Free Trade, Business Strategy and Globalization

This paper links the economist's analysis of free trade with the business strategist's analysis of the forces behind the globalization of competition. It argues that, although the drive to globalization may seem different from the seeking of superior outcomes in competitive markets, this may be only because the modern reference point for competition is inappropriate. However, reference to classical ideas of competition shows that both the advantages of globalization, and its disadvantages, had been anticipated by classical writers of the eighteenth century, most notably by Adam Smith. That argument is supported with two main lines of reasoning. The first identifies globalization as the most recent stage in a process of stadial development. The second links global business strategy to the analysis of competition as a dynamic process in classical economics. These two ideas are combined, to provide the basis for a 'cumulative causation' argument. In this approach, expansion of production, innovation, and increasing returns, are mutually reinforcing, causing a progressive spiral of growth. However, it is pointed out that the same process can cause 'vicious circles' as well as 'virtuous circles'. If demand starts to stagnate, this tendency can be self-reinforcing, with firms who are not industry leaders going to the wall, and a tendency to monopolisation asserting itself. Thus the process of globalization needs to be guided; the 'virtuous circle' is not a necessary outcome.