The Next Stage of Globalization

Transcript

Globalization was perhaps the most significant institutional development marking the Installation Phase of the Digital Techno-Economic Revolution. For the first time, information technology enabled people on opposite sides of the planet to coordinate, collaborate, and interact, instantaneously. But, during the revolution's transitional phase, which began with the collapse of the dot-com bubble, globalization effectively ground to a halt.

What happened, and what will happen next?

To answer these questions, let's examine the history of globalization and its drivers. The A.T. Kearney Global Business Policy Council recently reviewed the available data and divided globalization into three stages.

International economic interactions have obviously existed for millennia, but the current wave of globalization-defined as "the cross-border movement of goods, services, capital, and people" really took off after the end of the Cold War in the early 1990s. As former Soviet bloc countries and China liberalized their economies and integrated into the U.S.-led global economic system, they powered globalization as never before in modern times.

After decades of a global economy partitioned into separate blocs, truly global integration accelerated. Over the next decade, global trade grew by 85 percent and Foreign Direct Investment flows rose by an astonishing 580 percent. This 1989-2000 period is referred to as Globalization 1.0.

The period beginning in 2001 and leading up to the 2008-2009 global financial crisis is termed Globalization 2.0.

By 2007-2008, global trade flows had hit an all-time high of 64.3 percent of global GDP, and Foreign Direct Investment inflows had reached an apex of over $2.2 trillion. Global portfolio investment flows were also far above their historical average, at almost 2 percent of global GDP in 2005 and 2006.

The 2008-2009 global financial crisis and recession proved more disruptive to globalization than any previous challenge. The U.S. subprime mortgage crisis that nearly caused the American financial sector to collapse and created waves in financial and housing markets around the world was not only detrimental to global economic output, but also to the intercountry economic linkages essential to globalization. As a result, all major economic indicators of globalization fell during that period - both in absolute terms and as a share of global GDP.

During the global hiatus since 2009, real global economic growth has slowed to around 2 percent. Not good when compared to almost 3 percent during the Globalization 1.0 and Globalization 2.0 phases.

So that leads us to ask: "What's behind the halt in globalization?" And, "What comes next?"

The global hiatus, which has persisted since 2009, differs from Globalization 1.0 and Globalization 2.0 in several important ways. Specifically, the current global economic order is underpinned by five new forces that are reshaping the global business environment.

The first new force is increased prosperity. Vast numbers of people in emerging and frontier markets have been pulled into the global workforce and the prosperity of households in many emerging markets has increased dramatically.

• Computerized information such as databases and software
• Innovative property like copyrights, R&D, and patents
• Economic competencies including management know-how and brand building

The persistent stagnation and macroeconomic uncertainty is a primary reason that globalization has stalled in recent years. The number one reason for lower foreign direct investment flows is a lack of confidence in the macroeconomic outlook. This uncertainty is likely also affecting the nature of cross-border portfolio investment flows. Given business leaders' concerns about the stability of the macroeconomic environment, it is hardly surprising that developed markets continue to receive such a large share of global portfolio flows.

The fourth force relates to the return of geopolitical confrontation. Geopolitical tensions have negative economic implications not only for those markets that are directly involved in geopolitical disputes, but also for their neighbors, as well as the regional and global economy. Key geopolitical hotspots today include Russia and Eastern Europe, East Asia, and the Middle East.

The fifth force is a heightened nationalism and protectionism. Market liberalization and economic integration, carried out by countries looking to reap the benefits of connected global supply chains during times of global economic expansion, can also generate tensions when economic activity slows and governments seek ways to improve local economic performance. After decades of agreeing to lower global barriers on a host of economic interactions, countries are now increasingly as likely to erect new obstacles to cross-border activity, including financial regulations, rules governing the Internet, immigration restrictions, and trade barriers.

Given this trend, we offer the following forecasts for your consideration.

First, the current stagnation with respect to globalization will end by 2020, at the latest.

The "status quo" is inherently unstable and will naturally evolve into a more stable future.

Second, as the Deployment Phase of the Fifth Techno-Economic Revolution ramps up, we'll enter a new era which A.T. Kearney refers to as Globalization 3.0.

In its recent report titled, "From Globalization to Islandization," the A.T. Kearney Global Business Policy Council identified four alternative futures largely determined by the interaction of economic growth and the geopolitics of nationalism.

• The first potential future is a renewed chapter of cross-border integration called "Globalization 3.0," which corrects for the various systemic deficiencies that we have pointed to in previous sections.
• The second, "Polarization," marks a return to historical normalcy in which rising geopolitical tensions and economic rivalries divide the global economy into competing blocs of countries.
• "Islandization" is the third potential future, in which nationalism gains ground in key economies around the world, leading to dramatic protectionist measures and drastically reduced global economic flows.
• The fourth possible future, called "Commonization"represents a greater break from the past than ever before. It entails the rise of a new global commons through additive manufacturing and the sharing economy-and a corresponding decline of consumer capitalism which has defined the recent past.

Third, because of the convergence of trends, the Globalization 3.0 future will emerge unless the Digital Techno-Economic Revolution deviates from the pattern of techno-economic revolutions that we've witnessed over the past 250 years.

Fourth, multinational corporations will thrive in Globalization 3.0, although the competitive environment will be more challenging and diverse than it was in Globalization 1.0 and 2.0.

Large, innovative corporations based in emerging markets have succeeded in their international expansion goals, shaking up the global business landscape. Overall, though, global business strategies are largely the same as they were in Globalization 2.0-albeit focused on different geographies for sourcing and production (Sub-Saharan Africa rather than China). As the prosperity and buying power of emerging market consumers continue to rise, opportunities in new and growing consumer markets abound. And since country governments have tried to harmonize regulations and standards in order to compete in an increasingly globalized economy, regulatory compliance costs for multinational corporations are relatively low.

Fifth, problems could still emerge that derail Globalization 3.0 and other aspects of the Fifth Techno-Economic Revolution.

Globalization 3.0 involves the public and policymakers making a lot of the right decisions involving the evolution of economic institutions. While the overall future of the global economy remains uncertain, two implications are clear.

• The first is that the decisions that consumers, voters, and policy makers make today will affect the future course of the global economy. Thus, it is important for business leaders to monitor the leading indicators in key markets around the world for signals as to which global economic order is arising.
• The second is that the uncertainty surrounding what comes next creates the need for multiple, divergent business strategies to prepare for and succeed in the future. Carefully monitoring how the various forces at play unfold over the coming months and years will enable businesses to stay ahead of the curve.
• As the current global hiatus gives way to a new global economic order, organizational foresight and agility will be critical in determining winners and losers in the new global operating environment.

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