Project Syndicate

Reimagining global integration

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SAN FRANCISCO – Global trade still conjures images of giant container ships. But our world has changed. The transport of physical goods across borders is no longer the only, or even the primary, driving force behind global integration. Instead, we are increasingly connected by flows of intangibles, services, and talent. From the cloud-based applications that companies use to manage customer relations to the research that led to the development of the COVID-19 vaccines, knowledge is binding our world together.

As we show in a new report, global flows associated with know-how have taken the baton from manufactured goods, resources, and capital – the primary drivers of interconnection until the late 2000s. Between 2010 and 2019, international trade in services, intellectual property, and education grew twice as fast as trade in goods. Cross-border data flows – the fuel of the digital era – have exploded, increasing at an annual rate of 45%. In terms of trade in services, knowledge-intensive categories – including professional, government, IT, and telecommunications services – are growing most rapidly.

Speculation that the world is deglobalizing misses the mark: Global integration is evolving, not retreating, in the digital era. Every major world region imports 25% or more (in value-added terms) of at least one important type of resource or manufactured good that it needs, and often much more.

The spread of intangible know-how is having a palpable influence on many sectors. In particular, research and development now involves much more cross-border cooperation. In the automotive sector, the share of R&D occurring in offshore locations rose from 5% to 15% between 2000 and 2018. The same is true of the pharmaceutical industry: Multinationals based in Europe and Asia use R&D performed outside of their home countries for more than half of innovation that produces new patents.

Likewise, highly qualified talent – one of the most important inputs across sectors – is globally mobile. Consider the semiconductor industry. An estimated 40% of high-skill semiconductor researchers working in the United States were born in other countries, and foreign-born workers contribute over 80% of semiconductor patents.

Multinational corporations are pivotal players in world trade, accounting for about two-thirds of global exports. They are overrepresented in sectors where intangibles are the most relevant. For example, they account for about 80% of exports in some of the most innovative industries, including transport, pharmaceuticals, and electronics.

In knowledge-intensive global value chains, intangibles create highly scalable assets that can be deployed globally at low marginal cost. This, in turn, enables large economies of scale and a self-reinforcing cycle of higher returns, concentrating market share and performance in a small number of superstar firms that drive a disproportionate amount of economic activity. Hence, the close correlation between dominant multinationals and intangibles.

Multinationals have the opportunity to unlock new sources of competitive advantage through increased investment in intangibles, particularly those with the potential to flow across borders. One example is MELLODDY, a public-private partnership coordinated by the AI biotech company Owkin. The project uses decentralized data from ten leading pharmaceutical companies to tweak models that predict molecule behavior, in the hope of accelerating the drug discovery process. In some cases, investment in intangibles could enable multinationals to implement new business models in sectors that were previously less driven by knowledge flows.

According to MGI research, large companies are well positioned to outperform their peers when they master the deployment of intangibles investment: Firms in the top quartile for growth in gross value added invest 2.6 times more in intangibles than companies in the bottom two quartiles. This suggests new sources of growth for companies grappling with growing economic and geopolitical uncertainty. But there is room for all on the fast-moving intangibles train, from the largest multinational corporations to the smallest microbusinesses, which can have a cross-border presence thanks to digital technology.

Firms on the hunt for growth opportunities would also do well to consider trade in services, which seem poised to deepen and expand. More economies are undergoing a transition to services, and there is much to gain from further liberalization, as trade barriers affecting most services are two or three orders of magnitude higher than those for goods. Moreover, further technological advances could make these flows more seamless – the remote-everything of the pandemic era forced companies to provide services virtually, a practice that has become the norm for many services.

The widespread disruption to supply chains caused by the pandemic and Russia’s invasion of Ukraine has prompted a new narrative about globalization in retreat. Considering the full picture of flows, however, suggests that global integration is here to stay, and that knowledge and know-how are now an important part of the way forward. Firms will need to reconfigure value chains in order to capitalize on the growth potential in services, intangibles, and talent.

This article originally appeared in Project Syndicate.

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