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Ideas Made to Matter
Globalization vs. localization: 2 ways multinationals can adapt
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It took the Marriott Hotel chain roughly 70 years to gain a foothold in 130 countries. In contrast, Airbnb needed just a decade to establish a presence in nearly 200 countries.
Such is the power of digital technologies to supercharge globalization — allowing companies to rapidly grow into markets around the world.
These forces of expansion, however, are colliding with headwinds from new trade restrictions and protectionist measures — two relatively recent trends accelerated by the COVID-19 pandemic (and potentially by economic sanctions against Russia).
This emerging friction from localization is hampering the prospects of digital globalization. A recent webinar sponsored by MIT Sloan Management Review explored this tension and described how companies can realize the potential of digital globalization while adapting to forces of localization.
Satish Nambisan and Yadong Luo, co-authors of the new book, “The Digital Multinational: Navigating the New Normal in Global Business,” looked specifically at how companies can use digital tools for innovation. They said that companies have a choice when deciding how closely to align the processes of innovation among their global partners and subsidiaries:
- In a “tightly coupled” approach, different parts of the system are highly responsive to one another and rooted in a uniform standard. One example: innovation partnerships in which everybody agrees on shared goals and strategic priorities.
- A “loosely coupled” approach to innovation means that different parts of the system are more autonomous; change in one part does not have much of an effect in other parts. Global companies that maintain distinct innovation hubs around the world fit this model.
To determine which of these strategies is more suitable for a given company in a given geography, Nambisan and Luo created a 12-point checklist that business leaders can use to evaluate the intensity of globalization and localization forces in any given region or market. The checklist examines three dimensions:
- What are a country’s or a market’s policies around innovation? How do they approach intellectual property, for instance?
- What is the infrastructure as it pertains to innovation? What kind of communication and data infrastructure exist, for example?
- What is the culture of innovation? For instance, what is the work culture of local employees?
Answering these questions can help companies determine what kind of digital strategy to deploy, either tightly or loosely coupled, the authors said.
Tight vs. loose coupling
Nambisan offered the example of a U.S.-based company working on medical device innovations with partners in Europe and India. Because these partners shared similar regulatory and infrastructure environments, they formed a secure virtual environment for the innovation process — a tight coupling between partners.
In contrast, Philips, the global health technology conglomerate, established a freestanding research and development innovation lab in Shanghai that works closely with other national technology companies.
Given limitations on how data and other assets can move into and out of China, the innovation remains by intention mostly within the borders. “That is a specific context where the environment limited the kind of coupling that they could actually practice,” Nambisan said. In that case, “loose coupling was much more appropriate.”
Leadership plays an important role negotiating the tension between globalization and localization. “In our research, the good leaders in these multinational digital companies recognize and acknowledge that they cannot control everything, that they have to orchestrate,” Nambisan said.
Effective leaders work through influence, he said, not structural control. They also recognize the ways in which technology can simultaneously enhance the efficiency of and infuse more flexibility into operations.
“This is what we call the ‘duality of digital,’” Nambisan said. “If you can keep both these in your mind as you look at opportunities in different parts of your business, then it leads to a much more sensible and useful and effective business strategy.”
Read the Sloan Management Review article, “Think globally, innovate locally”
