News

SUMMARY PAPER: Redesigning the business landscape: Globalisation and technology

Introduction

Throughout recent history, technology and innovation have been powerful enablers of globalisation. Information technology, in particular, has been a driving force behind the flow of goods, services, capital and labour across borders. As we look to the future, it will continue to play a dominant role in the creation – and destruction – of business models and will remain an important source of long-term economic growth.

The traditional, western-led model of globalisation is increasingly being challenged. Through the rapid development of key developing countries, we are seeing the emergence of a more multi-polar perspective. And although the recent economic crisis may have caused globalisation to waver slightly from its course, this looks like being a temporary phenomenon. Technology and innovation, in particular, continue to drive change and embed deeper levels of connectedness around the world.

As the world emerges from the worst financial crisis for more than a generation, what role can technology and innovation play in keeping globalisation on track? What impact will new technologies, such as cloud computing, have on globalisation, and how can technology be harnessed to improve the management and governance of leading global businesses?

To answer these questions, Economist Conferences, in association with Accenture, hosted a panel discussion at the World Economic Forum 2010 in Davos that was attended by top-level executives from around the world. The discussion was moderated by John Micklethwait, Editor-in-chief of The Economist.

The role of technology and innovation in globalisation

History has shown us that, when properly applied, globalisation and technology are the most important sources of long-term economic growth. By enabling the more rapid transfer of information and technology around the world, technology has long been an enabler of trade, and the movement of capital, labour and ideas across borders. It also continues to be one of the major sources of productivity growth around the world, which itself leads to economic growth.

“Despite the severity of the recent financial crisis, it is clear that technology and innovation continue to be important drivers of change,” says Nouriel Roubini, Economist at New York University, and Chairman of Roubini Global Economics. “Although we don’t know what the shape of future industries will be, it is clear that there continues to be a huge amount of innovation, and we can be optimistic about long-term economic growth.”

The ongoing march of technology and innovation is enabling powerful new relationships between companies and their customers. Recent developments, such as cloud computing, social networking and others, create enormous potential to harness new business models, particularly when combined with the rise of emerging markets. “Our sense as we look forward is that business will have to deal with a whole new round of change,” says Mark Foster, Group Chief Executive of Global Markets and Management Consulting at Accenture, “and that should be seen as both an opportunity and a threat.”

In many cases, however, business appears to be ill-prepared to deal with this rapidly evolving business environment. A recent study by Accenture found that just 12% of companies thought that they had the right strategies in place to manage the pace of change that they were encountering.

Governments may be even less able to keep pace with rapid developments in technology and innovation. By enabling new business models and the transfer of ideas and services across borders, technology is a powerful source of creative destruction. It gives rise to new industries and business models, but it makes others obsolete, and this can create domestic pressures for political leaders that may lead them down the path to protectionism.

The offshoring of services to lower-cost countries is a particular flashpoint. Prof Roubini points to a recent study, which predicted that up to 25% of US jobs could potentially be offshored. “The advance of technology is inevitable but the progress of globalisation is not,” he says. “It is very easy to imagine dramatic things happening that make globalisation less of a sure thing if local resentment is stirred up.”

Mr Foster agrees that governments may have difficulty keeping pace with the rapid development of technology, and its impact on the global economy.  “The genie is out of the bottle from a technology perspective,” he explains. “We used to talk about a flat world, but we should now think of it as bumpy. Technology and innovation are accelerating opportunities in the world, but there are new battlegrounds emerging, either from governments trying to catch up, or an overlay with other challenges, such as natural resource shortages.”

New technologies emerging

Over the long term, developments in information technology have the potential to unlock significant new economic growth. Craig Mundie, Chief Research and Strategy Officer at Microsoft notes that, at present, only around 2bn out of a global population of more than 6bn use a computer. Further democratisation of computing power to those areas of the world that do not have access to the technology will create new levels of interconnectedness and foster myriad new opportunities.

Emerging models of computing that do not rely on the traditional interface of screen, keyboard and mouse will increase the accessibility of technology further. “Computers will become powerful enough that they move to meet people more than half way,” says Mr Mundie. “They will shift from being a tool that can do great things if you are adept at using it to becoming a genuine partner or assistant. That will change the mode of consumption for computing and give virtually everyone on the planet access to it over the next 20 years.”

New developments, such as parallel computing and cloud computing, will also have a significant impact on globalisation, believes Mr Mundie. “Not only are we seeing processor power increase, we are seeing storage levels increase to levels where people don’t yet fully comprehend them,” he says. “The cloud becomes the vehicle for allowing this scale of data management and analysis both for multinationals and for businesses of every size.”

Adi Godrej, Chairman of The Godrej Group, a privately-held family conglomerate based in India, notes that technology has had a dramatic impact on the efficiency of his business. “Each of our salesmen has a tablet PC,” he explains. “These are connected to a mainframe, so we get data very quickly and can manage a complex situation very efficiently.”

Blending local and global

Technology is also forging new ways of managing global businesses. Sanjay Khosla, Executive Vice-president and President, International of Kraft Foods, describes how his company created virtual meetings of product heads from around the world in order to create global initiatives that could be applied at a local level. “We have found from our experience that diversity of thought at the leadership table is a powerful competitive advantage,” says Mr Khosla.

At virtual meetings held using communications technologies, regional heads were encouraged to create a global framework for product development, which could then be adapted for implementation in local markets. This enabled the company to derive economies of scale at the same time as marketing products in a way that would be most relevant to local customers. “The idea is that we bring together leaders from around the world to plan globally and win locally,” says Mr Khosla. With one product, Tang, this approach led to growth of 25% year on year.

The ability to communicate freely and instantly across borders creates new models for research and development. Centres of excellence can be decentralised and located according to the availability of skills and proximity to customers. This means striking a careful balance between global resources and local knowledge. “Microsoft’s second largest lab in the world is located in Beijing,” says Mr Mundie. “We use the diversity of talent that exists there to make our global products better, but we also recognise that we need localisation, and a presence on the ground helps you to understand what is required.”

Emerging market multinationals are taking a similar approach. Mr Foster gives the example of Huawei, the Chinese telecoms company, which has set up R&D centres in Europe in order to get close to key markets.

Mr Khosla adds that companies should locate R&D centres in places where they can build critical mass. “Many companies have decided not to go to traditional countries for their centres of excellence but to spread them around,” he says. “The concept of the corporate headquarters is dying. It’s now all about where your centres of excellence are and how you connect them.”

This more decentralised view of business, which has been enabled by technology, is rendering the traditional, US-centric view of globalisation obsolete. “The belief that what is good for the west is good for the world is no longer applicable,” says Mr Khosla. Rather than assume that products that are successful in the US will be equally successful in the rest of the world, Kraft has sought to adapt its products to suit local tastes, while still leveraging resources and technology on a global scale.

An optimistic future

The size of the domestic market in countries such as China and India means that businesses in those countries can develop huge scale before expanding internationally. “We have a lot of consumer products that are designed for the bottom of the pyramid,” says Mr Godrej. “A combination of affordability and quality means that they are transferable into many other emerging markets.”

Mr Godrej notes that his company has 500m customers in India, but the brand is hardly known outside the country. “Our strategy is to acquire overseas companies that have strong brands,” he explains, “because this gives us great leverage in terms of expansion.”

Mr Godrej is highly optimistic about the future. “We are fortunate to be in a country that has its best decades ahead of it,” he explains. “To be in a country like India which is high-growth and then be able to leverage these ideas is a very exciting future for us.”

Conclusion

Despite the ravages of the global financial crisis, economic globalisation remains a powerful force with strong forward momentum. Technology and innovation continue to be important drivers of change and, with new models of computing on the horizon, are likely to remain important sources of long-term economic growth.

In addition to improving rates of productivity, technology is fostering new organisational structures and management methods. The hub-and-spoke model of corporate headquarters and country subsidiaries is becoming a thing of the past. In its place, companies are decentralising research and development, and basing investment decisions on the local availability of skills and proximity to customers.

For multinational businesses, there is an important balance to be struck between local and global. The most forward-looking businesses make the most of their scale and resources at a global level, but allow local decision-makers to adapt a global framework to suit local needs.

There is considerable optimism about the potential for technology and innovation to drive globalisation and long-term economic growth. But at the same time, there is a clear recognition that powerful challenges lie ahead. The speed of change can make it difficult for businesses and governments to keep pace. Creative destruction will make certain business models, and even industries, obsolete. Governments will need to balance the benefits of globalisation against domestic political pressures, which may encourage them to adopt protectionist measures.