Wednesday, May 02, 2012

Is business global?

New research from DHL shows there is room for improvement in international trade – and that means a world of opportunity for smart companies

Is business global?

Globalization has become an almost overwhelming mantra for business. You can read books on it (from Thomas Friedman’s seminal The World Is Flat to a host of lesser titles). You can study courses in it. You can take part in conferences to discuss it. If you’re not selling products in far-flung corners of the world, you might reasonably conclude, you might as well give up.

But in truth, the prevailing orthodoxy on globalization can be a little misleading, as the groundbreaking DHL Global Connectedness Index (GCI) suggests. DHL ranked 125 countries across 10 criteria, in the first significant survey to measure both depth (amount of trade) and breadth (number of trading partners), using measures as diverse as merchandise and services trade, foreign direct investment, international tourism and education and even the number of international telephone calls.

The conclusion: only 20% of trade is truly cross-border, which represents a huge missed opportunity. And there are alarming variations in the levels of inter-connectedness different countries experience. The Netherlands (by this measure, the world’s most connected country) sees 73% of its GDP accounted for by outward trade, compared to just 10% in Brazil. Singapore, Ireland, Switzerland and the UK come out well in DHL’s analysis, but Argentina and Indonesia – both fast-growing economies beloved of analysts and economists – still have some way to go compared the likes of China and Korea. India is growing impressively in connectedness, but still lags behind Poland and Saudi Arabia.

However, the GCI does prove that all countries can benefit from connectedness, not just trading hubs like the Netherlands, whose size often forces them to rely on external partners more heavily than larger, more self-sufficient countries such as the US. The 50 most connected come from six continents, although Europe is the most advanced region thanks in part to the ‘four freedoms’ (free movement of goods, services, capital and people) promoted by the European Union.

The discrepancies that exist are often down to local infrastructure, says Pankaj Ghemawat, chief author of the GCI report and Professor of Global Strategy at IESE Business School in Barcelona, Spain. “One of the interesting surprises of the report was the role that general business environment and the transport and communications infrastructure can play in boosting the total amount of activity both within a country and internationally… the domestic business environment matters a great deal.”

Of course, many multinational businesses are arguably more global than even the enlightened citizens of Amsterdam. Apple’s universally successful iPhone is designed in California and assembled in China using components from around 29 suppliers on three continents. Food giant Nestle operates in all but a handful of countries on Earth.  But even the biggest companies struggle to shed their original national identity and build a truly global business culture, in part because of the homogenous nature of the executive suite. Only 40 members of the Fortune 500 are led by a CEO from outside their home country. Companies with large workforces in fast-growing economies may struggle to develop senior managers quickly enough to support their expansion. Starwood Hotels, the name behind Sheraton and W Hotels, is trying to tackle the problem by relocating its leadership team to a different country for one month each year. Other companies are forming strategic partnerships with universities in India and China to sponsor the brightest young minds through their studies.

Businesses can use the GCI as a starting point to benchmark their own global connectedness, comparing themselves with their country’s general level of performance across the 10 criteria – for example, a large discrepancy in exports to a particular destination between the company and its host country could point to a missed opportunity. And they should investigate the resources available through official local channels to make connections with potential suppliers, partners and customers abroad. Countries also have the opportunity to consider their own connectedness as a means to cut their sovereign debt. As Ghemawat says: “If you think the world is already globalized, you miss out on the huge gains that are possible through further integration.”

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