers. Businesses must have access to technology, science, education, health and engineering workers, which the U.S. is not producing in adequate numbers at the present time. America needs a comprehensive, rational and balanced immigration policy that secures the borders, while welcoming legal immigrants who want to work toward the American dream and realistically addressing the unauthorized workers already in the United States. The continuation and expansion of the

temporary H1B and L-1 Visa programs are vital to assure highly- skilled workers are available to remain competitive globally, and to fill the jobs created by an expanding export market. The Employment-Based (EB) Visa program requires modernizing to clear backlogs and create a system where all equally qualified highly-skilled workers, no matter their country of birth, will receive green cards in the order they apply and based solely on their skills. Learn more about Global DSM: International Talent Strategy atDSMpartnership.com/globalDSM

PUSH FOR IMMIGRATION AND H1B VISA REFORM

SUPPORT EXPORT COMPETITIVENESS AND CAPACITY Enhance the transportation infrastructure: • Continue to improve the region’s business climate. Lowering

the cost of operations will enable exporters to be more competitive in foreign markets. Survey responses show some exporters see a challenge in finding shipping containers. The region should explore the development of a container pool.

• With the closing of the Maytag facility in Newton (Jasper County), the region lost its only intermodal facility. A subsequent study by the Des Moines Metropolitan Planning Organization illustrated that the region may not have enough lifts to justify an intermodal center. The region is working on attracting a transload facility to increase rail connectivity and decrease shipping costs.

ADVOCATE FOR MORE FREE TRADE AGREEMENTS Many foreign countries still maintain steep tariffs and other barriers against U.S. exports, while the U.S. market is largely wide open. Across the world, there are about 300 free trade agreements (FTA) in force, and the United States is a party to 20 of them. Trade agreements level the playing field by lowering other nations’ trade barriers, opening up foreign markets to U.S. exports and setting strong enforceable rules for trade between the U.S. and these countries. Since 2005, Iowa’s goods exports to FTA partners has increased by 72 percent. In 2015, $7.2 billion of Iowa’s merchandise exports, or 55 percent, went to FTA partners. Iowa’s workers and farmers deserve the opportunity to compete — and succeed — on a level playing field.

TRANS-PACIFIC PARTNERSHIP COUNTRIES

CANADA

U.S.

MEXICO

PERU

CHILE

JAPAN

VIETNAM

BRUNEIMALAYSIA

SINGAPORE

AUSTRALIA

NEW ZEALAND

Source: United States Trade Representative

22 23GREATER DES MOINES PARTNERSHIP22 23GREATER DES MOINES PARTNERSHIP

American Institute for Economic Research. (2015). While China’s slowdown raises concerns about global growth, risks to the U.S. economy are muted. Business Conditions Monthly, 2(9).

Association for University Business and Economic Research. (Producer). Budny, A. (Speaker). (2015, April). BE-13: Survey of new foreign direct investment in the United States [webinar].

Baker & McKenzie. (2015). Global transactions forecast: The impact of macro trends on future M&A and IPO activity. Chicago: Baker & McKenzie Global Services LLC

Berube, A., Parilla, J., Ran, T., & Trujillo, J. (2015). Global metro monitor 2014: An uncertain recovery. Metropolitan Policy Program at Brookings. Retrieved from Brookings.edu/~/media/Research/Files/Reports/2015/01/22-global-metro-monitor/ bmpp_GMM_final.pdf?la=en

Brookings Institution, The. (2015). Des Moines IA MSA. Market Scan – Metro FDI 2015 Cohort. Washington, DC: Author.

Brookings Institution, The. (2015). Export nation: Des Moines, IA export scan. Washington, DC: Author.

Brookings Institution, The. (2015). GCI Exchange FDI Working Session. Washington, DC: Author.

Bruns, A. (2014). Everybody’s doing it: But some states appear to do FDI better than others. Site Selection, 59(6), 74-75, 78-79.

CBRE Research. (2014). In and out: Middle East: The review of capital flows in and out of global commercial real estate markets. The Middle East Edition. Retrieved from Cbre.com/research-and-reports/in-and-out-a-review-of-global- flows-in-and-out-of-the-middle-east

Chen, T, & Korn, M. (2015). Colleges pay a price for foreign students: Agents hired to woo overseas applicants, who sometimes fake records, essays. The Wall Street Journal, CCLXVI(78), A1-A14.

Dencik, J. & Roel, S. (2014). Global location trends: 2014 annual report. United States of America: IBM Institute for Business Value, IBM Corporation

Donahue, R. & McDearman, B. (2016). Does the ‘foreign’ in ‘foreign direct investment’ matter? The Avenue: Rethinking Metropolitan America. Retrieved from Brookings.edu/blogs/the-avenue/posts/2016/01/14-foreign-direct- investment-donahue-mcdearman

Donahue, R. & McDearman, B. (2015). Guide to Writing a Global Trade and Investment Plan. Global Cities Initiative: a Joint Project of Brookings and JPMorgan Chase Global Trade and Investment Planning. Retrieved from Brookings.edu/~/ media/multimedia/interactives/2013/GCXMedia/Guides/Global%20Trade%20 and%20Investment%20Plan%20Guide.pdf

Donahue, R. & McDearman, B. (2015). Regional foreign investment strategies begin at home. The Avenue: Rethinking Metropolitan America. Retrieved from brookings.edu/blogs/the-avenue/posts/2015/09/30-regional-foreign-investment- donahue-mcdearman

Donahue, R. & McDearman, B. (2015). The 10 Lessons from Global Trade and Investment Planning in U.S. Metro Areas. Global Cities Initiative: a Joint Project of Brookings and JPMorgan Chase Global Trade and Investment Planning. Retrieved from Brookings.edu/~/media/research/files/reports/2015/05/26-10-lessons- exports/tenlessons.pdf

Donahue, R. & McDearman, B. (2015). What can metro areas do about foreign mergers and acquisitions? The Avenue: Rethinking Metropolitan America. Retrieved from Brookings.edu/blogs/the-avenue/posts/2015/08/11-metro-areas-foreign- mergers-and-acquisitions-donahue-mcdearman

Dun & Bradstreet. (2016). The Top Five Risks Facing the U.S. in 2016. Retrieved from Dnb.co.uk/resources/top-five-risks-factsheet

Eller, D. (2015). Iowa could be hurt by China economic slowdown. The Des Moines Register. Retrieved from Desmoinesregister.com/story/money/ agriculture/2015/08/24/china-economy-iowa/32117551

Fikri, K. & Devashree, S. (2015). Using foreign direct investment to strengthen U.S. advanced industries. The Avenue: Rethinking Metropolitan America. Retrieved from Brookings.edu/blogs/the-avenue/posts/2015/03/23-foreign-direct- investment-advanced-industries-fikri-saha

Fikri, K., Marchio, N., & Saha, D. (2014). FDI in U.S. metro areas: the geography of jobs in foreign-owned establishments. Brookings. Retrieved from Brookings.edu/ research/reports/2014/06/20-fdi-us-metro-areas-saha-fikri-marchio

Foda, K., & Prasad, E. (2015). Opinion: The world economy remains adrift in choppy waters. Brookings. Retrieved from Brookings.edu/research/ opinions/2015/10/04-world-economy-growth-patterns-prasad-foda

Hilsenrath, J., & Wei, L. (2016). World economic forum: Outlook 2016: Global economy loses steam. The Wall Street Journal, R1-R12.

Hoover, K. (2015). More bad economic news: U.S. exports fall to lowest level in 3 years. The Business Journals. Retrieved from Bizjournals.com/bizjournals/ washingtonbureau/2015/10/more-bad-economic-news-u-s-exports-fall-to-lowest.html

International Trade Administration, Trade Policy and Analysis, & U.S. Department of Commerce. (2015). Iowa Exports, Jobs, and Foreign Investment. Retrieved from Trade.gov/mas/ian/statereports/states/ia.pdf

International Trade Administration, Trade Policy and Analysis, & U.S. Department of Commerce. (2015). Iowa: Expanding exports and supporting jobs through trade agreements. Retrieved from Trade.gov/mas/ian/build/groups/ public/@tg_ian/documents/webcontent/tg_ian_005325.pdf

Kaczmarski, M. (2015). When FDI fails… the complexities of overseas expansions are often overlooked in the bid to tap into new growth markets. FDI Intelligence, 12-15. Leubsdorf, B., & Peters, M. (2015). Export weakness hampers growth. The Wall Street Journal, CCLXFI(77), A1-A6.

Pasquali, V. (2014). New game, new rules. Global Finance. Retrieved from Gfmag.com/magazine/january-2014/cover-story-new-game-new-rules

Richards, J., & Schaefer, E. (2016). Jobs attributable to foreign direct investment in the United States. Industry and Analysis Economic Brief. Washington, DC: International Trade Administration.

Rose, J., Sirikin, H. L., & Zinser, M. (2013). How robots will redefine competitiveness. Bcg.perspectives. Retrieved from Bcgperspectives.com/content/ articles/lean-manufacturing-innovation-robots-redefine-competitiveness

Solis, M. (2015). TPP: The end of the beginning. Brookings. Retrieved from Brookings.edu/blogs/order-from-chaos/posts/2015/10/05-transpacific- partnership-agreement-solis

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United States Department of Commerce. (n.d.). SelectUSA. Retrieved from Selectusa.commerce.gov.

BIBLIOGRAPHY

ACKNOWLEDGMENTS

Special thanks to the Brookings Institution and JPMorgan Chase for their guidance in creating regional export and foreign direct investment strategies through the Global Cities Initiative. The Partnership is grateful to the large group of individuals who helped shape the original Regional Export Plan in 2013, some of whom are listed below, as well.

FDI CORE TEAM Marlena M. Bandurski, Research Manager for Economic Development, Greater Des Moines Partnership

Ryan Carroll, International Trade Manager, Greater Des Moines Partnership

Kavilash Chawla, Partner, Baton Global

Patricia Cook, Director, U.S. Commercial Service, International Trade Administration

Dr. Michael Crum, Vice President for Economic Development and Business Engagement, Iowa State University

Steve Dickinson, Attorney, Fredrikson & Byron, P.A.

Kathy Hill, Team Leader – International Trade Office, Iowa Economic Development Authority

Michael Swesey, Senior Vice President of Economic Development, Greater Des Moines Partnership FDI STEERING COMMITTEE (IN ADDITION TO THE CORE TEAM) R. Todd Ashby, Executive Director, Des Moines Area Metropolitan Planning Organization

Tony Braida, AVP International Banking Sales Officer, Bankers Trust Company

Dan Cosgrove, Business Development Director, DuPont Pioneer

Nick Gerhart, Insurance Commissioner, State of Iowa

Jay Isaman, Senior Vice President, JPMorgan Chase

Dr. Jeffrey Kappen, Assistant Professor of International Business, Drake University, International Business Strategy Program

David Maahs, Executive Vice President of Economic Development, Greater Des Moines Partnership

Chris Sackett, Attorney, Brown Winick

Richard Tan, Account Director, JLL, Principal

Mark Tezak, Managing Director, PGI Strategy, Principal Global Investors

ACKNOWLEDGEMENTS AND BIBLIOGRAPHY

D E S M O I N E S , I O W A

700 Locust St., Ste. 100 Des Moines, Iowa 50309 | USA (515) 286-4950

DSMpartnership.com/globalDSM

#globalDSM #DSMUSA

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Publisher: Oxford University Press Print Publication Date: Apr 2017 Print ISBN-13: 9780198779551 Published online: Apr 2017 DOI: 10.1093/actrade/9780198779551.001.0001

Globalization: A Very Short Introduction (4th edn) Manfred B. Steger

Previous Edition (3 edn) Next Edition: 5th edn Latest edition (5 edn)

4. The political dimension of globalization Manfred B. Steger

https://doi-org.cowles-proxy.drake.edu/10.1093/actrade/9780198779551.003.0004 <https://doi-org.cowles-proxy.dr

ake.edu/10.1093/actrade/9780198779551.003.0004>

Published in print: 27 April 2017

Published online: 27 April 2017

Abstract

Political globalization refers to the intensification and expansion of political interrelations across the globe. ‘The

political dimension of globalization’ considers how these processes raise an important set of political issues

pertaining to the principle of state sovereignty, the growing impact of intergovernmental organizations, and the

future prospects for regional and global governance, global migration flows, and environmental policies affecting

our planet. Contemporary globalization has led to a permeation of the traditional territorial borders of nation-states

and fostered the growth of supraterritorial social spaces and institutions that, in turn, unsettle both familiar political

arrangements and cultural traditions. Will the final outcome of political globalization be the emergence of a

‘cosmopolitan democracy’?

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9/8/2020 4. The political dimension of globalization – Very Short Introductions

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Political globalization refers to the intensification and expansion of political interrelations across the globe. These processes

raise an important set of political issues pertaining to the principle of state sovereignty, the growing impact of

intergovernmental organizations, and the future prospects for regional and global governance, global migration flows, and

environmental policies affecting our planet. Obviously, these themes respond to the evolution of political arrangements

beyond the framework of the nation-state, thus breaking new conceptual and institutional ground. After all, for the last two

centuries, humans have organized their political differences along territorial lines that generated a sense of ‘belonging’ to a

particular nation-state.

This artificial division of planetary social space into ‘domestic’ and ‘foreign’ spheres corresponds to people’s collective

identities based on the creation of a common ‘us’ and an unfamiliar ‘them’. Thus, the modern nation-state system has rested

on psychological foundations and cultural assumptions that convey a sense of existential security and historical continuity,

while at the same time demanding from its citizens that they put their national loyalties to the ultimate test. Nurtured by

demonizing images of ‘outsiders’, people’s belief in the superiority of their own nation has supplied the mental energy

required for large-scale warfare—just as the enormous productive capacities of the modern state have ↵ provided the

material means necessary to fight the ‘total wars’ of the last century.

Contemporary manifestations of globalization have led to the greater permeation of these old territorial borders, in the process

also softening hard conceptual boundaries and cultural lines of demarcation. Emphasizing these tendencies, commentators

belonging to the camp of globalizers have suggested that the period since the late 1960s has been marked by a radical

deterritorialization of politics, rule-making, and governance. Considering such pronouncements premature at best and

erroneous at worst, sceptics have not only affirmed the continued relevance of the nation-state as the political container of

modern social life but have also pointed to the emergence of regional blocs as evidence for new forms of territorialization.

Some of these critics have gone so far as to suggest that globalization is actually accentuating people’s sense of nationality.

As each group of global studies scholars presents different assessments of the fate of the modern nation-state, they also

quarrel over the relative importance of political and economic factors.

Out of these disagreements there have emerged three fundamental questions that probe the extent of political globalization.

First, is it really true that the power of the nation-state has been curtailed by massive flows of capital, people, and technology

across territorial boundaries? Second, are the primary causes of these flows to be found in politics or in economics? Third, are

we witnessing the emergence of new global governance structures? Before we respond to these questions in more detail, let

us briefly consider the main features of the modern nation-state system.

The modern nation-state system

The origins of the modern nation-state system can be traced back to 17th-century political developments in Europe. In 1648,

the Peace of Westphalia concluded a lengthy period of religious wars ↵ among the main European powers following the

Protestant Reformation. Based on the newly formulated principles of sovereignty and territoriality, the ensuing model of self-

contained, impersonal states challenged the medieval mosaic of small polities in which political power tended to be local and

personal in focus but still subordinated to a larger imperial authority. The centuries following the Peace of Westphalia saw the

further centralization of political power, the expansion of state administration, the development of professional diplomacy,

and the successful monopolization of the means of coercion in the hands of the state. Moreover, nation-states also provided

the military means required for the expansion of commerce, which, in turn, contributed to the spread of this European form of

political rule around the globe.

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The modern nation-state system found its mature expression at the end of the First World War in US President Woodrow

Wilson’s famous ‘Fourteen Points’ based on the principle of national self-determination. But Wilson’s assumption that all

forms of national identity should be given their territorial expression in a sovereign ‘nation-state’ proved to be extremely

difficult to enforce in practice. Moreover, by enshrining the nation-state as the ethical and legal pinnacle of his proposed

interstate system, he unwittingly lent some legitimacy to those radical ethnonationalist forces that pushed the world’s main

powers into the Second World War. Wilson’s other idea of a ‘League of Nations’ that would give international cooperation an

institutional expression was eventually realized with the founding of the United Nations in 1945 (see Illustration 9). While

deeply rooted in a political order based on the modern nation-state system, the UN and other fledgling intergovernmental

organizations also served as catalysts for the gradual extension of political activities across national boundaries, thus

simultaneously affirming and undermining the principle of national sovereignty.

9. The Security Council of the United Nations in session.

As globalization tendencies grew stronger during the 1970s and 1980s, it became clear that the international society of

separate ↵ states was rapidly turning into a global web of political interdependencies that challenged conventional forms

of national sovereignty.

In 1990, at the outset of the First Gulf War, US President George H. W. Bush announced the birth of a ‘new world order’

whose leaders no longer respected the idea that cross-border wrongful acts were a matter concerning only those states

affected. Did this mean that the modern nation-state system based on national sovereignty and autonomy was no longer

viable?

The demise of the nation-state?

Globalizers respond to this question affirmatively. At the same time, these observers consider political globalization a mere

secondary phenomenon driven by more fundamental economic and technological forces. They argue that politics has been

rendered almost powerless by an unstoppable techno-economic juggernaut that will crush all governmental attempts to

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↵ reintroduce restrictive policies and regulations. Endowing economics with an inner logic apart from, and superior to,

politics, these commentators look forward to a new phase in world history in which the main role of government will be to

serve as a superconductor for global capitalism.

Pronouncing the rise of a ‘borderless world’, globalizers seek to convince the public that globalization inevitably involves the

decline of bounded territory as a meaningful concept for understanding political and social change. Consequently, they

suggest that political power is located in global social formations and expressed through global networks rather than through

territorially based states. In fact, they argue that nation-states have already lost their dominant role in the global economy. As

territorial divisions are becoming increasingly irrelevant, states are even less capable of determining the direction of social

life within their borders. For example, since the workings of genuinely global capital markets dwarf their ability to control

exchange rates or protect their currency, nation-states have become vulnerable to the discipline imposed by economic choices

made elsewhere, over which states have no practical control.

The group of globalization sceptics disagrees, highlighting instead the central role of politics in unleashing the forces of

globalization, especially through the successful mobilization of political power. In their view, the rapid expansion of global

economic activity can be reduced neither to a natural law of the market nor to the development of computer technology.

Rather, it originated with political decisions made by neoliberal national governments in the 1980s and 1990s to lift

international restrictions on capital. Once those decisions were implemented, global markets and new technologies came into

their own. The clear implication of this perspective is that national territory still matters. Hence, globalization sceptics insist

on the continued relevance of conventional political units, operating in the form of either modern nation-states or global cities

linked to national units.

The arguments of both globalizers and sceptics remain entangled in a particularly vexing version of the chicken-and-the-egg

problem. After all, economic forms of interdependence are set in motion by political decisions, but these decisions are

nonetheless made in particular economic contexts. As we noted, the economic and political aspects of globalization are

profoundly interconnected. For example, it has become much easier for capital to escape taxation and other national policy

restrictions. In 2016, the ‘Panama Papers’—a leaked set of nearly 12 million confidential documents—revealed how wealthy

individuals (including government officials) managed to evade national income taxes by hiding their assets in Panamanian

offshore companies. Moreover, global markets frequently undermine the capacity of governments to set independent national

policy objectives and impose their own domestic standards. Hence, it is difficult not to acknowledge the decline of the nation-

state as a sovereign entity and the ensuing devolution of state power to regional and local governments as well as to various

supranational institutions.

Political globalization and migration

On the other hand, the relative decline of the nation-state does not necessarily mean that governments have become impotent

bystanders to the workings of global forces. States can still take measures to make their economies more or less attractive to

global investors. In addition, they have continued to retain control over education, infrastructure, and foreign policy. But the

intensifying population movements in the era of globalization have challenged some of the most crucial powers of nation-

states: immigration control, population registration, and security protocols. Although in 2016 only 2 per cent of the world’s

population lived outside their country of origin, immigration control has become a central issue in most advanced nations.

Many governments seek to restrict population flows, particularly those originating in the poor countries of the global South.

Even in the United States, annual inflows of about 1 million legal permanent immigrants during the ↵ 2010s are less than

the levels recorded during the first two decades of the 20th century.

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In order to illustrate the growing problems of nation-states to cope with increasing trans-border migration flows, let us

consider a recent example that has proven to be especially challenging: the Syrian refugee crisis. It started in March 2011

when, as part of the wider Arab Uprisings that swept across the Middle East region from Tunisia to the Gulf States, pro-

democracy protests erupted in Syria that challenged the authoritarian rule of President Bashar al-Assad and his Baath Party.

At first, Assad seemed to bow to mounting domestic foreign pressure to hold free elections and respect basic human rights.

But once Russian President Vladimir Putin signalled his support, the Syrian dictator embarked on a confrontational course

with pro-democracy demonstrators whom he vilified as ‘rebel forces’. The country quickly descended into an all-out civil war

that would kill more than 250,000 people over the next five years.

The relentless fighting triggered a humanitarian crisis of truly epic proportions. By 2016, nearly 6 million Syrians—out of a

total population of 23 million—had been internally displaced. Close to 5 million people had fled the country in search of both

personal safety and economic opportunity (see Map 4). The majority of Syrian refugees ended up in camps in the

neighbouring countries of Jordan, Lebanon, Iraq, and Turkey, where they received some humanitarian assistance from local

governments, international NGOs such as Mercy Corps and World Vision, and global institutions like the UN. Still, in most

cases, the massive refugee flows pouring out of Syria strained the available material resources of host communities and also

created significant cultural tensions with domestic populations who saw these ‘outsiders’ as a drain on their country’s

economic resources.

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Map 4. The Syrian Refugee Crisis.

In recent years, hundreds of thousands of Syrian refugees have attempted the dangerous trip across the Mediterranean from

↵ ↵ Turkey to Greece, hoping to find a better future in the prosperous states of the European Union. Germany, in

particular, emerged as their preferred place of refuge. But in order to reach their destination, Syrian migrants had to embark

on a long route that led them from Greece across Macedonia, Serbia or Croatia, Hungary or Slovenia, and Austria, until they

finally arrived in Bavaria hoping for a swift approval of their residence applications. Even though some EU countries like

Hungary resorted to rather inhumane policies and drastic measures to keep refugees out of their territory, their hastily erected

border fences stretching over many miles ultimately proved to be ineffective in stopping such gigantic population movements.

In fact, the Syrian refugee crisis revealed the inadequacy of the EU’s current institutional immigration arrangements based on

national preferences. The so-called ‘Schengen Agreement’ that provided for open borders among EU core countries lacked

the robustness and comprehensiveness necessary for coping with this crisis situation. As policy differences among various

national governments became more pronounced, some member countries temporarily withdrew from the agreement and

reinstituted systematic border controls. Others placed arbitrary limits on the number of refugees they were willing to process

and refused to consider a more coordinated approach. Unable to deal with the huge influx of migrants, the EU faced a

predicament that laid bare deep political divisions over migration policy among member states.

Moreover, the Syrian refugee crisis also made visible existing cultural fissures and biases. For example, a number of official

government ministers in member states like Poland, Slovakia, and Hungary openly expressed their opposition to the

‘Islamization of Europe’ and stated their preference for Christian refugees. Countries like Germany and Austria, on the other

hand, experienced a polarization of public sentiments with roughly even numbers of citizens supporting or opposing more

liberal immigration ↵ measures. In the face of such politically explosive divisions, the conservative German government

under Chancellor Angela Merkel showed tremendous courage and compassion by welcoming over 1 million refugees in 2015

alone—half of whom hailed from Syria. To put this remarkable number into perspective, this means that Germany accepted

more Syrian refugees than the US refugee total for all political refugees for 2015. With additional social and political crises

mounting in the global South, the migration crisis in Europe—and in many other parts of the world—is likely to continue for

many years, even decades (see Illustration 10).

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10. Syrian refugees protesting at a makeshift camp in Northern Greece, March 2016.

Finally, the intensifying global migration dynamics coupled with the activities of global terrorist networks—such as the 2015

Paris attacks or the 2016 Brussels bombings by local cells affiliated with ISIL—have revealed the inadequacy of conventional

national security routines and protocols based on the modern nation-state system. The globalization of terrorist and crime

networks has forced national governments to engage in new forms of ↵ international cooperation. Thus, we can observe

a seemingly paradoxical effect of political globalization: states still matter, but at the same time they are increasingly forced

into transnational dynamics that undermine their old claims to national sovereignty and non-interference.

In summary, then, we ought to reject premature pronouncements of the impending demise of the nation-state, while also

acknowledging its increasing difficulties in performing some of its traditional functions. Contemporary globalization has

weakened some of the conventional boundaries between domestic and foreign policies while fostering the growth of

supraterritorial social spaces and institutions that, in turn, unsettle both familiar political arrangements and cultural traditions.

As the 21st century wears on, people around the world will become more conscious of the fact that they live in a transitional

era moving from the modern nation-state system to postmodern forms of global governance.

Political globalization and global governance

Political globalization is perhaps most visible in the rise of supraterritorial institutions and associations held together by

common norms and interests (see Figure G). In this early phase of global governance, these structures resemble an eclectic

network of interrelated power centres such as municipal and provincial authorities, regional blocs, international organizations,

and national and international private-sector associations.

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G. The nation-state in a globalizing world.

Source: Jan Aart Scholte, ‘The globalization of world politics’, in John Baylis and Steve Smith (eds), The Globalization of World Politics, 2nd edn (Oxford University Press, 2001), p. 22. With permission of Oxford University Press

On the municipal and provincial level, there has been a remarkable growth in the number of policy initiatives and trans-

border links between various sub-state authorities. For example, Chinese provinces and US federal states have established

permanent missions and points of contact, some of which operate relatively autonomously with little oversight from their

respective national ↵ governments. Various provinces and federal states in Canada, India, and Brazil are developing their

own trade agendas and financial strategies to obtain loans. An example of international cooperation on the municipal level is

the rise of powerful city networks like the World Association of Major Metropolises that develop cooperative ventures to deal

with common local issues across national borders. ‘Global cities’ such as Hong Kong, London, New York, Shanghai,

Singapore, Sydney, and Tokyo sometimes are more closely connected to each other than they are to their national

governments.

On the regional level, there has been an extraordinary proliferation of multilateral organizations and agreements. Regional

clubs and agencies such as APEC or ASEAN have sprung up across the ↵ world, leading some observers to speculate

that they will eventually replace nation-states as the basic unit of governance. Starting out as attempts to integrate regional

economies, these regional blocs have, in some cases, already evolved into loose political federations with common

institutions of governance. For example, the European Community began in 1950 with French Foreign Minister Robert

Schuman’s modest plan to create a supranational institution charged with regulating French and German coal and steel

production. Half a century later, fifteen member states had formed a close community with political institutions that create

common public policies and design binding security arrangements. In the first decade of the 21st century, some of the

formerly communist countries in Eastern Europe joined the EU, which now extends as far to the East as Latvia and Romania

(see Map 5). But, as pointed out in Chapter 8, such an expansionist dynamic is by no means inexorable. The 2016 UK

referendum in favour of ‘Brexit’ is a clear illustration that globalization—and even regionalization—can be reversed.

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Map 5. The European Union.

On a global level, governments have formed a number of international organizations, including the UN, NATO, WTO, and

OECD. Full legal membership of these organizations is open to states only, and the decision-making authority lies with

representatives from national governments. The proliferation of these transnational bodies has shown that nation-states find it

increasingly difficult to manage sprawling networks of social interdependence.

Finally, the emerging structure of global governance has been shaped by ‘global civil society’—a social realm populated by

thousands of voluntary, non-governmental associations of worldwide reach. International NGOs like Doctors Without

Borders or Greenpeace represent millions of ordinary citizens who are prepared to challenge political and economic decisions

made by nation-states and intergovernmental organizations. ↵

One concrete example of the growing significance of NGOs in managing increasing global interconnectivity was the role of

Médicins Sans Frontières/Doctors Without Borders during the dramatic outbreak of the Ebola virus disease in West Africa

from December 2013 to early 2016. Made up mainly of doctors and health sector workers from around the world who

volunteer their services at any location on earth, MSF/DWB provides assistance to populations in distress such as victims of

natural and man-made disasters, and armed conflict. The NGO observes neutrality and impartiality in the name of their

medical code of ethics and also maintains complete independence from all political, economic, and religious powers. When

Ebola—one of the world’s most deadly diseases that can kill up to 90 per cent of those stricken—hit in the West African

countries of Guinea, Sierra Leone, and Liberia in late 2013, MSF/DWB were among the first responders on the ground, much

earlier than many of the aid initiatives organized by the UN or individual nation-states.

At its peak, MSF/DWF employed nearly 4,000 national staff and 325 expat staff in West Africa to combat a disease that

threatened to turn into a global pandemic, especially when isolated cases of virus transmission were reported in North

America and Europe (see Illustration 11). By the time the WHO declared an official end to the Ebola epidemic in January

2016, MSF/DWB had treated more than 10,000 patients in dozens of their management centres in the region. Given the lack

of political will by national and local governments to rapidly deploy assistance to help affected communities in West Africa,

the activities of NGOs like MSF/DWB proved to be decisive in preventing what could have easily turned into an

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unprecedented catastrophe of global proportions. There is no question that coordinated international steps must be taken to

better prepare the world for a future outbreak, and international NGOs will play a major role in both designing and

coordinating those efforts.

11. MSF health worker in Liberia holding a child suspected of having Ebola, October 2014.

As a result of the tough lessons learned in the struggle against pandemics and other global problems, some global studies

experts ↵ believe that political globalization might facilitate the strengthening of democratic transnational social forces

anchored in this thriving sphere of global civil society. Predicting that democratic rights will ultimately become detached

from their narrow relationship to discrete territorial units, these optimistic voices anticipate the creation of a democratic

global governance structure based on Western cosmopolitan ideals, international legal arrangements, and a web of expanding

linkages between various governmental and non-governmental organizations. If such a promising scenario indeed comes to

pass, then the final outcome of political globalization might well be the emergence of a ‘cosmopolitan democracy’ that would

constitute the basis for a plurality of identities flourishing within a structure of mutual toleration and accountability (see

Figure H).

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Subscriber: Drake University; date: 07 September 2020

1.

2.

3.

4.

H. Incipient global governance: a network of interrelated power centres.

Source: adapted from Peter Willets, ‘Transnational actors and international organizations in global politics’, in Baylis and Smith, The Globalization of World Politics, 5th edn (Oxford University Press, 2011), p. 339. With permission of Oxford University Press

According to David Held, one of the chief academic proponents of this view, such a cosmopolitan democracy of the future

would contain the following features: ↵

A global parliament connected to regions, states, and localities;

A new charter of rights and duties locked into different domains of political, social, and economic power;

The formal separation of political and economic interests;

An interconnected global legal system with mechanisms of enforcement from the local to the global.

A number of less optimistic commentators have challenged Held’s idea that political globalization is moving in the direction

of cosmopolitan democracy. Most criticisms boil down to the charge that his benign vision indulges in an abstract idealism

that fails to engage current political tensions on the national level of public policy such as the clashing immigration

perspectives within the EU. Global governance sceptics have also expressed the suspicion that the proponents of

cosmopolitan democracy do not consider in sufficient detail its cultural feasibility. In other words, the worldwide

intensification of cultural, political, and economic interactions makes the possibility of resistance and opposition just as real

as the benign vision of mutual accommodation and tolerance of differences. To follow up on this cultural dimension of

globalization, let us turn to Chapter 5.

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