Ernst & Young report suggests growth in globalization is led by technology and cross-border flow of ideas.
February 12, 2013
by PLANT STAFF
LONDON—Despite weak growth in 2012 and an uncertain economic outlook in many markets for 2013, globalization is still increasing among a majority of the world’s 60 leading economies according to the Ernst & Young’s annual globalization report, Looking beyond the obvious: globalization and new opportunities for growth.
The report concludes:
While most forecasters believe global GDP will be in the range of 3%-3.5% in 2013 with a modest increase in subsequent years, the Index suggests that globalization will continue to advance driven primarily by technology and the cross-border flow of ideas. It also highlights the improved globalization scores in the last 12 months for medium sized rapid growth markets like Vietnam, Malaysia, Thailand and Philippines as well as smaller European countries including Belgium, Slovakia and Hungary.
However there are real concerns from the survey respondents that continuing weak growth combined with increased global competition could spark more protectionism in the next 12 months. The respondents also specifically pointed to the increasing challenges of operating in some BRIC economies as well as slowing growth in some BRIC markets. As a result nearly 50% of respondents expect an increase in protectionism in the BRIC countries as well as an increase in developed markets. In contrast, respondents see a decline in protectionism as more likely in other smaller rapid growth markets.
Rise of the second tier?
The Index highlights that non-BRIC rapid-growth markets are emerging as hot spots for global business, thanks to a perception of being more globally integrated on a range of trade, investment, cultural and technological criteria than the BRICs. These markets also show consistently high economic growth close to that of the leading BRICs. Turkey, Mexico and Indonesia closely shadow China and India in terms of GDP growth from 2000 through 2015. Peru, Colombia, Venezuela, Malaysia and Vietnam, as well as several countries and regions in Africa are all shaping up to be among the most dynamic parts of the world for investment.
The number of executives questioned who view rapid-growth markets, other than the BRICs, as the most important source of new revenue nearly doubles from 26% today to 45% in three years time. And they are planning accordingly with South Africa, Indonesia, Mexico and Turkey reported to be the most competitive locations. Executives from all geographies expect to increase investment in these markets – 82% plan to do so, and 4 in 10 expect to increase it by more than 10%.
Mature markets remain critical
While many of the non-BRIC rapid-growth economies are worth a big, mostly long-term bet, the report reinforces that they are only part of the picture. To create a well-rounded portfolio, investors will need to diversify their bets to include several mature markets, which are making a comeback in certain areas and sectors.
Executives surveyed confirm that North America and Western Europe remain critical to protecting the bottom line. Although new investment in these regions remains patchy, high energy costs, the decline in a labor cost differential between developed and developing markets and shorter product lifecycles are driving global organizations to pursue near-sourcing. In the next three years, the number of respondents who expect to outsource more operational functions to providers in mature markets will rise to 36% from 22% today and the number that plan to near-source previously outsourced activities will more than double, from 14% to 35%.
The report also highlights how innovation and exchange of technology and ideas can give developed markets an edge over their rapid-growth counterparts. The diffusion of broadband, social, digital and mobile technologies is much higher in these markets, enabling them to retain a high share in the export of goods and services.
As the trade in goods and services is returning to pre-financial-crisis levels, and the flow of capital shows a steady increase, technology and the cross-border flow of ideas will continue to shape the growth and character of globalization. As trade integration stabilizes, a shift between import and export countries is forecast, with rapid-growth markets emerging as stronger consumer markets and developed markets regaining strength as producers and exporters of goods and services.
The report draws on two sources of original research: Ernst & Young’sGlobalization Index, which measures the world’s 60 largest economies according to their degree of globalization relative to their GDP, and a survey of 750 senior business executives worldwide, conducted in late 2012, canvassing their opinion on globalization.