Cross-border flows plummeted in 2020 as the Covid-19 pandemic swept the world, reinforcing doubts about the future of globalization. As we move into 2021, the latest data paint a clearer — and more hopeful — picture. Global business is not going away, but the landscape is shifting, with important implications for strategy and management.
The Covid-19 pandemic is not likely to send the world’s level of globalization below where it stood during the 2008-09 global financial crisis (the worst setback for international trade and capital flows in decades), according to the 2020 edition of the DHL Global Connectedness Index, which we released in December. The index measures globalization based on more than 3.5 million data points on trade, capital, information, and people flows.
The only part of the index showing an unprecedented collapse due to Covid-19 is people flows. Trade has rebounded strongly, capital flows are recovering, and digital information flows have surged. Consider the business implications of developments in each of these four areas:
1. Trade Flows
The rebound of world trade has surpassed even the most optimistic early forecasts. Trade in goods dropped faster in March and April 2020 than during the Great Depression and the global financial crisis. But it started growing again in June and rocketed all the way back to its pre-pandemic level by November. Despite early disruptions, trade turned out to be a lifeline for economies and health care systems. Trade in medical products and electronics (for working from home) soared, as social distancing shifted spending from local services (e.g. restaurants) to imported goods.
The trade turnaround should put to rest the idea that Covid-19 is the last straw for global supply chains. Many companies have already shelved pandemic-era reshoring plans, recognizing that concentrating production at home often raises costs without boosting resilience. Diversification across efficient domestic and/or foreign production locations, along with investments in technology and inventory, usually makes more sense, and surveys show more companies embracing these strategies.
Expect supply chain shifts to accelerate when business travel opens up again, but with most pre-pandemic trends, such as China plus one sourcing, continuing. With trade still flowing, companies risk falling behind competitively if they miss out on imported inputs or export sales. So, efforts to boost resilience need to fit into broader supply-chain strategies addressing shifts in demand and production costs across countries, geopolitical tensions, and advances in automation and other technologies.
2. Capital Flows
Cross-border investment flows were hit even harder than trade by Covid-19. Investors withdrew record amounts of portfolio capital from emerging markets at the onset of the pandemic, but these flows quickly stabilized and then rallied in late 2020. Bold fiscal and monetary policy responses have, thus far, prevented the Covid-19 crisis from turning into another global financial crisis.
International corporate investment, however, is still subdued going into 2021. Foreign direct investment (FDI) flows, which involve companies buying, building, or reinvesting in operations abroad, fell 42% in 2020, to a level last seen in the 1990s. Firms are understandably cautious about investing in new “greenfield” expansion amid a fragile and uneven economic recovery. However, international mergers and acquisitions (M&A) started to show signs of a pickup in late 2020, and the international share of M&A activity held steady last year. Corporate dealmakers do not appear to have become more averse specifically to international transactions.
Prospects for international business investment should brighten as pandemic-induced macroeconomic uncertainty, lockdowns, and travel restrictions begin to lift. But tighter screening of foreign takeovers on national security grounds will remain in place, and supply-chain diversification and partial reshoring will boost prospects for some projects while making others less attractive. The business case for investing in foreign operations will still rest on traditional drivers, such as access to markets and resources, but risk assessments should place greater emphasis on geopolitical factors in the present context.
3. Information Flows
Before the pandemic, there were signs of a slowdown in the globalization of information flows. The growth of international internet traffic, phone calls, royalties, and scientific collaboration had all diminished. But then digital flows surged as the pandemic sent work, play, and education online. International internet traffic soared 48% from mid-2019 to mid-2020, and international telephone call minutes rose 20% in March versus the same month the previous year. According to one study, cross-border e-commerce sales of discretionary goods spiked 53% in the second quarter of 2020. All that said, though, domestic data and calls have also grown significantly during the pandemic. So, we cannot say yet whether information flows have become more — or less — globalized in 2020.
Looking forward, the growth of digital flows will slow down again as the pandemic-induced spike fades. But the 2020 digital flows boom will have accelerated two longer-run shifts in the business environment. First, it expands possibilities for services trade. The Covid-19 crash course in remote work is teaching companies ways of working that can enable them to tap more into foreign talent pools. Second, the expansion of cross-border e-commerce can help smaller companies go global, but it also means that companies of all sizes need to be on the lookout for new competitors riding this wave into their markets.
4. People Flows
While trade, capital, and information flows all had positive roles to play in the pandemic response, personal mobility had to be restricted to curb transmission of the virus, prompting this year’s unprecedented decline in people flows. The number of people traveling to foreign countries fell 74% in 2020. International travel is not expected to return to its pre-pandemic level before 2023.
Business trips were just 13% of international travel before the pandemic, but they play key roles in facilitating trade, investment, and the management of global corporations. Travel supporting companies’ external sales and business development agendas is expected to recover before travel for internal company meetings and participation in conferences and trade shows. This implies that managers in multinational corporations should pay special attention over the medium-term to effects of travel restrictions on internal team functioning and learning and innovation. Remember that global teams are more vulnerable than domestic teams to misunderstandings and breakdowns of trust, especially after long periods without in-person contact.
So, the pandemic has not halted most types of international flows. Nor has it clearly turned the tide toward deglobalization moving forward. The DHL Global Connectedness Index 2020 report also looks for evidence of the global economy fracturing into rival blocs. U.S.-China decoupling has advanced somewhat since the onset of the trade war in 2018, but these economies remain highly intertwined. China’s share of U.S. trade spiked during the pandemic, and American multinationals such as Walmart, Tesla, Disney, and Starbucks continue to invest there. Moreover, the average distance across which countries trade has been on a modest rising trend since 2016. This casts doubt on the contention that we are seeing a big shift from globalization to regionalization.
Many governments have also taken major steps to open markets over the past year. The Regional Comprehensive Economic Partnership (RCEP) was signed in November, promising to simplify trade across a swath of the Asia-Pacific region that encompasses almost one-third of the global economy. The US-Mexico-Canada agreement (USMCA) entered into force in July, replacing the North American Free Trade Agreement (NAFTA). And trading under the African Continental Free Trade Agreement (AfCFTA) began on January 1, 2021.
These moves are supported by public opinion data. Majorities across several countries want more international cooperation, and polling in the U.S. shows record-high support for globalization in general and for immigration specifically.
The bottom line for business is that Covid-19 has not knocked globalization down to anywhere close to what would be required for strategists to narrow their focus to their home countries or regions. Corporate globalization was never easy, but if international opportunities and competitive threats mattered for a company before the pandemic, they will surely continue to matter in 2021 and beyond. And since countries that connect more to global flows tend to grow faster, we need more rather than less globalization to accelerate the recovery from Covid-19.
