Today after landing at London Heathrow Airport and sorting out wheelchair assistance for my pregnant wife, I found myself chatting with our buggy driver, a lovely young lady who migrated from Punjab India to the UK 7 years ago.
The conversation naturally gravitated to the Brexit decision, and when I asked her if she had voted she turned and said with a smile, “leave… definitely leave”.
“I know it will be difficult for a couple years, but I just wanted change. We work so hard to make an honest living, and we can’t even afford to get ourselves a decent home. I hope after we exit the EU housing prices will come down and we’ll get more quality jobs as people leave.”
I didn’t sense an ounce of xenophobia in her, and I found myself thinking that if I were in her shoes I’d probably feel the same way. But what troubles me is that this could be the beginning of a global phenomenon. Note supporters of a certain presidential candidate who promises to build a wall and kick Muslims out of America.
If the wildly volatile equity and fx market reactions to the Brexit result are any indication, it seems that isolation and uncertainty will likely not bring the desired effect of a stronger economy and more jobs. The fact that countries that trade with each other don’t go to war has been frequently referenced. But beyond the spheres of macroeconomics and world peace, the impact of a structural shift to isolation would make perhaps an even more pronounced impact in the sphere of technology and entrepreneurship. To understand why let’s take a look at what has happened over the past few decades.
With the paving of roads, proliferation of free trade agreements and increased flight frequencies, companies who have dealt primarily with physical goods and services (what we venture capitalists call the realm of atoms) have come to experience more unified markets that have brought cheaper products to consumers and cheaper costs to businesses. But if tighter supply chains rolled across national borders like barrels of molasses, a flood of information crossed those same boundaries to encompass every cavity with just a crack of an opening. Companies that were engaged in selling digital products experienced much more unified markets much faster simply because bits travel more seamlessly than atoms.
A list of the world’s top ten retailers shows a group of players with relatively balanced market capitalizations across Europe and the United States (with some from Asia certainly a bit further down the list). A freer movement of atoms has certainly helped them to integrate globally, but compare that to Google’s near categorical dominance across the world, which illustrates the winner take all dynamic of seamless digital markets.
(A reversion to disparate markets would have a much more pronounced impact on information based businesses, the dominant domain of innovation and entrepreneurship)
Unified markets lead to more innovation because successful startups can achieve escape velocity faster and reach much larger scale than those targeting disparate markets. This leads to more venture capital for startups and more entrepreneurs who are motivated by outsized financial returns and the chance to make a global impact. If every country had a national intranet like North Korea we’d have fewer venture capitalists, fewer entrepreneurs, and many more sub-par search engines targeting each country. Globalization and innovation are two sides of the same coin.
Also, while the displacement and disruption do hurt in the short-term, history has shown that in the long-term society does benefit from globalization and innovation. Gutenberg’s printing press dealt a blow to bible copying monks. They were pained for a while but eventually they made more beer and lived a good life. More importantly, bibles and books in general, which were reserved for the elite became available to the masses. Though it may not feel like it right away the eventual beneficiary of globalization and innovation is the average citizen.
Unfortunately our buggy ride did not last long enough to articulate this to our driver, but somehow we must address the growing urge towards isolation and create as efficient, as peaceful and as connected a world as possible for generations to come.