A report released today by Ernst & Young in cooperation with the Economist Intelligence Unit (EIU) highlights how globalization slowed during the financial crisis and the subsequent downturn. But as the economy recovers in 2010 the growth of globalization will once again resume, although at a slower pace than in the past decade, the report predicts.
Redrawing the map: globalization and the changing world of business draws on three sources of original research: a Globalization Index, created by the EIU, that measures 60 countries according to their degree of globalization relative to their GDP; an online survey of 520 senior business executives worldwide, conducted in late 2009; and a program of in-depth interviews with 30 senior executives and high-level experts.
The Globalization Index, which runs from 1995 to 2013, gives an overview of how the drivers of globalization have evolved and will continue to develop. The index has five criteria: openness to trade, capital movements, exchange of technology and ideas, labor movements and cultural integration. Each of the criteria's weighting was validated by the business leaders surveyed.
Globalization and economic growth
James S. Turley, Chairman and CEO of Ernst & Young, comments, "The long-term trend toward increased globalization has, unsurprisingly, paused in the last couple of years. Countries and corporates have been retrenching while the recessionary storm blows over."
The index measures the relative level of global engagement of a country. It does not measure the absolute or relative impact a country has on global commerce or the global economy. This means that countries that have large domestic markets - such as China, India and the United States - appear towards the middle of the table. Small countries that rely heavily on exports and world trade - such as Singapore and Ireland - appear at the top. More closed countries - such as Iran and Venezuela - are at the bottom.
Many of the same countries that sat at the top of the index in the 1990s continue to do so. Where there has been significant change is with the emerging economies in the bottom half of the index.
John Ferraro, Chief Operating Officer of Ernst & Young, explains, "Although the index questions whether the degree to which a country is globalized correlates with its subsequent economic growth, it clearly shows all the major emerging economies becoming more globalized. Also, the contrast between 2010 and 1995 is even more significant for certain smaller countries like South Korea and those from Eastern Europe like Romania. Both have seen major advances in the past 15 years."
What does it mean for business?
The temporary halt to the trend in the last two years does not alter how significant the longer-term implications of globalization will be for business. Companies based in emerging markets are looking to compete more and more with established corporates from developed markets. This competition is playing out not only in the emerging markets themselves but also increasingly in Western markets.
Turley explains that to be a long-term winner in this new globalized world, "Companies must rethink many aspects of their overall strategy ranging from capital raising to how they source their products. And as companies deepen and broaden their presence in international markets, the need for culturally diverse management teams becomes all the more pressing."
To fully maximize the benefits of more open global markets, business will also have to make a more concerted effort to engage with governments and other policy makers on global issues such as protectionism, regulation and trade
As Turley concludes, "Whether you like it or not, globalization is here to stay and will deepen further over the longer term. It can be painful - but the exchange of ideas, culture, people and capital is a force for good from which the majority of the world's population will see an economic upside."