Cynics ask, "What’s so important about globalization? It’s been under way for decades." In some respects, they are right. The underlying processes have indeed been evident for some time, though without making much more than a modest impact on the world’s economy. Apart from the relatively small international trade in goods and services and a few industries that globalized early, national economies have remained predominantly local.

But all this is changing. Suddenly, the pace of globalization has quickened. The gradual process that gave companies ample time to adjust has gone for good. In just a couple of decades, our economy will become substantially global.

In the past, globalization amounted to little more than evolutionary change in a few scale-driven industries. In the future, its impact will be ubiquitous, affecting services as well as manufacturing, and emerging market economies as well as the developed world. As a result, corporations in almost every sector will face the huge challenge of learning to play in a globalizing economy where many of the old rules no longer apply, and where the new rules are still being created. The global prize has never been more golden; the gales of destruction never more fierce.

A fundamental transformation

The transformation now taking place in the world economy is unlike anything we have experienced before. The increasing availability of global capital, coupled with advances in computing and communications technology, is serving to accelerate the processes of globalization. Economies are becoming superconductors of vast flows of capital and transplants of production techniques. The barriers to globalization are coming down wherever you look: not just in Western Europe, North America, and Japan, but in the emerging giants of China, India, Brazil, Russia, and Indonesia.

Underpinning these changes are three mutually reinforcing factors:

• The growing scale, mobility, and integration of the world’s capital markets
• The increasing irrelevance of national borders as regulation is liberalized and other economic barriers fall
• The expanding ability to leverage knowledge and talent worldwide through technology.

Global capital markets

The growth and integration of the world’s capital markets are the engine of globalization. As foreign exchange and bonds become more integrated, the law of one price begins to apply throughout the world. As equity markets start to integrate in their turn, capital becomes more mobile.¹

Crossborder capital flows rose from $536 billion in 1991 to $1,258 billion four years later. These totals exclude foreign direct investment, which itself soared from an average of $26.2 billion between 1986 and 1990 to over $250 billion by 1996. The world’s stock of liquid financial assets grew from $10.7 trillion in 1980 to $41.5 trillion in 1994, and is expected to exceed $80 trillion by the year 2000 (Exhibit 1).

A rising proportion of these flows is going to the emerging markets that used to seek their finance primarily from official sources such as the World Bank and the IMF. Today, almost 50 percent of direct foreign investment and well over 10 percent of portfolio capital flows are directed toward these markets, even though they account for less than 25 percent of world dollar-denominated GDP. Moreover, these flows are increasingly oriented toward the long term: Endesa of Chile was able to issue a century bond for $200 million in early 1997. And even when there are crises, as in Mexico in 1995, private investors are usually willing to reinvest as soon as they see that underlying economic imbalances are being tackled.

The impact of these capital market developments is striking. First, they are driving a convergence of economic policy across more and more countries. Economies that the capital markets perceive as fiscally responsible and politically committed to market-based policies attract the international capital they need to finance growth and infrastructure development. This is as true for emerging markets as it is for more developed economies.

Second, a deepening pool of internationally mobile capital is pursuing profitable investments. No longer the ally of vested interests within a closed national economy, capital is increasingly available to anyone capable of generating high returns, wherever in the world they may be. Companies that used to face capital constraints can now obtain virtually limitless supplies of relatively inexpensive capital to fund their growth (Exhibit 2).

Third, the capital markets are enforcing shareholder value and market capitalization as the dominant metrics for measuring corporate performance. And as they become the arbiter of companies’ destinies, the equity markets are discriminating more and more powerfully between weak and strong performers. Since 1986, the stakes needed to enter the S&P top 10 have risen from $18.4 billion to $70.7 billion. With so much capital seeking out high returns, those companies that do deliver exponential global growth are richly rewarded in their market capitalization.

The world’s capital markets now possess both the power and the instruments to globalize the world economy

As capital markets grow and mature, the financial instruments that can be used to unbundle and manage different classes of risk become more sophisticated. Ten years ago, infrastructure projects in emerging markets were almost always financed through public sector resources. Today, despite regulatory and exchange rate risk, more and more of these projects are funded by private sector sponsors. They are able to disaggregate the various components of the risk, allocate them to the players that are in the best position to bear them, and then securitize the project financing, spreading risk efficiently through the capital markets. Thanks to developments such as these, the world’s capital markets now possess both the power and the instruments to globalize the world economy.

A global arena

With the greater mobility of capital comes an expansion in the scale of the profit opportunity. We estimate that the value of the world economy that is "globally contestable"—that is, open to global competitors in product, service, or asset ownership markets—will rise from approximately $4 trillion in 1995 to well over $21 trillion by 2000, boosted by emerging markets and new sectors joining the fray (Exhibit 3). This trend to economic openness looks set to continue, fueled by communications technology and by the power of the idea that markets create freedom and expand individual choice.

In the past decade, the legitimacy of the state’s role in running national economies has come under question: witness the demolition of the Berlin Wall, the wave of economic liberalization across Latin America, and the explosive dynamism of capitalism with a Chinese face. As regulation is relaxed and other barriers—such as foreign exchange controls, ownership restrictions, and access to capital, infrastructure, and information—are overcome, opportunities to globalize products and relationships and capture country differences are growing exponentially. In the financial, utility, and transportation sectors, among others, the creed of national interest and natural ownership that has kept international competition at bay is being swept away. The profit opportunities now there for the taking are worth hundreds of billions of dollars; moreover, unlike most such opportunities in national economies, they have no natural owner.

Consider personal financial services, which has an annual pretax profit opportunity worth roughly $300 billion, of which over 95 percent is currently captured by nationally based competitors. Within a decade, this opportunity is likely to double in value, quickly becoming accessible to global competitors via transplants or electronic distribution. Existing national players will see their profitability come under threat as they face hundreds if not thousands of new competitors, any one of which could, if it plays the game well, reap extraordinary rewards. In much the same way, almost all industries, from food to electronics, are becoming globally contestable.

Global knowledge economics

Three decades of constant progress in information and communication technologies have triggered a complex pattern of social and economic change. This technological revolution is shaping the process of globalization by providing new tools and infrastructures with which to capture global opportunities.

Evolving technologies and the worldwide deregulation of the telecommunication industry cut the marginal cost of computing and communications almost to zero. The upgrading of the world economy’s computing and communications infrastructure is enabling a massive increase in the crossborder information flows that serve to reduce the risks associated with unfamiliarity, speed up the arbitrage of price anomalies, and stimulate consumer demand for world-class products, services, and brands. Soon, services that used to require a local physical presence will be opened up to electronic delivery, amplifying companies’ ability to reach consumers across the globe.

More subtly, technological change is also driving up the relative value of all forms of intangible asset—brands and reputation, intellectual property, software, media content, talent—throughout the world. Many of these assets have huge scale effects when leveraged globally, giving intangible-rich companies strong incentives to shape their industries along global lines. The likes of Coca-Cola, Microsoft, Glaxo Wellcome, and Marriott Hotels are benefiting from a business approach that seeks to minimize investment in fixed assets and maximize the ability to leverage brands, standards, management skills, and intellectual property across the global arena. It is no accident that such companies are among the top performers for their shareholders over the past decade.

The global accelerator

The combination of capital market developments, broader market access, and knowledge intensification is driving an exponential change in the pace, scale, and scope of globalization. Pace is increasing because the globalization process is fueling itself—and because the infrastructure for diffusing technology and ideas globally has become much more powerful. Scale, because the share of world GDP that is effectively globalized is set to rise from around 20 percent today to well over 50 percent in the next 10 to 15 years. And scope, because as globalization’s footprint expands, so do opportunities to combine resources and segment markets in new ways.

Abundant opportunities

As economic barriers fall, an abundance of opportunities suddenly and simultaneously become accessible

The globalization process, as we have seen, is driven by global capital seeking profits across national borders. As the barriers around national economies fall, an abundance of opportunities suddenly and simultaneously become accessible. And as companies capture these opportunities, they in turn spur the globalization of the world’s markets.

Two types of opportunity arise from this process. The first derives from the specialization and scale effects that can be exploited by a player that successfully leads the globalization of a good or service such as package delivery, personal computers, or jet engines. The second originates in the variations in factor cost productivity and patterns of demand that exist because most of the world’s economic activity still takes place in national markets. Crossborder participants are able to exploit these country differences in skill sets and productivity, and to arbitrage labor price differentials, taxes, and so on.

Only a decade ago, most OECD countries and almost all emerging markets held the telecom sector, power, a large chunk of banking, and the whole of education and healthcare in state ownership. What the state did not own, it regulated. Today, these sectors are fast becoming local private domains, and, little by little, global private domains. As more industries become globally contestable, it is paradoxically those that appear most local—those with natural barriers to foreign competition and limited physical scale effects—that will offer the richest pickings to the pioneering companies that seek to capture them. Such will be their size and growth that they represent a prize too big for major players to ignore.

Global trailblazers

Trailblazing corporations have their foot on the global accelerator. These pioneers realize how large the profits can be for a player that captures arbitrage opportunities between countries or shapes a global industry. They understand the dynamics of globalization: first find a way around national barriers, and then turn them to your advantage. They know how to shape an industry to play to their own strengths.

They recognize that unplanned globalization can destroy value for all of an industry’s participants, leading as it does to wars of attrition in which players contest away value in country after country, eventually commoditizing the entire industry. They need look no further than automobiles, semiconductors, interbank FX trading, and public telecom switching equipment to see that not all globalization is profitable. They know how to create opportunities through deep knowledge of local markets married with global reach—opportunities that others are unable to see until they are converted into real profit streams.

Pioneering corporations in search of global profits are driving the globalization of their industries. There is no structural reason why soft drinks should be global while beer and spirits remain much more local. The only difference is that Coca-Cola has redefined soft drinks as a global industry. Similarly, it was hardly inevitable that trainers should become the only global footwear product. But Nike and Reebok drove their business in a global direction, creating global brands, a global customer segment, a global supply chain, and a set of global imitators.

Much the same is true of fast food, aircraft production, construction equipment, and credit cards. One or two players shape an industry on a global basis, and we all discover with hindsight that there are global scale and skill effects in RR&Damp;D, the supply chain, branding, knowledge management, talent development, and risk diversification, to name but a few.

A gradual transition

Though the forces of globalization are strong, the world is not about to be converted overnight. The process will rather be one of gradual transition over several decades. Some sectors of the economy, particularly government services, will remain predominantly closed (Exhibit 4), though even these will feel some effects. EDS’s recent multi-year outsourcing contract with the UK tax authorities is surely a sign of things to come in core government functions.

Nor does globalization erase the differences between countries or render local knowledge, local talent, and local relationships obsolete. Quite the opposite: privileged access to country-specific intangible assets of this kind will be critical to success. However, it will also be vital to understand what differs and what remains the same from one country to another, and to command assets that can be leveraged worldwide.

The greatest threat to this trend will come if local companies deny its existence and refuse to adapt. To do so will put millions of jobs at risk in advanced economies. Such companies will find that standing still is no answer in a global economy in which other players are racing ahead.

Since about two-thirds of the world’s economy and almost all services are still in the early stages of globalizing, it seems likely that most of the great growth firms of the twenty-first century have yet to be born. These companies will start out with a vision of the world as their market; they will share few of the mental constraints that inhibit the incumbents; they will seek to recruit and develop the best talent from all nationalities; and they will aspire to a market capitalization that seems enormous today. Lacking all respect for the status quo and having nothing to gain by preserving it, they will be the architects of discontinuity in their industries. Many will be from outside America and Western Europe.

Firms with a national focus are not alone in having to adjust. Even large, successful multinationals in such global industries as automobiles and chemicals face tremendous upheavals. As they watched their industries mature into global structures with unfavorable economics, they lost the advantages they had traditionally derived from superior access to capital and local skills. They must now learn how to prosper in a world where most of the best new opportunities are in services, and where the key to profitability is to leverage intangible assets such as knowledge, talent, and people.

The management challenge

This new era presents a fundamental challenge to all but those very few companies that have already learned how to ride the globalization whirlwind.

Closing down ...

In industry after industry, globalization is raising the stakes and forcing national and regional players to double or quit

With greater freedom and choice come intensifying competition, diminishing control, accelerating product cycles, and deepening uncertainty. The new global economy is one in which most companies, unable to rely on patronage or position for protection, are permanently vulnerable. The scale of the global opportunities, the complexity of the competitive arena, and the relentless performance discipline imposed by the capital markets will force companies either to specialize and become world class and world scale in their chosen field, or exit. In industry after industry, globalization is raising the stakes and forcing national and regional players to double or quit. The next decade will see shakeouts and consolidation in new and old industries alike—even in such highly fragmented industries as machine tools, which had appeared relatively immune from globalization-driven restructuring until the recent transatlantic takeover activity.

In the face of these global opportunities and threats, many companies are finding that the very ways in which they develop strategies and organize themselves are becoming obsolete. And as the complexity of integrating information and formulating strategies grows, the time available for making decisions shrinks.

Many companies respond to these challenges by "closing down" the problem. That is, they choose to narrow the range of opportunities they pursue to fit the capacity of their existing processes for developing strategies and their existing organization for making decisions. They do this by closing their eyes and ears to what is going on, or by avoiding making commitments to anything other than cutting costs and selling harder. Instead of making informed strategic choices, they bury their heads in the sand. Then they lament that they have a growth problem in a world with an excess of global opportunities.

... or opening up

When you look behind the success stories of leading globalizers, you find companies that have learned how to think differently from the herd. They seek out different information, process it in a different way, come to different conclusions, and make different decisions. Where others see threats and complexity, they see opportunity. Where others see a barren landscape, they see a cornucopia of choices.

Freed from self-imposed constraints, they discover they have limitless scope. Rather than let others shape their future, they take steps to define the global industries in which they operate. Open minded, they see the world as it is: in transition, moving toward a single market, but at the same time teeming with local diversity in industry dynamics, regulations, and customer requirements.

If changing one’s mindset is half the battle, shifting to open strategic and organizational models is the other half (Exhibit 5). In the old world of national economies, companies had relatively little freedom in where and how to compete. Size was achieved through diversification or integrated business systems. The rules of the game within each national market were relatively stable, and most incumbents enjoyed massive advantages over new entrants. Even when players started to compete as multinationals, the business logic did not change; it was simply rolled out and tailored to a series of segmented national markets.

By contrast, companies operating in a global economy enjoy virtually infinite scope in strategy and organization. If anything, they face too many choices: how to define their industry, which customer segments to target, which countries to prioritize, how to manage the risks in uncertain geographies, how best to rationalize the business portfolio, what to own and what to influence, how to manage a complex network of external relationships, how to shape their organization’s internal architecture, and which levers to pull to overcome the rigidities of the formal structure. Consider the oil and gas industry, for instance. Until recently, most major oil companies pursued the same vertically integrated strategy in the same few markets, but they are now entering a new era marked by a diversity of geographic and product strategies and by varying degrees of organizational openness. In a similar way, the landscape of the auto industry is becoming increasingly complex as the number of players, markets, and customer segments multiply to create a dazzling array of new opportunities and organizational models. The challenge for companies is to avoid getting blinded by the possibilities and to open up their strategic posture and organizational model.

Choices are made easier when companies understand what is new about globalization. With this in mind, they can identify strategies that fit the processes under way, instead of conflicting with them. They can shape opportunities by concentrating on pieces of the business in which they have world-class skills and proprietary intangible assets. They can create open business ecologies that thrive on constant change, translate diversity into strength, attract top talent from all over the world, and leverage third-party capabilities.

We are on the brink of a major long-term transformation of the world economy from a series of local industries locked in closed national economies to a system of integrated global markets contested by global players. This is a world where capital is freely available to those with the necessary assets and skills, where intangible and not physical assets are the source of strategic differentiation, and where a glut of opportunities are up for grabs. Within a global arena that is expanding to four times its former size, standing still means falling behind in the race for position and opportunity. Creating a shared understanding of this reality is the principal leadership task for most corporations. Without a global mindset, companies risk being marginalized; with it, the opportunities they face will seem almost limitless.