The New Era of Digital Globalization

Transcript

Globalization is the exchange of products, services, people, money, and data across national borders. In recent years, the growth of these types of exchanges has slowed down. This is to be expected. After all, the world contains a finite number of people, which limits how many can move from one country to another. The world's population needs a finite number of televisions, t-shirts, and bananas, so there is a natural limit to the number of those goods that will be produced in one country and sold in another.

But one type of exchange is not finite: data. In fact, the more data that people consume-in the form of videos, information searches, blogs, social media posts, and e-commerce transactions-the more their demand increases.

As a result, according to a Business Roundtable study reported in InformationWeek, the amount of "online data exchanged across national borders increased by a factor of eighteen between 2005 and 2012." The study predicts that by 2025 the amount of data will increase another 700 percent.

A newer study from the McKinsey Global Institute reached a similar conclusion. The McKinsey analysts modeled the flows of "goods, services, finance, people, and data" for ninety-seven countries. The combined impact of all of these flows created $7.8 trillion in value in 2014, boosting global GDP by about 10 percent.

Almost one-third of this impact, $2.2 trillion, was due to the flow of data across national borders, or "digital globalization." That's a greater contribution to the world's wealth than the global trade in products or foreign direct investment-and that contribution is even more remarkable when you consider that cross-border data flows barely existed as recently as fifteen years ago.

What's driving this trend? The technology that makes data flows possible has matured and become widely adopted. As McKinsey points out, over the past decade the bandwidth that is used to share data across borders has gone up forty-five times, from 3.1 terabits per second in 2005 to 140.8 terabits per second in 2014. That's just the beginning; McKinsey's projection is even more bullish than that of the Business Roundtable. The consulting firm predicts that data flows will grow another nine times within the next five years.

• Lower transaction costs: Digital commerce, whether business-to-business or business- to-consumer, is more efficient than the traditional model of international trade. For example, a customer in Germany can order an e-book on Amazon from a publisher in New York and download it instantly. Shipping costs and waiting times are eradicated.
• Global scope: Even the smallest start-up company can establish a global presence and market to customers around the world. Consider that, according to Facebook, 50 million SMEs (small and medium enterprises) have set up company pages. That's a 100 percent increase in just two years. Nearly one-third of those companies' fans, on average, live in other countries. Similarly, when eBay studied SMEs that use its auction site in eighteen countries, it found that 88 to 100 percent of them sell internationally.
• Empowerment of individuals: People can improve their skills by taking free online university courses on sites like Coursera and edX, display their portfolios and talents on sites like LinkedIn and YouTube, find a better job by searching sites like Monster and Indeed, stay in touch with friends on Facebook and Twitter, and buy whatever they need on Amazon or Alibaba. Roughly 914 million people have connections with friends or colleagues in other countries via social media, while 361 million people conduct international transactions online.

The boom in the global flow of data is even more important because the traditional sources of wealth creation through globalization-the flows of products and capital-have become stagnant or worse.

McKinsey found that the global flow of goods as a share of global GDP has flattened. Between 1985 and 2008, that number soared from 13.8 percent to 26.6 percent. As of 2014, the most recent year in the study, it stood at 24.6 percent.

• higher labor costs in China
• the need to respond more swiftly to shifts in demand
• the opportunity to capture the savings from shorter supply chains

Consider that cross-border shipments of intermediate goods, which are used to create other products, are down in half the categories, such as paper, steel products, chemicals, textile fabrics, fertilizer, and communications and electrical equipment.

Meanwhile, the flow of capital across borders is plummeting. According to McKinsey, "For 25 years prior to the 2008 financial crisis, these flows grew faster than global GDP, rising from $0.5 trillion in 1980 to $11.9 trillion in 2007." Since then, they've dropped to just $5.2 trillion-a plunge of 57 percent. This is largely the result of tougher banking regulations in the wake of the recession that have caused banks to avoid risk.

Therefore, global digitalization will become increasingly important to the growth of global GDP in the coming decade. Looking ahead, we foresee the following developments emerging from this crucial trend:

First, the successful companies of the next decade will be those that embrace digital globalization.

1. Reevaluate whether they need expensive physical locations in every country when a website could be just as effective.
2. Consider whether to market the same products in every market, or create new offerings for each market.
3. Determine whether to off-shore manufacturing or locate production closer to the end-user.
4. Evaluate whether they can monetize assets such as customer data to develop new products or services.
5. Recognize the threat that competitors from emerging markets and tech companies can disrupt their industries with lower-cost offerings.
6. Protect their digital assets from hackers by using the latest data security software and training employees in methods to prevent breaches.

Second, countries that impose limits of global data flows will damage their own economies and deprive their citizens of the benefits of digital globalization.

According to InformationWeek, several countries, including Australia, Brazil, and Greece, have enacted policies that limit the storage of data. More than 100 nations have created or are working on laws that are designed to prohibit personal data from being moved across national borders. The motives vary, from protecting personal privacy to preventing foreign companies from competing with local firms. But, as a Brookings Institution study found, a 10 percent rise in a country's broadband penetration causes its economic growth to jump by 1.3 percent.5 A government that enacts excessive regulations on data flows will prevent its population from enjoying the benefits of digital globalization.

Third, the Internet of Things will ignite an explosion of data flows.

The digital technologies that have been developed and embedded during the Installation Phase of the Digital Revolution will be switched on during the Deployment Phase. Smart devices, sensors, GPS, and artificial intelligence will revolutionize logistics, fleet maintenance, agriculture, and healthcare, among many other applications. By 2019, according to Cisco, more than 40 percent of data flows will be the result of machine-to-machine connections.

Fourth, the global trade in goods is unlikely to return to previous levels.

As previously mentioned, many companies in the U.S. are re-shoring their manufacturing operations. As the technology of 3D printing continues to advance, companies and consumers will create more products and intermediate goods as they are needed and where they will be used, rather than ordering them from overseas suppliers.

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