Why the World Isn't Flat

BY PANKAJ GHEMAWAT | FEBRUARY 14, 2007

Ideas will spread faster, leaping borders. Poor countries will have immediate access to information that was once restricted to the industrial world and traveled only slowly, if at all, beyond it. Entire electorates will learn things that once only a few bureaucrats knew. Small companies will offer services that previously only giants could provide. In all these ways, the communications revolution is profoundly democratic and liberating, leveling the imbalance between large and small, rich and poor." The global vision that Frances Cairncross predicted in her Death of Distance appears to be upon us. We seem to live in a world that is no longer a collection of isolated, "local" nations, effectively separated by high tariff walls, poor communications networks, and mutual suspicion. It's a world that, if you believe the most prominent proponents of globalization, is increasingly wired, informed, and, well, "flat."

It's an attractive idea. And if publishing trends are any indication, globalization is more than just a powerful economic and political transformation; it's a booming cottage industry. According to the U.S. Library of Congress's catalog, in the 1990s, about 500 books were published on globalization. Between 2000 and 2004, there were more than 4,000. In fact, between the mid-1990s and 2003, the rate of increase in globalization-related titles more than doubled every 18 months.

Amid all this clutter, several books on the subject have managed to attract significant attention. During a recent TV interview, the first question I was asked -- quite earnestly -- was why I still thought the world was round. The interviewer was referring of course to the thesis of New York Times columnist Thomas L. Friedman's bestselling book The World Is Flat. Friedman asserts that 10 forces -- most of which enable connectivity and collaboration at a distance -- are "flattening" the Earth and leveling a playing field of global competitiveness, the likes of which the world has never before seen.

It sounds compelling enough. But Friedman's assertions are simply the latest in a series of exaggerated visions that also include the "end of history" and the "convergence of tastes." Some writers in this vein view globalization as a good thing -- an escape from the ancient tribal rifts that have divided humans, or an opportunity to sell the same thing to everyone on Earth. Others lament its cancerous spread, a process at the end of which everyone will be eating the same fast food. Their arguments are mostly characterized by emotional rather than cerebral appeals, a reliance on prophecy, semiotic arousal (that is, treating everything as a sign), a focus on technology as the driver of change, an emphasis on education that creates "new" people, and perhaps above all, a clamor for attention. But they all have one thing in common: They're wrong.

In truth, the world is not nearly as connected as these writers would have us believe. Despite talk of a new, wired world where information, ideas, money, and people can move around the planet faster than ever before, just a fraction of what we consider globalization actually exists. The portrait that emerges from a hard look at the way companies, people, and states interact is a world that's only beginning to realize the potential of true global integration. And what these trend's backers won't tell you is that globalization's future is more fragile than you know.

THE 10 PERCENT PRESUMPTION

The few cities that dominate international financial activity -- Frankfurt, Hong Kong, London, New York -- are at the height of modern global integration; which is to say, they are all relatively well connected with one another. But when you examine the numbers, the picture is one of extreme connectivity at the local level, not a flat world. What do such statistics reveal? Most types of economic activity that could be conducted either within or across borders turn out to still be quite domestically concentrated.

One favorite mantra from globalization champions is how "investment knows no boundaries." But how much of all the capital being invested around the world is conducted by companies outside of their home countries? The fact is, the total amount of the world's capital formation that is generated from foreign direct investment (FDI) has been less than 10 percent for the last three years for which data are available (2003-05). In other words, more than 90 percent of the fixed investment around the world is still domestic. And though merger waves can push the ratio higher, it has never reached 20 percent. In a thoroughly globalized environment, one would expect this number to be much higher -- about 90 percent, by my calculation. And FDI isn't an odd or unrepresentative example.

The levels of internationalization associated with cross-border migration, telephone calls, management research and education, private charitable giving, patenting, stock investment, and trade, as a fraction of gross domestic product (GDP), all stand much closer to 10 percent than 100 percent. The biggest exception in absolute terms -- the trade-to-GDP ratio shown at the bottom of the chart -- recedes most of the way back down toward 20 percent if you adjust for certain kinds of double-counting. So if someone asked me to guess the internationalization level of some activity about which I had no particular information, I would guess it to be much closer to 10 percent -- the average for the nine categories of data in the chart -- than to 100 percent. I call this the "10 Percent Presumption."

More broadly, these and other data on cross-border integration suggest a semiglobalized world, in which neither the bridges nor the barriers between countries can be ignored. From this perspective, the most astonishing aspect of various writings on globalization is the extent of exaggeration involved. In short, the levels of internationalization in the world today are roughly an order of magnitude lower than those implied by globalization proponents.

A STRONG NATIONAL DEFENSE

If you buy into the more extreme views of the globalization triumphalists, you would expect to see a world where national borders are irrelevant, and where citizens increasingly view themselves as members of ever broader political entities. True, communications technologies have improved dramatically during the past 100 years. The cost of a three-minute telephone call from New York to London fell from $350 in 1930 to about 40 cents in 1999, and it is now approaching zero for voice-over-Internet telephony. And the Internet itself is just one of many newer forms of connectivity