In April, 2005, NY Times columnist Tom Friedman published The World is Flat: A Brief History of the Globalized World in the Twenty-first Century. Friedman’s bestseller did much to explain to a wide audience the impact of the Internet and related technologies on the connected, global economy that was rising all around us.
A few years later, Friedman was a keynote speaker at a 2011 conference commemorating IBM’s Centennial. To illustrate the incredibly fast pace of change, Friedman noted that in the short time-span since World is Flat was published, we were already transitioning from a connected to an increasingly hyperconnected world. Many of the companies and technologies that are now part of our every day conversations, - Facebook, Twitter, Cloud, Smartphones, Big Data, LinkedIn, 4G or Skype, - were not mentioned in the connected global economy he wrote about only 6 years earlier because they had not been born or were in their infancy.
What do we mean by a hyperconnected economy? I recently found a really good answer in an excellent study by the McKinsey Global Institute (MGI), Global Flows in the Digital Age. The study takes an in-depth look at the expansion of cross-borders flows in the economy. It carefully analyzed these flows in 5 different categories: goods, services, finance, people and data and communications. It then developed the MGI Connectedness Index, which measures these 5 flows in 131 countries, examined how the flows had changed over the past 10 - 20 years, and predicted how they are likely to evolve over the next decade.
Two major forces have been driving the growth of cross-border flows. First is the continuous advances in digital technologies, in particular, the spread of Internet access around the world. We’ve been going through a kind of digital perfect storm, where a number of major IT trends are each gathering speed while interacting with and amplifying each other: mobile devices, cloud computing, Internet of Things, social networks and big data and analytics.
The number of mobile subscriptions around the world is already approaching 7 billion, while close to 3 billion have access to the Internet. Cross-border Internet traffic has been going up by over 50% CGR since 2005. As the cost of smartphones and Internet access keep dropping, data and communications flows, - the enabling foundation for all other digital flows, - will continue increasing at a similar torrid pace.
Even more dramatic is the expected rise in global prosperity over the next decades. McKinsey estimates that over the coming decade, up to three billion additional people will connect to the Internet with mobile devices and wireless networks. They will thus become part of the global digital economy, and will see significant improvements in their standard of living. “By 2025, 1.8 billion people around the world will enter the consuming class, nearly all from emerging markets, and emerging-market consumers will spend $30 trillion annually, up from $12 trillion today.”
What is the impact of technology advances and rising economic prosperity on the global economy? According to the MGI study, the combined value of trade in goods and services plus financial flows grew from $5 trillion or 23% of global GDP in 1990 to $26 trillion or 36% of world GDP in 2012. If present trends continue, the value of these flows could triple by 2025, thus having a major impact on economic growth.
The MGI Connectedness Index measures the degree of connectedness of 131 countries across all five flows. For each country, it then calculates an overall flow intensity, a single measure that reflects that country’s connectedness across all flows. McKinsey’s analysis found an overall positive correlation between increased flows and GDP growth. Countries with the highest flow intensities can expect up a 40% increase in GDP growth compared to the least connected countries.
Not surprisingly, the Index found that developed economies have higher flow intensities, that is, are more connected than emerging economies. Germany tops the list, followed by Hong Kong, the US, Singapore, the UK, Netherlands, France and Canada. However, the situation is changing as emerging economies are rapidly gaining ground, including Brazil, China and India.
Besides rising cross-border flows, the study uncovered that the very nature of these flows is changing. The globalization that Tom Friedman wrote about a decade ago was primarily based on the outsourcing of labor-intensive tasks from the developed world to developing countries with lower labor costs, as well as by commodity-intensive flows, like oil, from the countries with those resources. But things are different in our emerging knowledge-intensive economy. According to McKinsey:
“Knowledge-intensive goods and services flows (as opposed to labor-, capital- or resource-intensive ones) include goods and activities that have a high R&D component or utilize highly skilled labor. As such, they help transmit information, ideas, or expertise among exchanging parties. Examples include high-tech products such as semiconductors and computers, pharmaceuticals, automobiles and other machinery, and business services such as accounting, law, and engineering.”
The study estimates that the value of knowledge-intensive flows was $12.6 trillion in 2012, nearly half the $26 trillion total value of cross-border flows. Knowledge-intensive flows are growing at 1.3 times the rate of labor-intensive flows, and so their share will continue to increase.
Moreover, digital technologies are continuing to transform many cross-border flows. Digital flows, - with their lower costs of access, transport, and production, - are replacing the flow of many physical goods, e.g., e-books, digital music, games, news and entertainment and streaming movies. Digital communications and collaborations of all sorts are substituting for work that previously involved physical travel. 3-D printing holds the promise of revolutionizing the production of physical goods with an increasing portion of such goods being manufactured just-in-time at their point of consumption.
Digital technologies are also playing a major role in improving the production, distribution and operations of physical goods, resulting in a significant improvement to their overall productivity and quality. Examples include tracking shipments of goods, and monitoring and optimizing the performance of all kinds of physical things, - i.e., the Internet of Things. In addition, online platforms make it easier to transact goods and services across borders. For example, 90% of eBay sellers export their goods to other countries, compared with an average of 25% for traditional small companies.
In the not too distant past, global flows were concentrated in the more advanced economies, as well as in large, global companies. But, digital technologies and rising prosperity are combining to significantly disperse global flows, making it possible to include a larger number of countries as well as a larger number of participants across all countries. McKinsey notes that:
“The network of global flows is expanding rapidly as emerging economies join in. Rising incomes in the developing world are creating enormous new centers of consumer demand, global production, and commodities trade, as well as sending more people across borders for business and leisure. Existing routes of flows are broadening and deepening and new ones emerging as more countries participate. Developing economies now account for 38 percent of global flows, nearly triple their share in 1990. South–South goods flows between developing countries have grown from roughly $200 billion (6 percent of goods flows) in 1990 to $4.2 trillion (24 percent) in 2012.”
“Not only more countries but also more players are participating in global flows. Governments and multinational companies were once the only actors involved in cross-border exchanges. But today, digital technologies enable even the smallest company or solo entrepreneur to be a micromultinational, selling and sourcing products, services, and ideas across borders. Individuals can work remotely through online platforms, creating a virtual people flow. Microfinance platforms enable entrepreneurs and social innovators to raise money globally in ever-smaller amounts.”
Advances in technology and rising standards of living will continue to accelerate the pace of change in our hyperconnected, knowledge-intensive economy. “For players of all types- whether regions, countries, cities, businesses, or individuals - there are major economic opportunities from participating in global flows. The imperative for policy makers is to fully embrace the new era and ensure that their economies are positioned to benefit from it.”