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 / Spring 2013 / Issue 70(originally published by Booz & Company)


Strategies for Global Connectedness

Depth, in particular, seems to spur economic growth. There is a strong positive correlation across countries between the depth of a country’s global connectedness and measures of its prosperity, such as its GDP per capita and its ranking on the U.N.’s Human Development Index. To be sure, correlation is not the same as causation, but statistical regressions show that after controlling for initial income levels, countries with deeper global connectedness have tended to grow faster than less-connected countries.

Traditional economic models capture only a fraction of the benefits of global connectedness. Six ways to increase value through breadth and depth are feasible: adding volume, decreasing costs (for example, by expanding scale), differentiating or specializing, intensifying competition, normalizing risk, and generating knowledge. Traditional models assume full employment (especially problematic during times like these) and leave out economies of scale, so they capture only part of the gains from adding volume or decreasing costs. Because they leave out the last four activities entirely, they miss such benefits as those that accrued to some U.S. automobile companies in recent years as they increased the quality of their vehicles. Today, General Motors sells more cars in China than in the U.S., diversifying its risks and helping it recover from its economic problems. And cars are becoming “greener” faster because of international knowledge flows.

Taking this full set of factors into account, the gains from expanding merchandise trade alone represent an increase of 2 to 3 percent of global GDP. Although some services (like haircuts) will always be delivered locally, liberalizing trade in services can increase gains from trade to 4 percent of GDP or more. Reducing restrictions on the flow of capital, information, and people could reasonably expand GDP another 4 percent, bringing the total economic gains to 8 percent or more—trillions of dollars in increased income every year. Complementarities among the different types of flows push this estimate up even farther. Cultural, political, and national security benefits often accrue from deeper and broader globalization: Prosperity typically tempers xenophobia, and military conflicts tend to decrease.

How can countries reach this level of globalization? The diversity that is fundamental to our world precludes issuing one-size-fits-all recommendations for policies and practice. Three countries—the Netherlands, India, and Mexico—demonstrate the range of choices available to decision makers.

The Netherlands: Room to Gain

In 2011, the Netherlands was a leader in global connectedness, ranking fifth in depth and third in breadth. It had hundreds of times the depth of the least connected country, Burundi. The Netherlands’ ranking is unsurprising; it was one of the pioneers of global trade centuries ago, remains a key trading hub, and is at the center of Europe, the world’s most interconnected continent.

But even the Netherlands has significant headroom for gains from increasing globalization. Although its merchandise exports represented 79 percent of its GDP in 2011, more than half of its manufacturing exports flowed through the country rather than originating within it. From the standpoint of a Dutch manufacturer (as opposed to a Dutch importer), there is still a great deal of export growth potential. The depth of the Netherlands’ home-produced merchandise exports is closer to 30 or 40 percent.

The breadth of the Netherlands’ merchandise exports also indicates significant growth potential. In 2011, 80 percent of the Netherlands’ merchandise exports went to destinations within Europe, even though Europe makes up only about 30 percent of the world economy. There are similar proportions for its capital flows (68 percent of the Netherlands’ incoming foreign direct investment came from Europe), its information flows (76 percent of its international calls occurred within Europe), and its migration of people (46 percent of Dutch emigrants stayed in Europe).

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