Nationality Matters More Than Ever. That's No Joke
By Michael Schrage

(FORTUNE Magazine) – Stop me if you've heard this one before: In Heaven, the cooks are French, the police are English, the mechanics are German, the lovers are Italian, and the bankers are Swiss. But in Hell, the cooks are English, the police are German, the mechanics are French, the lovers are Swiss, and the bankers are Italian.

So did you smirk, or were you offended? (Please don't tell me.) Less than a generation ago, middlebrow publications such as Reader's Digest would print jokes like that one, gently mocking nationalist stereotypes and pretensions. Where you were from said something about who you were.

In today's era of political correctness, of course, humor that plays and preys upon ethnic imagery is verboten. The economic imperatives of global markets ostensibly trump the prejudices of cross-cultural caricature. As national economies become more intertwined, it is people's fundamental similarities--not their myriad differences--that drive globalization.

There's some truth to that. But another truth is that national, cultural, and ethnic differences will increasingly determine success in tomorrow's global markets. Why? For all the punditry proclaiming that globalization promotes homogeneity, simple economic reality dictates that firms competing in global markets are relentlessly driven to differentiate. A casual survey of the global business landscape reveals that it's become far harder for firms to differentiate themselves simply by being faster, better, and/or cheaper than their competition. "Faster, better, cheaper" is being commoditized. So where should companies turn for assets and insights that make them special? Those intangible elements that define a regional taste, an ethnic sensibility, a national culture. The intangible assets that go into "German engineering" or "Italian design" or "French fashion." They represent resources that can't so easily be emulated or reverse-engineered by business competitors.

This concept of cultural capital has been enthusiastically embraced by governments and trade ministries worldwide. Culture has become postindustrial policy. Prime Minister Tony Blair talks of "branding Britain" and aggressively promotes England as a world capital of pop culture and design. Malaysia's Mahathir Mohammed and Singapore's emeritus Prime Minister Lee Kwan Yew stridently emphasize "Asian values"--as opposed to Western values-- as the reason for the resilience of Asian economies. Hungary, Bangalore, and Ireland celebrate the software development savvy of their people. Israel and Taiwan argue that their indigenous business cultures represent a future of high-tech entrepreneurship. Is there any country in the world more xenophobically arrogant about its sensibilities than France? As the CEO of France's largest film company once observed, "American movies succeed because they are supposed to appeal to everybody. French movies succeed because they are French."

In fact, the past decade of globalization has seen a tremendous surge in the active marketing by governments of positive ethnic and nationalist stereotypes. Enlightened globalists may feel that nationalism and ethnicity in economics should matter less, but they should hardly be shocked when the Indians, Chinese, Hungarians, Brazilians, Indonesians, Koreans, and French insist they should matter more. And they are not the only ones. World Bank economists have become increasingly sensitive to cultural considerations in their efforts to promote development. Economic historians like Harvard's David Landes and strategic management gurus like Michael Porter argue that cultural and regional tastes have profound influences on a nation's ability to innovate.

But this resurgent strain of nationalistic and ethnic economics will prove extraordinarily volatile and dangerous. For every positive stereotype of a national economic character, there are ugly and destructive negatives. What's more, stereotypes can become chains of self-fulfilling prophecies: A country or region may define itself along its cultural competence to the exclusion of other opportunities.

Companies may become arbitrageurs of stereotypes and reorganize themselves accordingly: We'll hire Hungarian and Indian software developers; Koreans and Mexicans to do the manufacturing based on our German subsidiary's engineering; the French can handle the high-end marketing, and we'll have the Americans do the mass marketing; and the Israelis can do the venture stuff.

It's easy to see how that kind of cultural apartheid can breed resentment and backlash. Nevertheless, this is the direction in which global markets will go. So global managers with multinational, multi-ethnic work forces had better pay close attention to the kinds of jokes they hear: There may be a differentiation opportunity there.

MICHAEL SCHRAGE is co-director of the MIT Media Lab's e-markets initiative and author of Serious Play. Reach him at michael_schrage@fortunemail.com.