The Impact of Globalization on Business
May 22, 2006
By Mike Myatt . Chief Strategy Officer, N2growth
I have traveled to more than 22 countries and have had the opportunity to transact business in various parts of Asia, the Middle East, Canada, Central and Latin America, Russia and former Eastern Block countries, India, and the European Community. Conducting business on a global basis has always been of great personal interest to me, and it has also been both a pleasurable and financially rewarding experience. However the days of doing business abroad are no longer a luxury. The ability to conduct business internationally is an absolute necessity if you hope to remain competitive in today’s marketplace. In today’s post I’ll look at the impact of globalization on business…
Expanding the geographic footprint of your business has always been an expensive and risky proposition – the risks have not gone away, they’ve just shifted. I believe we’re in an environment where we have a short window (3 – 5 years) before the landscape changes again. Currently, globalization is a developing and stabilizing force, but I’m fearful that the interdependencies now shoring up some of the risk, may at some point down the road turn against us in the form of financial ripple turns Tsunami. Here’s the caution – times change and markets are fluid. Short term opportunity abroad abounds, but with that opportunity comes the potential for unforeseen future risk. That said, and with eyes wide open, if you are not taking aggressive steps to expatriate your business then you may be making a big mistake.
In today’s marketplace conducting business internationally is as much of a defensive play as an offensive play. In examining the upside of going global, consider the sheer size of international markets as contrasted with the size of the domestic market and you will likely find that the majority of your potential customers live abroad. So if you could double, triple or quadruple your revenue why wouldn’t you aggressively pursue that goal? Now consider the downside of not going global – if your company is not pursuing those customers your competition will be. They will not only take a first mover’s advantage of securing customer loyalty and brand recognition, but they will also tie-up key partners and distribution agreements. As consumers continue to become more demanding and the world economy continues to flatten there will soon be an expectation that you be able to serve multiple markets in a seamless fashion. Being a slow adopter in today’s world could eventually damage your business.
The phenomenon of “Globalization” is not new. In fact, it has been creeping up on us since the dawn of time; it just hasn’t been so visibly impactful until recent years. The broad macro-economic effects of globalization being experienced today arguably became most identifiable with the end of the cold war, and have only continued their rapid advancement with the development of third world countries and other emerging markets, establishment of free trade agreements, the creation of the Internet and other technology/communications improvements, the growing multi-national footprint of business, the emergence of the European Community, the stabilizing impact of the Euro on global currency markets, as well as the increased liquidity of more sophisticated and efficient capital markets.
The above referenced worldwide macroeconomic maturation, more commonly referred to today as “Globalization,” has served to stabilize business and financial markets in such a dramatic fashion that many industry pundits have yet to reach an understanding of the depth and breadth of the impact it has had on lowering political, financial, and economic volatility. Here’s the trick – markets don’t go up for ever, and when you tie your fortunes to a broader set of variables and unknowns you expose your business to the potential for a domino impact that will work against you. I mentioned a 3 -5 year window above, but like anyone who looks forward, this is just my best guess. At some point in the near to mid term, I believe we’ll see a shift in markets that unwind much of the current stability driving our current frothy capital markets and business expansion.
Let’s examine the stabilizing factor globalization has had on the world economy. Today’s trade deficit, petroleum pricing, down equity markets, housing crisis, constricted flow of funds, and overall cost of living should be challenging us more than it is. Conventional economic
theory would suggest that with many of the negative economic metrics in play today, our interest rate environment should more closely resemble that of 1980 than the low interest rates we are experiencing today. The difference between today’s financial landscape as contrasted with that of 1980 is the emergence of a truly global economy which is acting as a stabilizing factor. In fact, when the US went through the Great Depression it was largely a result of having an isolated economy. If (more likely when) the US economy does falter again, the inter-dependant nature of the global economy will likely stave off a collapse. In the event of severe financial turmoil in the US, you would see foreign investment from the G7, and countries like China, Japan, and Dubai would see it as an opportunity to affordably acquire interests in US companies.
The theory espoused above, while working for us presently, can only hold true for so long…The stability we are experiencing now, could turn against us if the economic downturn continues for an extended period. You see, the interdependancy that is presently shielding the US could in fact turn into a global domino effect causing a worldwide recession if the right combination of things fall into place. I guess what I’m trying to point out here is that the current hedge could turn into an adverse accelarant in a worse case scenario…
Also keep in mind that emerging markets in Eastern Europe, India, Latin America, China and the rest of Asia present scenarios for higher growth, even on a risk adjusted basis. On an aggregate basis the statistics are impressive. For example, currently 80 percent of the world’s population accounts for 20 percent of world GDP. By 2015, 50 percent of world GDP will be accounted for by emerging markets. Consider the following:
1. Rising Economies. Over the past decade, China has routinely experienced 8 percent to 9 percent annualized growth and India has followed closely with 7 percent annualized growth.
2. Demographics. For the most part, these markets represent younger populations, growing numbers of well-educated professionals, an expanding middle class, growing consumer bases, urbanization, and rising incomes. In addition, the structure of family life for these modern middle class populations is assuming the “western” nuclear form and moving away from the more traditional extended cohabitating family unit.
3. Commercial Demand. The economic expansion, as well as the presence of global companies that bring employment oriented around intellectual capital, is creating demand for modern, western style commercial real estate infrastructure. Core assets such as office, industrial, retail, multi-family, and hospitality are all experiencing rising demand.
4. Infrastructure Improvement. While communications, utilities, and efficient transportation can still be spotty in areas, it is much improved over what one would have experienced even a decade ago. In most metropolitan areas you will have most of the creature comforts that you experience in the United States.
5. Closed market systems opening up. Most successful emerging markets have been engaged in systematic reform of basic societal values we take for granted in the developed world. These include property rights, legal process, and published regulations and statues. In addition, specific reforms such as privatization of state owned industry, relaxation of capital controls, and liberalization of rules regarding foreign direct investment are all encouraging growth and investment.
In order to meet increased consumer demand many businesses are attempting to expand their geographic footprint and extend their value chain to an international level. The impact of globalization on business is best evidenced by the huge proliferation in cross-border transactions. In order to protect yields and maintain competitiveness, businesses are continuing to diversify their footprint as it lowers the beta factor on their investments by spreading risk across a broader market.
There is nary a week that passes where I don’t speak with offshore entities looking for inbound opportunities or domestic businesses seeking outbound plays. The bottom line on globalization is that it creates an opportunity for businesses to expand revenue streams, diversify risk and increase brand equity. My suggestion is to get a toe hold in the global market before the ship leaves the harbor and your window of opportunity has closed. I would also suggest you pick your markets well, and that you realize a few years down the road, the landscape will look differently than it does today – this could work for you or against you. Use caution.
Category: Personal Finance