Looking beyond the obvious

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  • 1. Looking beyond the obviousGlobalization and new opportunities for growthJanuary 2013
  • 2. About this reportLooking beyond the obvious: globalization and new opportunities for growth looks at the mostimportant elements of globalization for business. This report draws on three sources oforiginal research:► 2012 Globalization Survey, an online survey of 730 global business executives from around the world conducted for Ernst & Young by the Economist Intelligence Unit: ► 433 respondents from developed markets and 297 from rapid-growth markets (139 from Brazil, Russia, India and China (BRIC) and 158 from other rapid-growth markets) ► Reported annual revenues: 23%, US$10 billion or more; 24%, US$1 billion to US$9.9 billion; 49%, US$100 million to US$999.9 million; and 4%, under US$4 million► In-depth interviews with senior executives and high-level experts conducted at year-end 2012► Ernst & Young’s 2012 Globalization Index, which measures the 60 largest countries/territories by GDP according to their degree of globalizationPage 1
  • 3. Introduction► The changing face of globalization will have a profound impact on the business landscape.► Our latest annual report shows that globalization is evolving against a highly volatile economic backdrop.► While globalization continues, its pace has slowed and its nature has changed.► Capital flows between East and West have become more balanced.► Technology has become the key driver of globalization, promoting innovation across nations and cultures.► The globalization of talent is at an early stage, with skilled people clustered in some locations but scarce in others.► These changes will require business leaders to carefully consider globalization trends and issues and respond with flexibility, speed and unconventional thinking.Page 2
  • 4. Setting the scene: summary of high-levelfindingsGlobalization is set to continue:► Global integration will continue, but at a slower pace.► Technology integration, especially mobile and social, is the biggest contributor to further globalization.► Global growth strategies are rebalancing toward a mix of developed and rapid-growth markets.The BRICs will still be an engine of growth:► BRIC countries continue to outgrow as they integrate further into the global economy.► But challenges of market access, government policies and cultural integration persist, and traditional sources of competitive advantage (such as labor cost) start to erode.Frontier markets are emerging as growth hot spots:► Rapid-growth markets emerging as the largest new revenue opportunity.► Eight in ten executives are planning to increase investment in rapid-growth markets beyond BRIC.► This reflects significant improvement in ease of doing business and overall environment in these markets.Developed markets are competing in the new world:► Developed markets (North America, Western Europe) remain key to protecting the bottom line.► Near-sourcing and outsourcing in developed markets are increasing in response to high energy cost and emerging market opportunities.► Select industries (oil and gas, manufacturing) are planning to shift production capabilities back to developed markets.► Technology advances and innovation are rebalancing advantage.Page 3
  • 5. What this means for business: key considerationsPage 4
  • 6. Key considerations for companies► Globalization continues, but it’s different this time around. Globalization will continue in the years ahead, but its pace will slow, with the financial crisis and subsequent recessions providing a tipping point. Trade, technology, culture, labor and capital will integrate at different rates across the 60 countries measured in the Globalization Index.► Companies must make “big bets” on markets they may not have considered before. Leading companies are adopting a multi-market approach. This may mean looking at opportunities in non-BRIC rapid-growth markets and developed markets, as well as creating customized strategies for different markets, areas, regions, sectors and countries. Taking “big bets” on carefully chosen markets, categories or technologies — those that match a business’s existing competencies — offers the best chance of securing a sustainable competitive advantage.► The BRICs are still reliable options — for now. For many multinational companies, the BRICs were the big bets of the past decade and will continue to be major players in the world economy. But as their growth slows over the next few years and their operating environments become more challenging, companies must look for additional growth markets.Page 5
  • 7. Key considerations for companies► The momentum is shifting to other hot spots. Non-BRIC rapid-growth markets are emerging as attractive locations for global business. Despite their risks, these markets are more globally integrated than the BRICs on a range of trade, investment, cultural and technological criteria, and in the past three years they have improved markedly in terms of ease of doing business, infrastructure, government policies and labor productivity. Non-BRIC rapid-growth markets present an opportunity for businesses to grow their demand base, rather than simply cutting cost.► Are developed markets worth betting on? While rapid-growth markets are picking up output share, developed markets are still major drivers of world economic activity. Innovation and exchange of technology and ideas give these markets an edge over their rapid-growth counterparts. Advanced economies that can leverage these capabilities are at an advantage.► Operational changes are essential to picking the right big bets and increasing their chances of a payoff. To choose the best opportunities from a wide variety of markets, companies must adapt their operations to a new growth cycle – one that requires highly disciplined and rigorous strategic planning, execution and learning, all supported and enhanced by technology.Page 6
  • 8. Achieving a competitive advantage► To achieve a competitive advantage by adapting operations to this new growth cycle, companies may consider the following approaches: ► Strategic planning: allocate resources in a bold and focused way: ► Deciding how to apportion scarce resources involves resolving many trade-offs and conflicts between slow-growth and rapid-growth markets, short-term and long-term returns, and volume-to-margin ratios. ► Once companies decide on the right balance of these elements, they must settle on a handful of key investments that offer the best promise of future growth. ► Execution: make your big-bet investments as local and granular as possible: ► Succeeding in the world’s new markets means being immersed in them, including tailoring offerings to meet the exacting needs of local customers, forming close relationships with local officials and communities, manufacturing locally or establishing regional supply chains, and empowering local managers to make decisions. ► Learning: transform your company into a “learning organization”: ► Technology can provide businesses access to a wealth of data that they can feed into future strategic planning and use to become lean and flexible organizations that are well positioned to thrive in the global economy of the future. ► An organization with a mind-set of continuous learning will be best equipped to manage in an ever-shifting business landscape.Page 7
  • 9. The 2012 Globalization IndexPage 8
  • 10. The 2012 Globalization Index► Ernst & Young’s annual Globalization Index was developed in 2009 in conjunction with the Economist Intelligence Unit to measure the extent to which the 60 largest/territories by GDP are connecting to the rest of the world.► The Index is based on a comprehensive understanding of the underlying drivers for globalization across five main pillars: openness to trade, capital flows, exchange of technology and ideas, labor movements and cultural integration.► In 2012 we introduced revisions to the Globalization Index scoring system and included several new sub-indicators to better reflect the state of play in the global economy, technology and markets.► This table provides a breakdown of the top 10 countries/territories in the index for each of the five key categories most relevant to business. 2012 Change in score Change in score Rank Country Trade Capital Labor Technology Culture Score since 2011 since 1995 1 Hong Kong 7.81 0.06 1.96 8.27 8.46 4.81 8.54 8.89 2 Singapore 6.31 -0.02 1.01 8.57 6.04 4.80 5.56 6.31 3 Ireland 5.63 0.08 1.20 6.32 6.04 5.90 3.68 6.35 4 Belgium 5.49 0.11 1.17 6.39 6.64 5.60 4.27 4.29 5 Switzerland 5.30 0.04 1.49 5.32 5.64 6.15 4.33 5.06 6 Netherlands 5.19 0.02 0.92 6.24 5.59 5.19 4.49 4.21 7 Sweden 4.96 0.01 0.97 6.27 5.29 4.82 4.07 4.12 8 Denmark 4.94 0.01 0.92 5.88 5.33 4.88 4.26 4.12 9 Hungary 4.75 0.07 1.02 6.63 4.15 5.03 3.82 3.92 10 United Kingdom 4.74 0.03 0.63 5.89 4.81 4.83 3.94 4.06Page 9
  • 11. More on the Globalization index► The Globalization Index was created by identifying the key indicators of globalization most relevant to business. The table below shows, for each of the headline categories, the individual indicators used and their source. The categories were then weighted according to the views captured in a survey of 992 business leaders. Category and indicators Weight Source Movement of goods and services Total trade (exports and imports) 40.0% National accounts Trade openness (5=very high) 10.0% Scored on 1-5 scale by EIU analysts Tariff and non-tariff barriers (5=very low) 10.0% Scored on 1-5 scale by EIU analysts Ease of trading (cross-border) (5=very easy) 10.0% Scored on 1-5 scale by EIU analysts Current-account restrictions (5=very low) 10.0% Scored on 1-5 scale by EIU analysts Share of main trading partners in total trade (%) 20.0% National accounts Movement of capital and finance (Business leader weighting: 21%) FDI stocks (in and out, % GDP) 50.0% IMF International Financial Statistics Portfolio capital flows (in and out, % GDP) 8.3% IMF International Financial Statistics Government policy towards foreign investment (5=very encouraging) 8.3% Scored on 1-5 scale by EIU analysts Expropriation risk (5=non-existent) 8.3% Scored on 1-5 scale by EIU analysts Investment protection schemes (5=very good) 8.3% Scored on 1-5 scale by EIU analysts Domestic favoritism by government (5=no favoritism) 8.3% Scored on 1-5 scale by EIU analysts State control/ownership (5=no state interference) 8.3% Scored on 1-5 scale by EIU analysts Exchange of technology and ideas (Business leader weighting: 21%) Trade in ICT goods (exports and imports) as % of GDP 30.0% UNCTAD Trade in creative goods and services (exports and imports) as % of GDP 30.0% UNCTAD Broadband subscriptions (per 100 people) 20.0% International Telecommunications Union Internet subscribers (per 100 people) 20.0% International Telecommunications Union Movement of labor (Business leader weighting: 19%) Net migration rate (per 1,000 population) 40.0% United Nations Current transfers (in and out, as %GDP) 40.0% IMF International Financial Statistics Hiring of foreign nationals (5=very easy) 20.0% Scored on 1-5 scale by EIU analysts Cultural integration (Business leader weighting: 17%) Tourism (in and out, per 1,000 population) 33.3% World Tourism Organization International outgoing fixed telephone traffic (minutes) per capita 33.3% International Telecommunications Union Openness of national culture to foreign influence (5=very open) 33.3% Scored on 1-5 scale by EIU analysts Note: IMF stands for International Monetary Fund; EIU stands for Economist Intelligence Unit.Page 10
  • 12. Closing remarks► Globalization continues to define our business landscape, increasing levels of cross- border trade, capital and labor integration.► A constant challenge for businesses is to anticipate and interpret how globalization is changing, while understanding the opportunities and risks it creates.► Business leaders can react effectively to the forces of globalization or, even better, anticipate them to their advantage.► Companies will need to look for growth in new ways and from new places.► Those that understand the significance of globalization and tailor their strategies based on that understanding can rise to the top.Page 11
  • 13. Appendix: select survey chartsPage 12
  • 14. Globalization is changingPage 13
  • 15. Technology will be the driver of globalizationPage 14
  • 16. BRIC growth will outpace that of other indexcountriesPage 15
  • 17. Protectionism remains a concernPage 16
  • 18. Non-BRIC markets have high levels ofintegration 4.00 3.50 3.00 Rapid Growth Markets Ex. BRICs BRICs 2.50 2.00 2004 2007 2010 2000 2001 2002 2003 2005 2006 2008 2009 2011 2012 2013 2014 2015 2016 Source: Ernst & Young 2013 Globalization Index (Economist Intelligence Unit, 2012; Ernst & Young analysis)Page 17
  • 19. Top competitive drivers for non-BRICemerging marketsPage 18
  • 20. A source of new demand opportunityPage 19
  • 21. But concerns about corruption remainPage 20
  • 22. Advanced economies remain key drivers ofeconomic activityPage 21
  • 23. Developed markets remain important to thebottom linePage 22
  • 24. Ernst & YoungAssurance | Tax | Transactions | Advisory Growing BeyondAbout Ernst & YoungErnst & Young is a global leader in assurance, tax, In these challenging economictransaction and advisory services. Worldwide, our times, opportunities still exist for167,000 people are united by our shared values and growth. In Growing Beyond, we’rean unwavering commitment to quality. We make adifference by helping our people, our clients and our exploring how companies can bestwider communities achieve their potential. exploit these opportunities — by expanding into new markets, findingErnst & Young refers to the global organization of new ways to innovate and takingmember firms of Ernst & Young Global Limited, each ofwhich is a separate legal entity. Ernst & Young Global new approaches to talent. You’llLimited, a UK company limited by guarantee, does not gain practical insights into what youprovide services to clients. For more information about need to do to grow. Join the debateour organization, please visit www.ey.com. at www.ey.com/growingbeyond.© 2013 EYGM Limited.All Rights Reserved.EYG no. EX0183BSC no. 1301-1003067This publication contains information in summary form and istherefore intended for general guidance only. It is not intended to be asubstitute for detailed research or the exercise of professionaljudgment. Neither EYGM Limited nor any other member of the globalErnst & Young organization can accept any responsibility for lossoccasioned to any person acting or refraining from action as a resultof any material in this publication. On any specific matter, referenceshould be made to the appropriate advisor.ED None Page 23