I have enjoyed reading Thomas Friedman’s work over the years, but I have to say that I am not a big believer in the Flat World hypothesis. Although intellectually appealing in many ways, it is not supported by scientific evidence. Decades of international business research has demonstrated that companies that span national boundaries face enormous risks and challenges. Moreover, a casual glance at the popular press on just about any given day provides countless examples of companies whose international expansion efforts have foundered because they failed to account for the additional costs imposed by institutional distance (for background, see my posts So You Want to Do Business in  a Developing Country, Tata and Jaguar, Tesco’s Venture into the U.S.).

In fact, just this week I received an email from Mike Malone of ABC News calling my attention to a recent article addressing the Flat World debate (see Navigating a Flat and Bumpy World). Mike writes:

Despite the title of a best-selling book of a few years back, it turns out that the world isn’t flat. And, despite all of the leveling forces being unleashed by the Internet, global business and social networks, it won’t be getting any flatter in our lifetimes.

But don’t believe the growing legions of naysayers to Tom Friedman’s book either, because nearly all of them begin by accepting his underlying premise … and then set out to debunk it by showing how pockets of entrenched cultural differences won’t succumb to Twitter and the iPhone.

As many recent stories have shown, if your business follows Friedman’s advice you are very likely to get blindsided by markets with rules that are alien — even antithetical — to our own.

Although Mike writes mostly about how technology impacts globalization and tries to find common ground between those who adhere to a Flat World view and those who subscribe to a Spiky World view, I thought his opening salvo (quoted above) was spot on.

Another good example of how the world is not so flat can be found in Qantas’s latest trouble in Vietnam (see Jetstar Creates a Jet Stir in Vietnam, ht Steve). According to Crikey:

The $US50 million ($A53.9 million) Qantas investment in Jetstar Pacific has flown into an ideological chasm in the ranks of the Communist Party and government in Vietnam and it isn’t clear how it can escape.

…ideologues in the [Vietnamese Communist] party are waging a glorious struggle against the oppression of the people and their cultural identity from the subversive forces of global capitalism, or words to that effect.

And if that weren’t enough evidence, last week BA and Iberia formally announced that they will merge (see Uniting in the Sky). What strikes me as interesting is not the deal itself, as I actually think that this deal makes a fair bit of operational sense. The potential for synergies are enormous. However, what struck me as odd is that BA and Iberia will be maintaining separate corporate offices and operations (one in Spain and one in the UK):

…while the pair will combine their businesses they will maintain separate corporate operations. This will allow both to maintain their roles as the national flag-carriers while keeping valuable bilateral international landing rights that go along with that status.

That may be; however, maintaining separate operations will also keep their costs elevated and reduce their competitiveness in a market that is often characterized as global. If companies can’t find a way to benefit from economies of scale in a global, homogeneous goods market like the airline industry (or even the automobile industry), …how flat is the world, really??

The Economist posted a nice chart this week of the number of mentions of the word “Globalization” in their magazine since 1979 (see Going Global).

It seems that the number of mentions grew briskly through the dawning of the new millennium, with a drop off after the dotcom bust. The number of mentions picked up once again from 2005-2007, but has tailed off since the start of the financial crisis.

In order to see if these numbers were consistent with mentions of the term “Globalization” at large, I checked the number of mentions in Google Trends.

Although the Google Trends data go back only to 2004, somewhat interestingly, it seems that Globalization as a search term has been decreasing steadily from 2004-2009.

I wonder if the differences across charts speak to the differences in interests between the readership of a specialized economics magazine and the general populous, …or if The Economist is missing the boat, dedicating more time and attention to topics that readers are increasingly uninterested in?

Personally, I think Globalization is not only an interesting phenomenon in its own right, but given the global nature of the financial crisis, an especially timely topic for debate. It should not be a surprise where I stand on that debate. I have long been a proponent of Globalization (see Globalization and its Discontents, Globalization Revisited, or Interview in the Effective Executive).

Oops, I may have just answered my own question.

Robert Cyran raised a legitimate question about Cisco’s growth trajectory and corporate strategy in a recent New York Times article (see Cisco’s Run of Spending). According to Mr. Cyran:

Cisco, the computer networking giant, has spent the last decade acquiring rivals and buying back stock. It’s time to acknowledge that this strategy isn’t working. Investors who bought Cisco’s shares a decade ago have received no return on their investment.

MY COMMENT: That might be true, but in all fairness, if you’d bought the Nasdaq index a decade ago, you haven’t received much return either. In nominal price terms, Cisco’s return is more or less equivalent to that of Cisco. But we’ll come back to that later.

Results this week should give Cisco another chance to profess its optimism…Eternal ebullience is nothing new from Mr. Chambers, who once claimed Cisco could increase sales by 50 percent a year over the long run. They’ve since grown 7 percent annually.

Yet the years of deal making may be making Cisco unwieldy. Cisco has 59 standing boards and councils. This seems like a recipe for endless meetings, management confusion and reduced accountability.

MY COMMENT: This latter point is one with which I wholeheartedly agree. In fact, one of the basic tenets of transaction cost economics (see Oliver Williamson, Nobel Honoree) is that although acquisitions might make sense when there is market failure, at some point the benefits of bringing transactions within a firm (e.g., through acquisition) wear off. Size eventually yields inefficiency.

Cisco has always acquired and plugged companies into its sales and production network.

…Cisco continues to acquire new businesses — $22 billion worth since 2002 (including some $7 billion this year), according to Dealogic.

The other pillar of Cisco’s strategy, stock repurchases, hasn’t rewarded shareholders either. Returning excess cash from operations to shareholders should increase a stock price. Unfortunately, in Cisco’s case, the practice hasn’t measured up to theory. Cisco has spent close to $60 billion on stock buybacks since the start of its 2002 fiscal year. That’s about three-quarters of cash flow from operations. So why haven’t shareholders benefited?

First, the total count of shares outstanding has only decreased by 1.3 billion. This is partly because of dilutive acquisitions. However, if the number of shares hasn’t shrunk much and Cisco’s stock hasn’t risen, this presents a conundrum. What exactly is the benefit to shareholders of these purchases? Shouldn’t the price of a slice of Cisco increase if it is spending so much on buybacks?

MY COMMENT: Ouch! Now that is damning evidence. If the number of shares (float) decreases but the price remains the same, shareholder value is destroyed. In this sense then, Cisco’s return actually compares unfavorably in real terms to that of the Nasdaq. Moreover, it is suggestive that Cisco’s acquisitions may have played a role in destroying shareholder value (see Acquisitions, A Great Shareholder Ripoff).

So what is Mr. Cyran’s proposed solution?

After 10 years of searching for the promised land of growth, it’s time for something different. Slowing acquisitions would [be] a good start.

Moreover, if Cisco is so complex that it requires 59 councils, it should consider breaking into more manageable pieces.

MY COMMENT: After years as a Wall Street darling, I wonder whether Cisco truly deserves that distinction. And I agree that it might not be a bad idea for them to reevaluate their corporate strategy.

Good stuff!!