What's new about globalization?

Abstract

A superconductor of knowledge and capital is about to reach the right temperature A $21 trillion dollar market will emerge - with no natural owners The challenge will be to leverage brands, ideas, and people The biggest opportunities will be the ones that look most local Cynics ask, What's so important about globalization? It's been under way for decades. In some respects, they are right. The underlying processes have indeed been evident for some time, though without making much more than a modest impact on the world's economy. Apart from the relatively small international trade in goods and services and a few industries that globalized early, national economies have remained predominantly local. But all this is changing. Suddenly, the pace of globalization has quickened. The gradual process that gave companies ample time to adjust has gone for good. In just a couple of decades, our economy will become substantially global. In the past, globalization amounted to little more than evolutionary change in a few scale-driven industries. In the future, its impact will be ubiquitous, affecting services as well as manufacturing, and emerging market economies as well as the developed world. As a result, corporations in almost every sector will face the huge challenge of learning to play in a globalizing economy where many of the old rules no longer apply, and where the new rules are still being created. The global prize has never been more golden; the gales of destruction never more fierce. A fundamental transformation The transformation now taking place in the world economy is unlike anything we have experienced before. The increasing availability of global capital, coupled with advances in computing and communications technology, is serving to accelerate the processes of globalization. Economies are becoming superconductors of vast flows of capital and transplants of production techniques. The barriers to globalization are coming down wherever you look: not just in Western Europe, North America, and Japan, but in the emerging giants of China, India, Brazil, Russia, and Indonesia. Underpinning these changes are three mutually reinforcing factors: * The growing scale, mobility, and integration of the world's capital markets * The increasing irrelevance of national borders as regulation is liberalized and other economic barriers fall * The expanding ability to leverage knowledge and talent worldwide through technology. Global capital markets The growth and integration of the world's capital markets are the engine of globalization. As foreign exchange and bonds become more integrated, the law of one price begins to apply throughout the world. As equity markets start to integrate in their turn, capital becomes more mobile.(*) Crossborder capital flows rose from $536 billion in 1991 to $1,258 billion four years later. These totals exclude foreign direct investment, which itself soared from an average of $26.2 billion between 1986 and 1990 to over $250 billion by 1996. The world's stock of liquid financial assets grew from $10.7 trillion in 1980 to $41.5 trillion in 1994, and is expected to exceed $80 trillion by the year 2000 [ILLUSTRATION FOR EXHIBIT 1 OMITTED]. A rising proportion of these flows is going to the emerging markets that used to seek their finance primarily from official sources such as the World Bank and the IMF. Today, almost 50 percent of direct foreign investment and well over 10 percent of portfolio capital flows are directed toward these markets, even though they account for less than 25 percent of world dollar-denominated GDP. Moreover, these flows are increasingly oriented toward the long term: Endesa of Chile was able to issue a century bond for $200 million in early 1997. And even when there are crises, as in Mexico in 1995, private investors are usually willing to reinvest as soon as they see that underlying economic imbalances are being tackled. …