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Will the current economic turmoil result in a back tracking of globalization?

Many people think that the coming recession will lead governments in the U.S. and elsewhere to become more protectionist thereby slowing or reversing the ongoing march of globalization. I disagree for the simple reason that companies from the mature developed countries need access to high growth markets like China and India more than ever. Any protectionism in the developed countries will be met by a counter response thereby jeopardizing this much needed access.

Globalization refers to integration across economies. As the spread of the U.S. sub-prime crisis to the rest of the world has demonstrated, the world economy is more integrated than ever. As is also clear, a solution to this crisis has to be a globally coordinated one involving the developed as well as the major developing economies rather than isolated actions by individual countries.

Over the next five years, the primary growth opportunities will lie in the big emerging powerhouses (primarily China and India) and not in the developed markets of U.S., Europe, and Japan. Even as the U.S. and Europe head into a recession, China’s GDP is expected to grow above 9% in 2008 and around 8% for 2009. For India the predications are above 8% in 2008 and around 7% for 2009. Thus, for any established MNC, pushing for growth requires a deeper commitment to the pursuit of markets in China and India.

Another likely byproduct of the current recession in the U.S. and Europe will be a more intense push for cost reduction. As a result, companies are likely to be more eager to outsource value chain activities from countries such as China and India where the cost of blue collar labor is 1/20th and that of white collar labor 1/5th of the costs in the U.S..

For companies headquartered in China or India, the current economic turmoil means lower asset prices in the developed world creating more favorable opportunities to acquire valuable businesses. Thus, another outcome of the current economic turmoil is likely to be a more rapid globalization of the emerging dragons and tigers from China and India.