Globalization Continues to Define the Business Landscape, Part 1

Stephen DeAngelis

July 01, 2013

Back in January Ernst & Young released its annual globalization report. Commenting on the report, Steve Varley, Ernst & Young UK & Ireland Chairman and Managing Partner, stated, “Globalisation continues to define our business landscape with increasing levels of cross-border trade, capital and labour integration. Despite the highly volatile economic backdrop the trend for greater integration and closer co-operation continues to outweigh the threat of protectionism for the majority of the world’s markets.” [“BRICs face competition as globalisation creates new emerging players,” by Jonathan Marciano, Ernst & Young, 21 January 2013] Over the past few years as the global economy has tried to pull itself out of the clutches of the great recession, some pundits have declared that globalization is dead (or is at least suffering the throes of death). Clearly, that is not the conclusion of the Ernst & Young report. Marciano writes, “Despite weak growth in 2012 and an uncertain economic outlook in many markets for 2013, globalisation is still increasing among a majority of the world’s 60 leading economies.”

Marciano notes that the report draws on “two sources of original research: Ernst & Young’s Globalisation Index, which measures the world’s 60 largest economies according to their degree of globalisation relative to their GDP, and a survey of 750 senior business executives worldwide.” In other words, the report uses both objective and subjective data. Historically, globalization has been defined by the international flow of goods, people, and capital; but, Marciano reports, in the future, globalization “will continue to advance driven primarily by technology and the cross-border flow of ideas.”

The report does sound one note of caution. Many of the executives interviewed had real concerns “that continuing weak growth combined with increased global competition could spark more protectionism.” Nothing stops the flow of things like a good barrier. Interestingly, respondents believed that protectionist barriers were more likely to arise in the so-called BRIC countries (Brazil, Russia, India, and China) than in “in other smaller rapid growth markets.” That’s a pretty clear indication that many countries still see globalization as the gateway to prosperity. H. Khasnobis reminds us, “Globalization gained wide currency following the collapse of the Soviet Union in 1991. The term denoted a measure of triumph because capitalism no longer faced any large-scale barriers to its expansion.” [“20 years of globalization show what works, what needs fixing,” The China Post, 21 April 2013] There should be a note of triumphalism when discussing globalization; not because the Soviet Union collapsed but because it has helped raise millions of people out of poverty and into the middle class. To read more about why the optimists praise globalization, read my post entitled Globalization’s Bed of Nails, Part 1: The Optimists. Khasnobis writes:

“Globalization … carried the connotation of advances in transportation and telecommunications, mobility of people and expansion of markets on an unprecedented scale. Consumer choice had widened and this implied expanded levels of generalized prosperity.”

However, it’s clear from the headline of Khasnobis’ article that globalization hasn’t sailed entirely on smooth seas. He continues:

“The question is whether globalization has actually transformed the world for the better. Economists, who advocate extending globalization in its current form and those who are critical of this concept and call for reforms to make globalization work, argue that it is the only path to a more prosperous and peaceful world. Globalization has created increasing economic interdependence of national economies across the world through a rapid increase in cross-border movement of goods and services, technology and capital. It has resulted in increasing economic integration between countries leading to the emergence of a global marketplace. Multinational companies manufacture products across many countries and sell them all over the world. Money, technology and raw materials have broken international barriers. The developed economies are integrating with the less-developed through foreign direct investment, reduction of trade barriers, economic reforms and in many cases, immigration. Globalization has increased the flow of investments from developed to developing countries, and the money that is invested can be used for economic reconstruction.”

Countries that have yet to benefit fully from globalization’s touch still want that opportunity. That’s why Ernst & Young’s Steve Varley can safely assert that globalization will continue to define the business landscape. McKinsey & Company analysts Yuval Atsmon, Peter Child, Richard Dobbs, and Laxman Narasimhan, assert, “By 2025, annual consumption in emerging markets will reach $30 trillion—the biggest growth opportunity in the history of capitalism.” [“Winning the $30 trillion decathlon: Going for gold in emerging markets,” McKinsey & Company, August 2012] To win a portion of that pot of gold, companies are going to have to behave differently than they have in the past. Khasnobis writes:

“Globalization now carries with it the disturbing imagery of deforestation, desertification, the decline of small producers in both agricultural and commercial sectors, the primacy of foreign direct investment and transformation of economies to create the right investment climate. This could work out to the detriment of labor, sidelining of unions or making them illegal, a drop in real wage rates in the formal sector, increased participation in the informal sector, increase in child labor and a return to human trafficking. … As long as the profit-motive remains the sole principle of the production process and capital accumulation, the world will face rising unemployment and poverty. Violence, sparked by unfulfilled needs, will persist. Even the staunch advocates of globalization concede that some of the concerns of pessimists are legitimate.”

Fortunately, it is becoming more difficult for companies to behave badly without being caught. Is there a long way to go — certainly. Recent events in Bangladesh and China demonstrate that some working conditions remain hazardous and unacceptable. The good news is that these events were not able to be swept under the rug. They received media attention around the globe. Khasnobis writes that “the trend towards ethical considerations is quite a recent paradigm shift.” The fact that it started during an economically difficult period is also worthy of note. There are other reasons to be optimistic. Atsmon, Child, Dobbs, and Narasimhan write:

“Over the past two decades, the urbanization of emerging markets — supported by long-term trends such as the integration of peripheral nations into the global economy, the removal of trade barriers, and the spread of market-oriented economic policies — has powered growth in emerging economies and more than doubled the ranks of the consuming class, to 2.4 billion people. By 2025, MGI research suggests, that number will nearly double again, to 4.2 billion consumers out of a global population of 7.9 billion people. For the first time in world history, the number of people in the consuming class will exceed the number still struggling to meet their most basic needs.”

Consumer packaged goods manufacturers and retailers are certainly aware of this fact. Getting to know these new consumers will be one of the big challenges that will emerge in the coming years. Only big data analytics can help provide the insights that manufacturers and retailers will need to reach these new consumers. In the second part of this post, I’ll discuss ten capabilities that Atsmon, Child, Dobbs, and Narasimhan believe are crucial for companies to successfully traverse the changing business landscape.