Deglobalisation: Is geo-politics forcing businesses to localise?

Maitreyi Balasubramanian – 25BC337

Introduction

It is said not to put all your eggs in one basket. The idea behind the saying is to emphasise the
risk of dependency on a single entity, and that benefits are derived from diversification. The
rapid spread of globalisation chased this idea for decades, spreading the operations of
businesses worldwide and increasing inter-dependency among countries. Yet this belief is
questioned when a newer factor of control becomes more and more important. Frequent
geopolitical and economic upheavals threaten the status quo, and not all changes end up being
beneficial. To minimise risk, businesses are exploring alternative strategies. The hypothesis
laid down by this article suggests that frequent geopolitical shocks are driving a trend of “De-
globalisation”. This de-globalisation has been explained in this article practically by looking at
case studies where governments are encouraging the rise of new, local businesses and
theoretically by explaining different strategies followed by established global companies to
localise supply chains and technology.

Increase in Geopolitical unrests and Economic volatility

The 2020s remain characterised with geopolitical unrests and economic volatility, unparallelled
since perhaps the WWII era. The Covid-19 pandemic in 2020 brought normal functioning of
business to halt, caused significant global contraction of output and collapsed trade volumes
by 7.4%. The Russia-Ukraine conflict from February 2022, and resultant sanctions imposed
by western countries severely impacted the energy, wheat and fertiliser prices worldwide.
Israel-Hamas war has intensified the middle-eastern crisis whose ripple effects impacted
energy, defence and regional investment flows. More recently, collapse of the Nepali and
Bangladeshi governments, the terror attack by Pakistani and the resultant Operation Sindhoor
has increased military tensions in the Indian subcontinent. From an economic perspective, Sri
Lanka and Pakistan experienced severe financial crisis and the series of self-destructive trade
wars have been launched due to the imposition of new tariffs system by the US government.
(source: McKinsey, Quarterly Article, May 17, 2024)

The above description establishes the case that geopolitical tensions have increased manifold,
and as expected, has also caused disruptions in global trade and commerce

Unpredictability and volatility cause business operations to be disrupted in many areas.

Businesses can only remain reliant on foreign markets if they are convinced of political and
economic stability of environment. Sudden price fluctuations, sanctions preventing critical
supply, and rising cost of cross-border trade has led to businesses adopt policies to maintain
stability. This policy is most often, to de-globalise, i.e, to reduce world-wide dependency and
ensure survival of business and profitability beyond geopolitical unrests. De-globalisation
reduces uncertainty of contracts being fulfilled and encourages companies to trade, since
domestic supply could meet domestic demand, without being challenged by foreign global
threats. Hence, it can be said that geopolitical disturbances have led to businesses to de-
globalise for the simple reason of prioritising stability and avoiding huge losses associated with
political and economic wars. Two paths towards deglobalisation include localisation and
establishment of local industries

Two stories of localisation: Self-reliance in opposite ends of the world

Policy instruments, targeted incentives and investments in ecosystems are tools that are
increasingly being used by government and private sector to foster local capacity and
production. Tariffs and non-tariff barriers, production-linked incentives and national trade
movements are being implemented worldwide to set up local industries. For developing
countries, skill-training programmes, logistics infrastructure investments are required for
reducing dependency on global markets. This research article explores two case studies - the
CHIPS and Science act in the US, and the Atmanirbhar initiative in India to build localised
industries to tackle geopolitical shifts.

US CHIPS and Science Act-

The United States, being heavily dependent on China for semi-conductors, introduced its
CHIPS and Science Act (Creating Helpful Incentives to Produce Semiconductors) in 2022.
This law aimed to strengthen US semiconductor research and manufacturing through a mixture
of grants, investments and tax credits. The overall objective of such an act is to ensure that
essential technologies are built and supplied in trusted US ecosystems. In particular, research
and development investments include public-private partnerships which promote workforce
training programmes and developments of next-generation technologies like advanced node-
chips. By investing in infrastructure and construction of “fabs” (fabrication capacity) in the
US, physical production of chips has been re-routed to the US, instead of China. Through this
initiative, over 22 states in the US have established “fabs” and 8 advanced packaging facilities
have been proposed. Resilience has improved, and US no longer faces immediate risk of supply
chain disruptions, having built sufficient buffers. Additional benefits include spillover effects
of such investment such as increased domestic employment, testing - packaging ecosystems
established and a boost to the overall economy. Data indicates that an estimated 115,000 jobs
have been added in construction and manufacturing of chips. Through this initiative, it is
estimated that US would gain a 28% of global advanced chips capacity by 2032, from a near-
zero level in 2022.

However, government incentives will still remain to be temporary solutions to build self-
reliance, unless structural causes are solved. More efforts must be made to reduce cost of
production and fill in the gaps of skilled technicians to reduce talent-dependencies as well. This
effort into building self-reliance is a R&D based one, so while efforts may show initial success,
the full impact can only be gauged over a 20-year period stretching into the 2040s.

Atmanirbhar Bharat –

The Atmanirbhar Bharat campaign was launched in May 2020 to promote Indian goods in
global supply chain markets and help India achieve self-reliance. Through the Atmanirbhar
initiative, government trust in private sector capabilities was enhanced and corporate entities
were viewed as important players to gain self-sufficiency and economic prosperity. Research
indicated that India possessed the domestic capacity to replace 25% of its imports from China
without any additional investments, by repairing existing bottlenecks and supply issues.
Production-linked incentive (PLI) schemes played a catalytic role in transforming certain
industries to become less reliant on imports. These include automobiles, pharmaceuticals and
mobile-manufacturing. The agenda remained same across different sectors, which was to
promote local value addition, follow import substitution and implement domestic supply-chain
ecosystems. Evidence suggests that this formula has led to significant gains. PLI schemes have
led to creation of 12 lakh direct and indirect jobs across industries, and generated over 16.5
lakh crore in sales. Mobile manufacturing units increased from merely 2 in 2014 to over 300
in 2025, aided by Make-in-India initiative. Share of locally made phones in domestic market
has increased to a staggering 99.2%. Increase in defence exports, development of the Vande-
Bharat trains, and indigenous vaccine research serve as testimony to the programme’s success.
A unique approach in the case of Atmanirbhar Bharat campaign was not only addressing supply
side issues, but to tackle domestic demand for imported goods. Target campaigns like “Vocal
for Local” were launched to appeal to nationalistic sentiments of the population and persuading
them to purchase locally produced goods.
Yet, similar to the case of US CHIPS Act, initiative towards self -reliance is largely supported
by government-backed expenditures, which might prove to be heavy fiscal burden if private
sector doesn’t parallelly increase its own efforts. The improvements have also been uneven,
with sectors like textiles and chemicals underperforming and losing markets to competitors like
Bangladesh and Vietnam. Bureaucratic delays in incentive implementation and presence of
skills mismatch prove to be major hurdles to efficiently exploit the benefits of self-reliance
schemes like Atmanirbhar Bharat.

Localisation of global operations-

In an effort to combat geopolitical fragmentation, establishing local units without generating

subsequent risks to the parent companies abroad is held as the primary solution, called
localisation. This series of localisation moves undertaken by companies to mitigate risks
associated with exposure, to enable locally informed decision making is known as “structural
segmentation”.

Full structural segmentation compels the businesses to set parallel and independent units in
several hubs across the globe, which indicates possible future investment in franchises over
FDI controlled businesses. The alternative is for the companies to restrict or re-route its
operations via the home country and allied partners, termed “friend-shoring”. From a
governance perspective, this will lead to newer foreign alliances and regional blocs being made
to foster trade and business without the underlying risk global uncertainty.

The easier approach for companies has been full structural segmentation Companies have taken
the easier approach full structural segmentation, which has resulted in localisation of supply
chains, in order to reduce dependency. This can be termed as strategic diversification, and
ensures survival of business if one part of the globe is cut off. Some companies have undertaken
the “in market, for market” approach, where localised supply chains are built so that demand
is met by supply produced in the same region, to the extent possible. Another strategy that is
being explored is the “market-plus” strategy, where a substantial footprint of the company is
localised, and additional requirements are sourced through imports and exports to other
geographies. The results of localisation of select-activities or certain portions of supply chain
mainly include retention of talent, access to global markets by complying to foreign regulations
and flexibility to develop products according to local requirements. These benefits are
extremely significant to India, in light of the recent imposition of 100,000 USD fee on H1b
visas by the US government

The scope of localisation has not been limited to supply chains, but instead also explored in
fields of data protection and privacy as well. Companies can invest in a fully localised IT
domain and separating sensitive data from high-risk geographies. As technological leverage
becomes a tool of power for countries. Global MNCs are adapting their tech products to comply
with regulatory requirements of different governments, creating localisations of products
themselves. Tech companies are also being compelled to modify their products and software in
technology arenas that serve as strategic gains for the home country. The most prominent
example is the case of Nvidia, where in compliance to US laws, certain chips have to modified
for sale in China, to prevent its use in military applications

Although localisation is seen as a viable solution, the extent of localisation depends on the
transition window available to firms and the distance between internal and external suppliers.
Research indicates that in times of very short reaction time, for example during the Covid-19
pandemic, companies are likely to restructure existing internal units within a focused region.
However, during moderate time periods available for transition, sourcing from both external
and internal suppliers, as well as diversification of supply base. This can be noticed in the case
of tariffs levied by US government, where although India’s exports to the US continues,
companies are looking for alternatives, i.e, diversification in competitor countries like Vietnam
and Bangladesh that face lower tariffs

Conclusion:

The hypothesis of the article can be deemed to be right, seeing that governments are
implementing policies to align with their foreign policy commitments and alliances, leading to
deglobalisation. Moreover, different localisation strategies are being followed by companies,
which was explored theoretically by the article. This suggests that the world is indeed moving
towards greater de-globalisation, especially, where national objectives are prioritised over
global connectivity. Yet, the globalisation is unlikely to vanish soon, since the world continues
to remain interdependent and connected, whether beneficial or not. Adaptability and dynamism
remains the most important characteristic of management that would determine survival of
business in the debate of Globalisation vs De-Globalisation.

References:

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