It's not your father's globalization anymore

By James Manyika

Globalization has morphed in a very different—and more digital—direction, writes James Manyika on LinkedIn.

It’s no surprise that globalization, always a hot-button topic, has resurfaced in the US presidential race. But a lot of the discussion continues to re-litigate the past rather than proposing how to compete in the future. While we’re still talking about tariffs, trade deficits, and currency wars, globalization has morphed in a very different—and more digital—direction.

Our old image of globalization was one of container ships moving manufactured goods from far-flung factories to markets around the world. Cross-border trade in goods remains a major force in the global economy, but the world’s web of economic connections has grown deeper, broader, and more intricate.

Now a multinational energy giant can monitor production remotely by installing sensors on 4,000 oil wells around the world. A manufacturer in Australia that needs components can find them from a Chinese supplier on Alibaba—or 3D print them from a digital design file transmitted from Europe. Adele can introduce a song on YouTube and sell millions of downloads in a matter of days. The girl in Kenya who logs on for a personalized math lesson from the California-based Khan Academy is part of the story, too. So are the thousands of Syrian refugees who turn to Facebook for updates to guide their journey to safety.

New research from the McKinsey Global Institute looks at how all types of global flows influence economic growth. We find that over the course of a decade, cross-border flows of goods, services, finance, people, and data increased world GDP by roughly 10 percent over what would have occurred in a world without any flows. This value was equivalent to $7.8 trillion in 2014 alone.

What really jumps out from our findings is that data flows account for $2.8 trillion of this effect. Not only do they represent a stream of communication, transactions, ideas, and information with tremendous value in their own right, but they also play a role in enabling other, more traditional types of flows. When we consider both of these effects together, data flows now have a larger impact on economic growth than the global goods trade—pretty remarkable when you consider that the world’s trade networks took centuries to develop but cross-border data flows barely registered just 15 years ago.

This shift creates an opening for countries to redefine their roles in the global economy. The United States is still a major engine of global consumer demand for imported goods. But now it’s also the world’s leading producer of digital platforms and content. In fact, it accounts for more than 50 percent of online content consumed in every region of the world except Europe. The United States found itself at a disadvantage in a world where low labor costs were the most important factor in the equation, but digital globalization plays directly to its strengths in technology and innovation.

This doesn’t mean that the developing world will necessarily be left behind. Previous MGI research found that the biggest benefits of traditional trade flows go to countries at the center of the global network. But our latest report finds that countries at the periphery of digital networks stand to gain even more than those at the center. Companies based in developing countries can overcome constraints in their local markets and connect with global customers, suppliers, financing, and talent. For economies that have been relatively disconnected, the arrival of new digital platforms and cross-border data flows can be transformational.

It’s true that all types of global flows remain heavily concentrated among a handful of advanced economies, but digital platforms open the door for developing countries, small businesses, and billions of individuals around the world to participate. E-commerce marketplaces such as Alibaba, Amazon, eBay, Flipkart, and Rakuten, for example, are turning millions of small enterprises around the world into exporters. Facebook estimates that 50 million small businesses are on its platform, up from 25 million in 2013; on average 30 percent of their fans are from other countries.

As digital globalization takes hold, we are entering some uncharted territory. Companies will be challenged to devise business models that can monetize digital consumption. Industry value chains and supply chains could evolve in unexpected ways if 3D printing is widely adopted. Even our old methods of measuring and tracking what moves across borders will have to change.

There are also hopeful signs that the new digital globalization is not a zero-sum game. One country’s participation in digital flows doesn’t have to come at another’s expense; it can increase economic growth across the board. Now more than ever before, companies and countries can’t afford to ignore the opportunities beyond their own borders.

This article originally ran in LinkedIn.

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