Is our country ready for the transition from globalization to localization?

English Section / 30 octombrie 2020

Is our country ready for the transition from globalization to localization?

Localization has become one of the most discussed topics in the US and Europe since the outbreak of the pandemic, after globalization has brought major benefits for large companies.

Thus begins a recent analysis by Deutsche Bank, signed by Jim Reid and Luke Templeman, which presents the actions of "forces of localization", which they claim "have engaged in a conspiracy against major corporations and in favor of small companies".

Corporations have benefited from globalization because they have built their production capabilities in countries where labor costs were low. Furthermore, these multinational companies have also created international supply and distribution chains, which have allowed them to significantly lower their production costs, Reid and Templeman say.

The trend toward globalization has mellowed significantly over the last few years, and the pandemic has done nothing but emphasize the dramatic change in favor of localization.

DB analysts have identified five main forces acting in favor of localization and against major companies.

The first is the significant drop in direct foreign investments, as "direct foreign investments, particularly in China, have led to an increase in the relative profitability of corporations compared to major companies".

Between China's joining of the WTO and 2019, direct US investments in China have increased almost ten times, and after the relative stagnation during the financial crisis, they have increased almost two times between 2013 and 2019.

A similar development was seen for foreign direct investments by European companies in China, but the accelerated upwards trend has only been maintained until 2013.

Now, the situation has changed radically. "The drop in investments this year will be brutal", the DB analysis states, as the most recent estimates of the World Investment Report of the UNCTAD (United Nations Conference on Trade and Development) show a 40% decline YOY, below the 1 trillion dollar level which was surpassed in 2005.

The second force acting in favor of small companies and the localization process is the increase in wages in China, amid the changing demographic structure of the population, given that "there is a lack of outsourcing alternatives on a scale similar to China."

According to the report, production costs in the manufacturing industry have increased sharply in China and reached a level only 5% lower than in the United States.

Then the authors come up with very important information for the prospects of Romania's economy. Reid and Templeman state that countries cheaper than China, in terms of including energy costs in comparison, are Mexico, Ireland, India, Thailand and Romania, while Poland and Hungary are only slightly more expensive.

Deutsche Bank analysts conclude that many compelling arguments can be found for relocating a significant number of European corporations to Ireland, Romania, Hungary and Poland, especially given their geographical proximity.

The opportunities for Romania are not limited, however, just to the possible return "home" of European corporations, but are represented, above all, by the creation of an environment that facilitates the creation and development of small companies.

These are also favored by the third force presented in the analysis from DB, namely the growing emphasis on ESG (Environmental, Social, Governance) criteria, which have a high potential for disrupting the current distribution chains.

The other two forces are customers and the political situation. In the first case we are dealing with changing consumer preferences, manifested more and more by giving up goods which are mass-produced by large international corporations and opting for personalized goods and services, a phenomenon that benefits small businesses operating in local markets.

The authors point out that the corporations' attempts to buy out such companies and to keep the brands did not have the expected success, as they still used the same distribution channels used for the mass produced goods.

Not least of all, political circumstances have come to represent some of the most important forces for localization, amid the rising popularity of politicians that promise supporting the national economies towards preserving or increasing the number of jobs.

Also being pursued is the changing of the taxation regime, so as to eliminate the tax advantages of relocating the corporate headquarters. An OECD program aims to change corporate tax regulations over the next 12 months, according to Deutsche Bank analysts.

The conclusion of the DB report emphasizes the ability of small companies to better adapt to the transition from globalization to localization, given that for them "there is no burden on investment in global distribution chains".

Small companies also buy production factors, raw materials, and labor at a lower scale, which means they can better use the local resources, and they are also not subjected to such a high pressure from investors to build additional production capabilities.

After three decades wasted by irresponsible and short-sighted authorities, which have as their only "merit" the fierce obstruction of every private sector initiative towards the reconstruction and accumulation of national capital, i.e. the basis for sustainable income growth, our country may be facing once again a historic chance.

In order to seize that chance there is no need for centrally-dictated "visionary" policies, just the creation of a fiscal, monetary and legal framework that would eliminate the barriers to innovation by the private sector.

Can we hope that Romania will be ready for switching from globalization to localization?

"We are witnessing a conspiracy of the forces of localization against major corporations and in favor of small companies". (Jim Reid and Luke Templeman, Deutsche Bank)

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