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Globalization has changed us into a company that searches the world, not just to sell or to source, but to fnd
intellectual capital - the worlds best talents and greatest ideas.
Jack Welch, ormer General Electric CEO
We are moving toward a global economy. One way o approaching that is to pull the covers over your head.Another is to say: It may be more complicated - but thats the world I am going to live in, I might as well be
good at it.
Phil Condit, ormer CEO and Chairman o Boeing
The global economy has undergone a vast transormation in the past 20 years:
Economic linkages among countries are growing rapidly. Since World War II, the growth rates o both
trade and cross-border investment have consistently exceeded the growth o economic output at the
global and regional levels, and or nearly all countries.
Since the late-1980s, economic liberalization has spread around the world. Ater decades o economic
isolation, countries such as China, India, Russia, Brazil, Egypt, Mexico, and others have joined the
global economy (see Figure 1 on page 5 or a graphical depiction o this phenomenon).
Nearly hal o global Gross Domestic Product (GDP) growth is projected to occur in developing countries
in the next 25 years (see Table 5 on page 7). In a recent study, Goldman Sachs projected that China,
India, Russia, and Brazil will all be among the worlds six largest economies by 2050 (this study is
discussed in more detail below).
The past decade has witnessed the rise o developing country-based multinational rms in sectors
as diverse as pharmaceuticals, brewing, banking, white goods, and inormation technology. Until
recently, nearly all global rms were based in the United States, European Union, or Japan (see the
Going Global case series or several examples).
Globalization is now occurring rapidly in service activities. Globalization has traditionally been
concentrated in the natural resources and manuacturing sectors, which employ about 16% o U.S.
workers. The services sector provides 78% o employment. (See Exhibit 3 or a depiction o costsavings rom moving an activity oshore.) The globalization o services is causing rms to actively
reengineer their global operations to better access and leverage global resources.
To provide context, Exhibits 1 and 2 present world maps scaled by, respectively, economic output and
population. The patterns evident in these maps indicate the challenge and opportunity that globalization
The Global Business Environment
Proessor Robert E. Kennedy developed this note. 2008, Robert E. Kennedy.
note1-428-65107 August 2004
THEWILLIAM DAVIDSON INSTITUTE
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creates or managers. For example, the United States has only 4.6% o the worlds population but produces
about 26% o global economic activity. At the other extreme, India has about 16.5% o the global population,
but produces only about 1.4% o global output. As India enters the global economy through closer trade and
investment linkages, it will aect the global economy in many ways. Its customers represent vast potential
markets. Its workers are skilled and very low cost. And its rms will create tremendous pressures or global
industries to restructure. These eects will unold over decades and will have a proound impact on nearly
all sectors o the economy and every prominent managers career.
This note provides a brie prole o the global business environment. It is organized into our sections.
The rst discusses how economic perormance is measured and presents comparative gures or a sample
o countries. The second reviews why rms trade and invest across borders and why governments generally
encourage such activity. The third section discusses global economic trends. The ourth presents several
projections or how the global economy will evolve in the next ew decades.
Measuring Economic Performance
Economic perormance is oten discussed using a concept called Gross Domestic Product (GDP). GDP is
dened as the total value o all nal goods and services produced within a country during a specied period(most commonly one year).
GDP is dened as:
GDP = consumption + investment + government expenditures + (exports imports)
GDP measures current economic activity within a country. A closely related concept is Gross National
Product (GNP), which measures economic activity by a countrys actors o production (people and capital).
In practice, the measures track closely or most countries.
GDP is by no means a perect measure o well being. It measures only currently produced goods and
services exchanged in market transactions. It ignores non-market events that may improve or subtract rom
the quality o lie. Examples include childrearing, enjoying nature, depleting natural resources, and religiousobservances.
As a stand-alone measure, GDP doesnt provide much insight. To understand a countrys economic
perormance, the analyst must compare either levels or growth rates across countries. To do so, a countrys
GDP must be converted to a common standard - typically the U.S. dollar - using some rate o exchange.
At market exchange rates, the United States has by ar the worlds largest GDP, with more than twice
the aggregate output o Japan (see Table 1). GDP comparisons using ocial exchange rates oer a good
indication o a countrys purchasing power and relative position as a supplier in international markets or
goods and services.
While quite logical, using ocial exchange rates can understate the eective domestic purchasing
power o the average producer or consumer in less-developed countries. This is because the relative prices
or goods and services within a country varies widely across countries. For example, compared with energy
or entertainment, domestic help is extremely cheap in India. In the United States, personal services are
relatively expensive, while energy is relatively cheap. Someone with an income equivalent to US $20,000 in
India can live very well, while that income in the United States would be near the poverty line or a amily
o our. One measure that attempts to correct or this distortion is the so-called Purchasing Power Parity
(PPP) exchange rate. The PPP exchange rate is the rate which equalizes the purchase price o a pre-dened
basket o goods. PPP rates oten vary substantially rom market rates. For example, in India, the PPP GDP
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is more than ve times GDP measured at ocial exchange rates. In very rough terms, this tells us that an
Indian worker earning the equivalent o $20,000 lives about as well as a U.S. citizen earning $100,000. When
PPP exchange rates are used to rank GDPs, China jumps rom the seventh to the second largest economy in
the world. India moves rom #12 to #4.
A nal measureperhaps most closely related to living standardsis per capita GDP. This measures
economic output per person. As the table indicates, many o the countries with the highest GDP per capita
are small, relatively specialized economies like Luxembourg, Bermuda, and the Cayman Islands. There is no
single best measure o economic perormance. Per capita GDP is a reasonable approximation o standard o
living. Market rate GDP indicates a countrys aggregate infuence in global markets. The United States isunique in that it appears near the top o all our lists. As we will see later, several prominent analysts predict
that large developing countriesspecically Brazil, Russia, India, and China (the so-called BRICs)will
become much more predominant in global GDP rankings in the next ew decades.
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Table 1
Global Rankings
Ranking Population (millions) Aggregate GDP (billion USD) PPP GDP Per Capita GDP
1 China 1,288 United States 10,881 United States 10,871 Luxembourg 55,100
2 India 1,064 Japan 4,326 China 6,435 United States 37,800
3 United States 291 Germany 2,400 Japan 3,582 Norway 37,700
4 Indonesia 214 United Kingdom 1,794 India 3,096 Bermuda 36,000
5 Brazil 176 France 1,747 Germany 2,279 Cayman Islands 35,000
6 Pakistan 148 Italy 1,465 France 1,632 San Marino 34,600
7 Russia 143 China 1,409 United Kingdom 1,606 Switzerland 32,800
8 Bangladesh 138 Spain 836 Italy 1,559 Denmark 31,200
9 Nigeria 135 Canada 834 Brazil 1,371 Iceland 30,900
10 Japan 127 Mexico 626 Russia 1,318 Austria 30,000
Luxembourg 0.45 India 586 Canada 963 Russia 8920
Bermuda 0.06 Brazil 492 Turkey 477 India 520
Cayman Islands 0.04 Nigeria 50 Nigeria 139 Nigeria 320
Source: World Bank Quick Reerence Tables
Table 2
GDP Growth Rates 1990-2002 (selected countries)
Low/Middle Income Countries (%) High Income Country (%)
China 9.7 United States 3.3
India 5.8 Germany 1.6
Poland 4.3 Norway 3.6
Argentina 2.7 France 1.9
Malaysia 6.2 Japan 1.3
South Africa 2.2 Australia 3.8
Low/Middle income countries 4.3 High income countries 2.5
Source: Global Economic Indicators
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Economic perormance over time is generally measured in terms o growth rates. As a general rule, well-
managed developing countries grow at aster rates than developed countries. This is because they can import
capital and technology and ollow a development path already blazed by more developed countries. (Table 2
summarizes 12-year growth rates or a selection o countries.)
Why Trade and Invest Across Borders?
History shows that embracing the global economy is crucial to economic growth in rich countries
and or development in poor ones. Scan the list o the worlds most successul countries over the past 50
yearsthe United States, Germany, France, Japan, China, Chile, and South Korea. In every case, encouraging
cross-border trade and investment fows has been a central element o the countrys economic strategy.
At the other extreme, countries that have resisted globalization have generally lagged their more open
neighborsor example, Burma, Tanzania, Aghanistan, the USSR prior to 1989, Venezuela, Zimbabwe ater
1997, and India prior to 1991.
Engagement in international trade and investment is integral to economic growth because it increases
the productivity o local resources, which invariably leads to higher productivity, wages, and living standards.
Free trade encourages a country to ocus on those things it does relatively well, and to stop doing things itdoes relatively poorly (economists reer to this as comparative advantage). A countrys standard o living can
rise only when the eciency with which it uses its resources (people, capital, etc.) improves. Tradealong
with education, investment, and technological progressare important drivers o productivity growth.
Trade has a second important benet. It increases the range and quality o options available to local
consumers and orces local producers to improve their oerings in order to compete more eectively. This
pressure is inconvenient or local producers but it benets consumers. Countries that have lowered their
tari barriers and increased the intensity o competition in the local market oten see rapid improvements
in productivity as local producers rush to upgrade their products and processes.
Much o the discussion around trade policy ocuses on the ate o specic workers who are displaced rom
trade-exposed industries. For example: How are North Carolina textile workers supposed to compete withSri Lankan workers making one dollar a day? Framing the issue this way ignores the wider benets o trade.
Everyone in a country benets rom the productivity improvements generated by tradeboth those engaged
in tradable activities and those in so-called non-tradable sectors such as education, security services,
healthcare, construction, hospitality, and personal services. Increasing productivity is always accompanied
by the dislocation and reallocation o productive resources, but the overall benets to the economy vastly
outweigh the costs to individual dislocated workers. Consider restaurant workers. U.S. bartenders and wait
sta earn 50-70 times more than their counterparts in India. They dont work 50 times as hard, nor are they
50 times more productive. They enjoy high wages because the overall U.S. economy is 50-70 times more
productive than Indias and a signicant portion o that wealth fows to hospitality workers, teachers, etc.
A displaced textile worker may be individually worse o, but those costs are vastly outweighed by the cost,
quality, and income improvements or society as a whole.
FDI
Foreign direct investment(FDI) also leads to an array o benets. In addition to providing capital to
und investment, direct investors (that is, those that invest directly in rms or physical assets, not publicly
traded securities) typically provide technology, links to supply and distribution chains, and management.
These actors all raise the productivity o local resources, thus raising wages and the standard o living. Much
o Chinas export growth in the past two decades has been driven by oreign-invested production acilities.
Investment capital was necessary, but other actors were just as important. Nearly all academic studies
indicate that recipient countries realize many and varied benets rom FDI.
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Many actors beyond trade infuence a countrys standard o living, including history, natural
endowments, and proximity to developed country markets. Most o these actors are xed, whereas trade and
investment policy are decision variables. Experience and numerous academic studies indicate that openness
to international trade and investment fows are critical ingredients or development.
Global Economic Trends
The global economy is in the midst o a vast transormation. Globalization can be measured in many
waysby exploring government policies, with actual trade and investment fows, or with many other
methods. Nearly every measure, however, shows that economic linkages among countries have become more
extensive. We review three measures here.
The rst explores a countrys openness to international trade and investment. First suggested by Sachs
and Warner (1994) and updated by Ghemawat and Kennedy (2000), this methodology uses seven actors
to calculate a policy openness index or 192 countries. Factors include: average tari rates, regulatory
restrictions on FDI, the presence or absence o a two-tiered oreign exchange system, etc. Figure 1 charts the
global shares o market GDP, purchasing power parity GDP, and population in countries that are considered
open to the global economy. This doesnt mean that all, or even most, citizens in these countries areengaged in global commerce, just that their national governments are not preventing them rom doing so. As
the chart illustrates, the share o global population living in open economies was airly steady rom the early
1960s through the mid-1980s. Then, starting around 1986 and accelerating in the early 1990s, dozens o
countries implemented programs o economic liberalization that deregulated domestic markets and lowered
barriers to trade and investment. In a period o just 13 years (1985 - 1998), the percentage o people living
in open economies rose rom 23% to 78%.
Global shares o GDP and PPP-GDP ollow a similar, but less dramatic pattern.
Measures o trade and oreign direct investment as a percentage o economic activity ollow a similar
pattern. Since the end o World War II, global GDP growth has averaged around 3.7%, with wide variation
across countries and regions o the world. Global trade has grown at a 7.2% compound annual rate, and
oreign direct investment fows have grown at a 9.6% rate. Measured as a percentage o country or global
economic output (see Table 3) exports and imports (not reported here) have steadily increased.
Figure 1
Global Openness Shares
0%
10 %
20 %
30 %
40 %
50 %
60 %
70 %
80 %
90 %
100%
Populat ion Market GDP PPP GDP
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A similar pattern is evident with oreign direct investment. While the year-to-year fows o FDI are quite
volatile, the cumulative stock o FDI has shown a steady increase since 1960. The rate o increase appears
to have accelerated since the early 1980s.
It is, o course, possible that these trends will reverse. But this seems unlikely. A consensus has developed
among development proessionals and the vast majority o national economic policymakers regarding how
best to help poor countries develop. This view holds that relatively ree prices, investment in education,
decentralized capital allocation, and openness to the global economy are the best paths out o poverty. Aterdecades o stop-go policy experimentation, the overwhelming majority o low- and middle-income countries
have implemented programs o economic liberalization. For those that stay the course, the uture looks
brighter than the recent past.
Projections
Over the next fve years, our experts project that eight developing countries - Brazil, China, India, Mexico,
Poland, Russia, South Korea and Thailand - will account or about 50 percent o global auto-industry
growth.
Rick Wagoner, CEO General Motors Corporation, Jan. 2003
World Bank Projections
Every year, the World Bank publishes an in-depth study entitled, Global Economic Prospects and the
Developing Countries. This book explores a variety o issues acing developing countries and, based on
current and anticipated policies, projects GDP growth by income group and region. Table 5 is adapted rom
the 2002 edition o the publication.
As o 2000, high income countries accounted or about 78% o global GDP and were orecast to grow
at their historical rate o 2.6% in the decades to come. The projections or the low- and middle-income
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Table 3
Global Merchandise Exports as a Percentage of GDP
Country 1950 1973 1992 2000
United States 3.0 5.0 8.2 11.7
Germany 6.2 23.8 32.6 34.5
Japan 2.3 7.9 12.4 10.8
China 1.2 2.1 17.5 27.6
India 2.6 4.2 9.0 11.2
World 7.0 11.2 13.5 20.1
Source: World Bank Global Economic Indicators
Table 4
World FDI Stock as a Percentage of World Output
1960 1975 1980 1985 1991 1997
4.4 4.5 4.8 6.4 8.5 11.8
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countries, however, were a revelation. The World Bank projected that low- and middle-income countries
would grow at more than twice the rate o high-income countries (5.5% vs. 2.6%) and that low-income
countries in every geographic region would outperorm the high income countries as a group. For the rst
time, the World Bank was projecting across the board convergence in income levels.
The projections indicate that nearly hal o global GDP growth over the next 25 years will occur in
developing countries. As a group, these countries will grow their share o global GDP rom 22% to 37%. Thisis a development that ew international rms can aord to ignore.
Goldman Sachs BRICs Analysis
Goldman Sachs, the well respected investment bank, issued a widely infuential study in October 2003
that changed the way many managers view the uture o the global economy. The paper, Dreaming theBRICs: The Path to 2050, projected economic growth or the six largest economies today (the G6, which
includes the United States, Japan, Germany, the U.K., France, and Italy) with projected growth or our large
developing countries it labeled the BRICs (Brazil, Russia, India, and China).
The study built an economic model that considered current economic policies, capital accumulation,
demographics, and technical innovation. The conclusions are interesting and have caused a undamental
reassessment o emerging market strategies in many leading companies. Conclusions include:
Over the next 50 years, the BRICs will become a much larger orce in the world economy. O todays
G6, only the United States and Japan will remain among the six largest economies in 2050.
As early as 2009, incremental GDP growth in the BRICs will exceed growth in the G6.
Total GDP or the BRICs will surpass the current G6 by 2039.
The list o the worlds largest economies will look much dierent in 2050. Many o the largest
economies will no longer be among the richest. This will make strategic planning and choices much
more complex or international rms.
Table 6 summarizes the aggregate GDP projections or each group o countries over the next 50 years.
By 2050, the our BRICs will account or more than 60% o these 10 countries output.
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Table 5
Projected GDP Growth by Income Level and Region
GDP Growth Projected GDP Share GDP Share % Incremental1974-98 Growth 2000 in 2025 Growth
High Income Countries 2.6% 2.6% 78.0% 62.6% 52.3%
Low - and Middle Income 3.6 5.5 22.0 37.4 47.7
East Asia 6.9 7.5 6.3 17.9 25.6
South Asia 5.3 5.9 2.0 3.7 4.9
Latin Am and Caribbean 2.9 4.4 7.0 9.0 10.4
Cent. Europe/ Cent. Asia 1.4 5.2 3.7 5.8 7.2
Middle East / N. Africa 1.9 3.7 1.9 2.0 2.1
Sub-Saharan Africa 2.3 4.2 1.1 1.3 1.5
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The projections are that the United States will continue to have the highest per capita GDP, but that
China will become the largest economy, with India a close third and every other country ar behind.
The study also projected development paths or individual countries. All our BRICs are projected to
close the per capita GDP gap with todays leaders, with Russia orecast to catch and surpass Germany by the
end o the period. Table 7 summarizes the current and projected GDP measures or a selection o countries.
Conclusion
The global economy has undergone substantial changes in the past 20 years. It is likely to change even
more over the next 50 years. The engines o growth in the new global economy are increasingly located
in developing countries. How managers seize these opportunities and manage the challenges these trends
create will determine the success or ailure o their companies, and o their careers.
Table 6
Projected GDP (billions of 2004 USD)
2005 2010 2020 2030 2040 2050
Current G6 22,548 24,919 29,928 35,927 44,072 54,433
BRICs 3,330 5,441 12,248 24,415 47,013 84,201
Table 7
Current and Projected GDP Measures (billions of 2004 USD)
United States Germany Brazil Russia India China
2000
GDP 9,825 1,875 762 391 469 1,078
per capita GDP 34,797 22,814 4,338 2,675 468 854
2050
GDP 35,165 3,603 6,074 5,870 27,803 44,453
per capita GDP 83,710 48,954 26,592 49,646 17,366 31,357
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Exhibits
Exhibit
1
GDP-WeightedMapoftheWorld
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10
Exhibit
2
Population-WeightedMapoftheWorld
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11
Exhibit 3
Total Delivered Cost as a Percentage of US Cost
80%
65%55%
48%40% 40%
35%
0%
25%
50%
75%
100%
Auto Parts Textiles SW - DetailedDesign SW-TestingCoding SW -Maintenance Call Center PaymentSevices
"Manufacturing" "Services"
Potential for Trade
% US Employment
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disseminating expertise on business issues in emerging economies. It was
established at the University o Michigan in 1992, and today integrates
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generate knowledge o, and management skills or, emerging
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oer unique educational opportunities to individuals and both
indigenous and multinational companies which operate in
emerging economies
provide a orum or managers and public policy-makers to discuss
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