Harnessing the power of shifting global flows
Here’s what countries and executives need to know
to benefit from the next—and markedly different—wave of globalization.
There has been a
steady drumbeat of reports in
the press and elsewhere that the heyday of globalization is over.1 Since the financial crisis, growth in global trade volumes
has slowed. Global financial flows are hanging at levels almost 70 percent
below their peak.2 Meanwhile, rising wages in China and shifting energy
dynamics have challenged lengthy global supply chains.3
These crosscurrents
are real, but our research suggests that they won’t undermine globalization’s
long-term trajectory.4 Cross-border flows of goods, services, finance, people,
data, and communication will expand in all plausible scenarios during the years
ahead (Exhibit 1). What is changing dramatically is the mix of
flows. Their networks and structures are evolving rapidly and will be radically
different from those of the past.
Foreign direct investment and trade in goods
used to account for the greatest volume of flows, which mostly streamed between
advanced economies. Trading partners were primarily neighboring or nearby countries.
Today, this trend is being upended: emerging markets are swiftly closing the
globalization gap with advanced economies, and emerging players are now sources
of consumption and innovation as well as production. New regional hubs are
coalescing around the world to facilitate flows of goods, services, and money
in an expanding global network. And new types of flows are growing rapidly:
information is now gushing to often-underserved areas (such as western Africa,
which is part of a network of new international undersea-cable routes), while
knowledge-intensive goods have become the fastest-growing traded flow across
the globe.
Digitization is at the heart of these changes
because it enables new business models using cheaper and modular cloud storage,
video streaming, or talent-sharing services. Digitization enables some
companies to grow quickly into what we call hyperscale businesses, extending
their reach to global markets at low cost. (For more, see “Competition at the
digital edge: ‘Hyperscale’ businesses,” forthcoming on mckinsey.com.) Digital
technologies, meanwhile, transform flows of physical goods into digital flows
that can not only be traded farther and faster but also tracked precisely,
which will bolster global supply chains. Finally, cheaper computing power and
communications technologies are becoming the building blocks of robust digital
platforms that increase the global participation of otherwise excluded small
and midsize companies (see sidebar, “The new shape of globalization”).
Governments (which are responsible for shaping
trade policies) and companies should take close note of the shifting landscape
and move quickly to adapt. The winners in the new era of globalization will be
organizations that can reallocate resources while quickly adopting strategies
and policies to take advantage of the trends.
The globalization gap
Globalization boosts GDP growth and opens
avenues to rising corporate profits. We examined this dynamic and discovered
that when countries increased their level of globalization by 1 percent (as
measured by the scale of flows of goods, services, finance, people, and data
relative to the size of their GDPs or populations) the rate of GDP growth rose
by about 10 to 15 basis points, a material figure. Overall, we estimate that as
much as one-quarter of global GDP growth comes from global flows. It’s
important for leaders of companies and countries to understand their
relationship with the shifting nature and pace of globalization.
Advanced-economy
multinationals
Companies from advanced economies have thus
far been globalization’s leaders. Some generate more revenue outside their home
countries than within them. But greater changes are looming. Despite a leading
position in globalization, most such multinationals are still underweight in
emerging markets, which represented only 19 percent of their revenues in 2013. Trade
in developing markets will continue to swell—by 2025, it will represent 47
percent of global consumption. Multinationals should accelerate their inroads
to secure a strong position in global commerce. And they’ll need to do so
quickly because they face a new breed of competitor: multinationals that are
rising in emerging countries and hope to win their own place on the global
stage.
Traditional global
companies took years to deploy resources on a global scale. They will need to
accelerate that pace not only to keep up with players from emerging markets but
also because digitization is ratcheting up the global economy’s clock speed.
Consider how digitally born companies, such as Facebook and Google, now earn
more revenue from global markets than from the United States.
Multinationals from
emerging markets
A number of companies in emerging markets are
embracing globalization—swiftly expanding abroad and gaining market share,
particularly in other emerging economies. A telling signpost: the value of
cross-border goods flows between emerging markets increased from 6 percent of
all global trade in 1990 to 24 percent in 2012. Even so, only 40 percent of the
revenue of the 100 largest listed companies in emerging markets comes from
overseas, versus 51 percent for the largest listed companies in advanced
markets. Moreover, while multinationals from emerging markets have expanded
into the United States and Europe, they have done so largely through M&A.
Such companies have yet to distribute their operations globally, and the data
show that their supply chains are more local than those of their peers in
advanced economies
.Small and midsize companies
Smaller enterprises
add a new dimension to global competition as they begin expanding across
borders. Internet platforms are empowering these “micromultinationals,”
enabling them to find customers, suppliers, funding, and talent around the
world at lower cost. One data point: digital platforms can cut the cost of
exporting by 83 percent as compared with traditional export channels.5 Even small companies can access international markets: in
2013, eBay analyzed a sample of its small sellers and found that more than 95
percent exported to other countries, compared with an average of less than 25
percent of traditional small businesses—and eBay merchants export to customers
not just in one market but in dozens. Still, most smaller companies today
haven’t taken full advantage of digital capabilities in developing their global
reach. Across the world, they consistently account for a smaller share of
exports than of value added.
Countries
Open, developed economies have been both the
rainmakers for globalization and its largest beneficiaries. The case of Belgium
illustrates the challenges they face going forward. The country is globally
connected, with trade flows three times greater than its share of world GDP,
and globalization is responsible for a third of GDP growth. According to our
research, the country’s central position in the network of flows makes it more
likely to capture benefits from trade than other countries are. Yet Belgium is
trending toward a current-account deficit, and in recent years, it may have
under-invested in areas that would take advantage of that position—not only in
traditional trade, but also (and particularly) for new flows. Furthermore,
while Belgium’s physical port infrastructure in Antwerp still compares well
with that of neighboring Rotterdam, the Netherlands has invested dramatically
in a virtual-port infrastructure in Amsterdam, which is now a leader in
cross-border data flows.
New strategic options
Progress toward globalization’s new era will
be uneven for economies and companies alike. Since many types of organizations
could deepen their cross-border activities, the priorities include combining a
more intense kind of digitization with a network view of the global landscape,
seeking opportunistic positioning in hubs bursting with talent and
capabilities, taking full advantage of intangible assets that can help
companies differentiate themselves among new customers and markets, and
becoming better attuned to the emerging new cross-border competition.
1. Nurture global
ecosystems
Digital platforms enable companies to expand
rapidly and profitably to customers far beyond home markets, while nurturing
new ecosystems that span borders and connect clusters of suppliers,
distributors, and after-sales services. The benefits will include lower-cost
procurement and better preemptive maintenance for plants, reducing downtime.
Boeing’s Edge offering, for instance, brings together the vast amounts of data
the airline business generates, thus creating a real-time information network
linking aircraft assets with maintenance groups, operations staff, suppliers,
and passengers.
Other global ecosystems are facilitating
innovation by linking researchers, financiers, and even customers to
crowdsource new ideas. AstraZeneca’s digital open-innovation platform, for
instance, aims to connect the company with scientists and academics at research
institutes worldwide. German equipment maker Bosch uses its innovation portal
to connect with individual and institutional researchers in key business areas,
such as power tools, new materials and surfaces, and the automotive
aftermarket.
2. Locate in the best
hubs
Many countries and
cities have established themselves as hubs for specific types of flows.
Locating within these vibrant centers can buttress a competitive advantage.
Amsterdam, for instance, with some of the world’s fastest and cheapest
broadband connections, has become a magnet for Internet companies. Another hub,
not far from Amsterdam, is Eindhoven’s Brainport, which boasts a concentration
of expertise for broadband deployment, applications, and other skills. With
8,000 researchers, developers, and entrepreneurs scattered among small and
midsize companies and global players, Brainport accounts for a third of private
R&D outlays in the Netherlands.6 In density of patents, it is one of Europe’s top three
regions.
People flows will
continue to be an important source of growth and innovation, and here the
United States is top ranked. Immigration has long enabled US businesses to
strengthen their competitive advantage by attracting global talent from every
nation. The impact of foreign entrepreneurs in Silicon Valley is legendary:
from 2006 to 2012, immigrants founded over 40 percent of all high-tech and
engineering start-ups there.7Global flows also allow pockets of specialization to develop
beyond high tech. In 2012, Switzerland—a global hub for knowledge on watch
manufacturing—produced 95 percent of luxury watches (those priced at over 1,000
Swiss francs).8
Companies without a strong presence in influential
hubs should consider moving operations to one or more of them. A leading
example of the trend is Singapore, where many multinationals have located to be
at the nexus of Asian flows of goods, services, and finance. Singapore has the
world’s highest density of regional head offices relative to GDP: more than
half of all large foreign subsidiaries in emerging Asia outside China are
located there. P&G, for example, chose it for the global headquarters of
its beauty and baby-care divisions. Rolls-Royce moved its marine business from
London to Singapore for the city’s advantages as a shipping hub.
3. Build digital
platforms and exploit proprietary assets
Digital platforms are connecting companies and
customers, suppliers and companies, talent and jobs, and entrepreneurs and
funding—and in ways that were all but impossible only a decade ago. Effective
platforms benefit both the participants using them and the companies operating
them.
E-commerce sites that
connect businesses to consumers are signature examples of the new platform
power. Global e-commerce sales reached over $1.2 trillion in 2013, nearly 2
percent of global GDP.9 E-commerce provides new access to consumers for companies
of all stripes and offers buyers more choice (and often lower prices). Alibaba,
China’s leading e-commerce platform, includes B2B, B2C, and P2P (peer-to-peer)
marketplaces. It posted merchandise worth approximately $248 billion in
2013.These online platforms are highly profitable as well.
Other platforms now
channel flows of knowledge and expertise to companies around the world. One
well-known example is InnoCentive, an online innovation-crowdsourcing site that
has reported a membership of 300,000 registered “solvers” in over 200
countries. Today, it has helped large R&D-intensive companies (in
industries such as pharmaceuticals, biotechnology, and consumer products) to
crack as many as one-third of a sample of knotty problems they had previously
considered unsolvable.10 Meanwhile, the staffing websites launched by oDesk and
Elance, both based in Silicon Valley, connect employers with freelance
professionals around the world. The two companies merged in 2013, creating a
platform used by 2 million businesses and 8 million freelancers.
Many companies have
assets that could be deployed more effectively to build such platforms. These
may be tangible assets, such as routers and servers, logistics networks, or
distribution centers. But they can also be intangible brands, data, and
knowledge. The brand position of companies such as Citigroup and Nike
undergirds their global reach, as do their data and knowledge of customer
preferences around the world. Starwood Hotels & Resorts, the global
hospitality group, is brandishing its digital expertise to expand its brand and
customer loyalty. Its mobile app books rooms in any of the chain’s hotels,
offers personalized suggestions for dining and entertainment, and even allows
users to check in and to open the doors of hotel rooms remotely .
Digital assets are especially
important to the new wave of globalization. Our research shows that tangible
and intangible digital assets will account for roughly a third of total global
GDP growth in the future.11 Consider the extent to which Google’s search algorithm or
Amazon’s recommendation engine underwrites global knowledge and bolsters
commerce.
4. Be ready for new
competitors and challenges to business models
Along with helping
smaller businesses everywhere and companies from emerging markets increase
their participation in global flows, digitization will put tremendous pressure
on business models. To succeed in the new environment, companies will need to
define and choose their businesses, their customers, their suppliers, and their
ecosystems quite nimbly.
Already, we can see how Internet-enabled lower
barriers to entry are creating new twists in competition: companies that
initially disrupted entire industries with first-stage digital technologies are
now being disrupted themselves. Web-based travel companies launched in recent
decades, for example, now face tough and growing competition from a new digital
business model represented by app- and web-based Airbnb. The peer-to-peer
hospitality site, launched in 2008, now offers rooms in more than 34,000 cities
worldwide. Airbnb’s customers research, reserve, pay for, and review their
lodgings—bypassing traditional digital travel sites.
New forms of competition will arise from three
sources. First, established companies from emerging markets will expand to
operate on a global scale. Second, smaller companies around the world can now
compete in niche markets globally, thanks to digital platforms. Finally, new
competition will come from players outside traditional industries—as is the
case, for example, with e-commerce companies, like Alibaba, which are
disrupting banking and payment systems.
The potential for
disruption shouldn’t be underestimated. According to research by the McKinsey
Global Institute, the number of Fortune Global 500 companies with headquarters
in developed economies will fall to less than 55 percent by 2025, from almost
75 percent in 2013.12 Seven out of ten new large companies will come from
emerging markets over the same period.
Small entrepreneurial
companies from emerging markets already are joining the fray and showing the
potential to grow. One of the new breed is Jumia, a Nigerian e-commerce company
that now operates in seven other African countries, including Egypt, Ivory
Coast, Kenya, and Morocco. M-Pesa, a now-famous mobile-money service that
started in Kenya, currently has 19.3 million users.13 What’s less known is how M-Pesa
is disrupting banking and payment businesses in a growing number of countries:
it has expanded across Africa and South Asia and in 2014 entered Eastern
Europe. Start-ups active in peer-to-peer lending are another potentially
disruptive segment in finance. Chile’s Cumplo, China’s Pandai, and Germany’s
Auxmoney all facilitate P2P loans, challenging a host of traditional financial
institutions.
5. Create new
businesses that combine and transform global flows
In the new era of globalization, pressure to
create new business models and redefine the borders of companies and markets
will increase because digital technologies make it possible to transform and
recombine flows.
Many physical goods are now virtual thanks to
digitization. Books and movies, for example, once moved from country to country
solely by ship, truck, or train. Today, they can digitally whiz across the
globe in an instant. This pattern of transformation may be only in its infancy.
In some areas of manufacturing, for example, 3-D printing will probably have
the same profile: product design files can be sent across the Internet, and
goods will be “printed” locally rather than manufactured in one country and
shipped to another. This development will create space for new business models
and for companies that will become the Amazons or Alibabas of 3-D printed
goods. (For more, see “Are you ready for 3-D printing?,” forthcoming on
mckinsey.com.)
Digital “wrappers”
that embed information within a good or service can also increase the value of
physical flows. Radio-frequency identification (RFID) technology is the
best-known example. From 2005 to 2012, the use of tags to track shipments of
goods has grown nearly three times faster than global goods flows.14 These tags improve the efficiency of global supply chains
by reducing losses in transit (in some cases, by up to 14 percent)—and they may
cut inventory costs by up to 70 percent.15
In the growing global peer-to-peer arena, Etsy
is an example of a company creating a new business model by straddling digital
and physical flows. Its online global marketplace connects over 40 million
buyers and sellers of artisanal goods and handicrafts. The company also wraps
knowledge and other services into its distribution channel: it offers
entrepreneurial education to artisans and has a partnership with the
crowdfunding site Kiva to help finance the growth of their businesses.
Companies that have seen their global
activities struggle in the wake of the financial crisis can take heart that
what they have witnessed is likely to be only a pause and not a break in the
progress of globalization. Yet they’ll need to up their game—and quickly.
Traditional competitive engines are proving ill adapted to a world of flows
moving at digital speed.
About the authors
byJacques Bughin, Susan Lund, and James Manyika
http://www.mckinsey.com/insights/business_technology/harnessing_the_power_of_shifting_global_flows?cid=other-eml-alt-mkq-mck-oth-1502
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