By Nilardi Mukherjee, Managing Director, Chief Investment Office

TODAY, VOTERS, ECONOMISTS, POLICY MAKERS and investors are questioning the future of globalization and, within it, the direction of free trade: Will it reverse, with companies and manufacturers retreating from the global scene due to nationalistic impulses? Or, will it strengthen by evolving into a format that is more inclusive?

The global flow of goods, services and finance peaked in 2007 at 53% of global gross domestic product (GDP), according to consulting firm McKinsey & Co. Since then, growth in the global trade of goods has remained roughly the same aside from a dip during the financial crisis. Financial flows have since fallen sharply and trade in services has posted only modest growth. In total, the flows are now just 39% of world GDP (see Exhibit 1).

These developments have prompted many to conclude that globalization and free trade (the movement of goods, services and finance) has peaked. We think, with the help of accelerated technological innovations, that globalization is morphing into a new digital future, which should prove more inclusive for the global population.

If globalization up to this point has been characterized by the tangible flow of goods among countries, tomorrow’s version will include the intangible flow of data and information, McKinsey emphasizes.1 Whereas the former was dependent on a robust transportation infrastructure and was driven by multinational companies, the latter requires digital platforms to enable the instantaneous flow of information and data, and it empowers small businesses, entrepreneurs and individuals. Digital platforms such as e-commerce marketplaces have brought down the cost of conducting cross-border transactions and thus have helped level the playing field between small and medium-sized enterprises (SMEs) and large multinational firms, while also bringing manufacturers closer to the consumer. Thus, we don’t believe that globalization is reversing. It is being redefined by the exponentially rising flow of cross-border data that conveys ideas, information and innovation. Increasingly, the Internet is binding the global economy together.

This digital version of globalization is leading to improved productivity in the manufacturing sector for both developed countries, which are primarily importing, as well as emerging countries, which are facing higher labor costs. According to Boston Consulting Group, the adoption of digital technology in manufacturing should increase output per worker by 30% over the medium term in countries like South Korea, Germany, the U.S. and China. Companies, therefore, will need to reconsider the location and design of their plants and supply chains. Adidas, for example, recently announced that it is moving some of its production from China back to Germany because advances in robotics make it cost-effective to do so. In the medium term, Adidas now plans to build factories in all major markets, thereby enabling faster delivery to customers.2 Global trade can therefore be affected when production moves closer to customers. A prime example of this is the U.S. oil fracking industry, which has reduced the need for oil imports.

The rise of ‘micro-multinationals’

While large corporations will still be the flag-bearers for international trade, increasingly SMEs will be connected to cross-border trade by riding the wave of digital globalization. In this new era of globalization, instead of waiting for the benefits to trickle down from large corporations, small businesses are born or become micro-multinational, using their technological adeptness to move immediately into the global market.

Platforms like eBay, Alibaba, Facebook, Amazon and PayPal are enabling SMEs to set up online stores and providing infrastructure that facilitates exports by even the smallest firms, including services such as shipping and logistics, international payments, translation, customer support and market research. These platforms are reducing trade costs for SMEs and giving them a global presence that was once reserved for large multinational firms, allowing them to compete directly with larger companies.

Facebook estimates that 65 million SMEs were on its platform by Q4 of 2016, up from 25 million in 2013 (see Exhibit 2).3 In September 2016, Facebook announced a program to help SMEs grow their businesses by connecting them with buyers overseas. The program, called “Expand Across Borders with Facebook,” offers a variety of tools to help small businesses find new customers around the world, create compelling marketing communications using Facebook pages and instantly reach an international audience.

In 2014, more than 90% of U.S.-based SMEs with stores on the eBay marketplace and annual sales greater than $10,000 were exporting internationally, compared to just 4% of all SMEs.4 In addition, around 59% of technology- or eBay-enabled SMEs were exporting to 10 or more countries. U.S. Census Bureau data indicate that 8% of all U.S. exporters, not just SMEs, reach 10 or more markets.

The story is similar outside the U.S. where a vast majority of smaller technology-enabled firms export, compared to only a small proportion of traditional SMEs that export. Technology-enabled SMEs also tend to reach a large number of foreign markets. For example, SMEs in China typically export to 63 countries, and Korean SMEs typically export to 57 countries (see Exhibit 3).5

A solution for inclusive growth

The opportunity for SMEs and individuals to go international is still in the beginning stages. As more consumers gain access to broadband Internet and mobile connectivity, and the security of data and digital payments improves, both emerging and developed economies will benefit from the rise of cross-border trade. Governments and the private sector need to fast-track the deployment of broadband, improving access in developing countries and increasing speed in ones that are already developed, as a critical part of their innovation infrastructure initiatives (see Exhibit 4). This could be an area quite suitable for public-private partnership.

Taken together, these findings provide an optimistic view of how technology (especially global digital platforms) can create a more inclusive version of global commerce. In a majority of countries, SMEs account for a significant proportion of employment. In developing countries, they account for around two-thirds of formal private employment outside of agriculture. Similar evidence has been found for developed countries. In a sampling of firms from 17 countries in the Organisation for Economic Co-operation and Development, micro firms and SMEs accounted for 63% of total employment.6 This ability of SMEs to reach customers around the world has the potential to support economic growth on a global scale.

 

1 "Digital globalization: The new era of global flows," McKinsey Global Institute, March 2016.

2 "What You Need to Know About Globalization's Radical New Phase." Boston Consulting Group, July 2016.

3 Facebook, Inc. Fourth Quarter and Full Year 2016 Results Conference Call. February 1, 2016.

4 eBay Small Online Business Growth Report, January 2016.

5 World Trade Report 2016—Levelling the trading field for SMEs. World Trade Organization.

6 World Trade Report 2016—Levelling the trading field for SMEs. World Trade Organization.

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In this new era of globalization, instead of waiting for the benefits to trickle down from large corporations, small businesses are born or become micro-multinational, using their technological adeptness to move immediately into the global market.
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