All About the Great Fragmentation

Today: The world is fragmenting at an accelerated pace, and geopolitics is not the only reason.

Credit: Alexis Antoine

The Agenda 👇

• Introducing the concept of a ‘Great Fragmentation’

• Brexit and Trump revealing the trend

• It really matters for us Europeans

• India as another illustration

• The consequences for businesses

The idea of the Great Fragmentation is another recurrent topic of this newsletter. I introduced it in the eponymous essay The Great Fragmentation (June 2020):

Google and Facebook give the impression of globality because theirs are such formidable brands, and billions of people use their products every day. But we shouldn't be mistaken: Marriott, Hilton and Amex, although they have smaller market caps, are more globalized than Google or Facebook will ever be. To paraphrase Seth Godin, a tech business is rarely more global than the users it is able to attract. Some startups focus on their domestic market because that is where most of their users are.

Of course, it was not the first time I wrote about a world where crossborder frictions are bound to increase—for both geopolitical reasons and the fact that software is eating the world, entering industries that are structurally more local than global.

The revelation of a fragmenting world actually came with the outcome of the Brexit referendum in June 2016, about which I wrote in Brexit: Doom, or Europe's Polanyi Moment?:

Sometime at the end of the 19th century the gold standard economic order began to unravel. At work was the rise of various forms of protectionism, from tariff barriers to colonial empires, which in turn triggered the breakdown of the gold standard. When several pillars of that weakening system began to falter, the resulting tensions mounted up until World War I, which completed the destruction of the 19th century world order and proved to be the final crisis of the gold standard economy. 

The idea of the geopolitical turmoil that comes with the Great Fragmentation was further discussed in the more recent Tales of a Fragmenting World (September 2020).

Obviously the world only continued to become more fragmented once Trump won the US presidential election later in 2016. Here are three essays in which I explore his influence over the world in general and the US tech industry in particular: 

• What Trump Did to Silicon Valley (October 2019) 

• Big Tech in a Fragmented World (November 2019) 

• The Future of Silicon Valley (February 2020) 

The Great Fragmentation matters from my European perspective because it represents an opportunity more than a threat for the local tech ecosystems. The more fragmented the world is, the easier it is to grow local tech champions. Of course, those companies won’t have a shot at dominating at a global scale; but if such domination has become impossible in general, growing at the continental level is still an optimum—and it’s the new framework within which European tech people must build from now on.

I launched this discussion on the European perspective in Will Fragmentation Doom Europe to Another Lost Decade? (January 2020):

The persistent fragmentation explains why European tech is lagging behind. Because of the core features of increasing returns to scale, tech businesses have a critical need to reach a very large scale if they want to be profitable and win out over competitors. If European entrepreneurs encounter barriers on all three fronts of building a business (customers, talent, and capital), they can’t grow as quickly and steadily as their competitors from the US and China. And some things are even getting worse, as we’re now having to let go of a hub that concentrates all the capital (which was London, but with Brexit comes the end of freedom of movement and a likely divergence in financial regulations).

Here are other writings that explore the Great Fragmentation viewed from the European startup world:

• What Language Should Startups Speak? (November 2019) 

• European Startups as an Asset Class (February 2020) 

• Why European startups should focus on their home market (June 2020—in Sifted) 

• The 10 Keys to Investing in European Startups (July 2020) 

• Each Country Is Different (November 2020)

• What is a 'European' startup in the era of remote work? (December 2020—Sifted) 

🇮🇳 India is another part of the world that reveals the Great Fragmentation, notably with the emergence of a local tech industry that primarily serves the (very large) local market. I discussed it, echoing James Crabtree’s The Billionaire Raj, in What's Happening in India? (June 2020):

As in the case of China, what I’m interested in is the lessons we Europeans could draw from the Indian experience of growing its own tech giants and positioning accordingly on the global stage. As I wrote in October in Europe Is a Developing Economy, I think emerging countries have a clear advantage when it comes to positioning in the global digital economy. On the other hand, I don’t see why Europe couldn’t learn from what those emerging countries have implemented in their effort to race ahead in the Entrepreneurial Age. Can the Modi-Ambani playbook be emulated outside India—especially in Europe?

🎧 If you want to dig deeper into India, make sure to listen to James’s conversation with my wife Laetitia, as featured in The Billionaire Raj w/ James Crabtree. A Long Week in the USA. Jack Ma and the CCP. Protectionism Back in Style.

🇪🇺🇺🇸 The Great Fragmentation means it’s more difficult to do business across the Atlantic Ocean. It’s not impossible, but we do need to explore new approaches. I discussed it in US venture capitalists: here are 10 tips if you want to make it in Europe (December 2019—in Sifted):

The press is abuzz with the news that more and more US venture capital firms are establishing a foothold in Europe. This is good news indeed for the local ecosystems. Ambitious founders will be able to raise more money, and the trend validates the idea that tech entrepreneurship is finally taking off in Europe. 

But are these US investors prepared for what they’re about to discover? From a European perspective, Americans often come off as unaware of what Europe is about, and clumsy in the way they approach things here. This is why I compiled the following list of advice to help them succeed.

About that (transatlantic business), also have a look at these essays:

• Transatlantic Consolidation (June 2020—on Just Eat Takeaway acquiring Grubhub).

• Privacy & Taxes: It Takes Two to Tango (July 2020—on regulatory frictions between Europe and the US) 

One outcome of the Great Fragmentation is that the startup world is about to become more spread out than ever, with entrepreneurial ecosystems thriving all over the world. I discussed that in my review of Brad Feld and Ian Hathaway’s The Startup Community Way, Anyone Can Build an Entrepreneurial Ecosystem (July 2020):

Today’s economy is much more decentralized and dominated by free agents. Those free agents have access to increasing computing power and can connect with one another through vast networks that provide unrivaled access to information and various other resources. In other words, today’s economy much more resembles startup communities than did that of the 20th-century Fordist Age. Therefore whatever policymakers learn from working with startup communities following Brad and Ian’s guidelines, they’ll be able to apply to many other policy fields.

More generally, the Great Fragmentation has an impact on every dimension of business. Here’s a selection of essays which cast light on various aspects of doing business in a fragmented world:

• Challenges of a Remote Workforce (June 2020) 

• Investment Banking Rifts (July 2020—on investment banks revealing the Great Fragmentation in the business world) 

• Is Going Global Still a Thing? (October 2020) 

• Why Local Businesses Can Thrive in the Entrepreneurial Age (November 2020)

• Global or local? (November 2020—The Family) 

Finally, here are additional essays you might be interested in that discuss the Great Fragmentation from an economic policy perspective:

• The Geography of Value Creation (October 2020) 

• You're The Protectionist! (November 2020)

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From Munich, Germany 🇩🇪

Nicolas