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It’s time for policy to reflect the big shift

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Despite setbacks due to the economic crisis, Europe continues to be the most deeply globalised region of the world, measured in terms of international flows of trade, capital, information and people. That’s the takeaway from the 2013 Depth Index of Globalisation, which also finds that, for all the talk of how the Internet eliminates borders, interactions on social media remain mostly domestic.

Though developed multinationals are globalising their operations and sales targets, their people lag behind with respect to both diversity and mobility, echoing the broader pattern of international trade and capital flows outpacing people flows.

Emerging economies are the ones driving most of the growth in international trade flows, and this big shift in the share of world output from advanced economies to emerging ones is profoundly changing the pattern of globalisation. That said, emerging economies still have a way to go. Although nearly equal to advanced economies with respect to trade, emerging economies are only a quarter as deeply integrated in international capital and people flows, and only a ninth as globalised in terms of information flows.

As they grow wealthier, however, they are seeking to catch up. Indeed, one recent report projects that by 2025 more than 45 per cent of the Fortune Global 500 are likely to be based in emerging economies.

These are some of the findings of the Depth Index of Globalization, which compares the overall size of a country’s economy with the percentage represented by its international flows of trade, capital, information and people.

The 2013 index ranks 139 countries, which together account for 99 per cent of the world’s GDP and 95 per cent of its population. It updates and extends the DHL Global Connectedness Index that was prepared in 2011 and 2012.

Here are some takeaways for business observers:

Stalled recovery

The world still is less deeply interconnected than it was in 2007. Macroeconomic weakness is the main cause, but there also is evidence of increasing protectionism, which the authors regard as a danger.

Falling trade and foreign-direct-investment depth

The share of the world’s economic output and fixed investment crossing national borders has declined.

Internet fragmentation

Even as international bandwidth expands, interactions on social media, as with other information flows such as telephone calls, remain largely domestic. The potential of technology to expand information flow needs to be exploited, say the authors, who call for more openness rather than too much regulation in this area.

Multinational firms are struggling

While multinationals from emerging economies remain few and far between, firms from advanced economies are falling behind. Their people, in particular, have not globalised as fast as their operations and sales targets. This suggests that managers have yet to crack the code on how to bridge the distances and differences that separate the home bases of most of the world’s largest multinationals from their most important growth markets.

Europe is the most deeply globalized region

The top 10 overall globalised countries, in terms of depths of international flows, are Hong Kong, Singapore, Luxembourg, Ireland, Belgium, the Netherlands, Malta, Malaysia, Bahrain and Estonia. The majority are in Europe, though South and Central Asia did experience the second-biggest increase in depth of globalisation after North America.

Strengthening international flows could bolster macroeconomic recovery, the authors say. Every country and region possesses untapped possibilities to increase their depth of globalisation through domestic as well as international policies.

The largest threat to globalisation comes from policy errors, they add. The world economy is projected to grow faster between 2012 and 2018 than it did during any of the previous three decades. For that reason policy, rather than macroeconomic fundamentals, becomes the most pressing area for concern.

Rather than turning to nationalism or hiding behind borders, nations should look to globalisation, which still has much to offer the world in terms of increasing prosperity.

© The New York Times 2013

From IESE Insight

© 2013 Instituto de Estudios Superiores de la Empresa, IESE Universidad de Navarra

Every country and region possesses untapped possibilities to increase their depth of globalisation through domestic as well as international policies.

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