Credit: Shutterstock photoModern research suggests globalization is coming is coming to an end. The World Trade Organization estimates international volume trade will grow by just 2.8% this year, marking the fifth consecutive year of subpar growth. The unusual patterns in cross-border flow since the financial crisis have undermined traditional economic relationships and contributed to today’s market volatility.
However, in reality, we are entering a new phase of globalization defined by flows of data and information. Digital flows, which were virtually nonexistent at the turn of the millennium, now exerts a larger impact on GDP growth than conventional trade. According to a recent McKinsey report, Digital globalization: The new era of global flows, trade of all kind contributed 10%, or roughly $7.8 trillion, to global GDP in 2014. Data alone accounted for $2.8 trillion of this gain and is exponentially growing each year. The shift creates a greater degree of connectedness between economies, but also poses new risk and policy challenges.
Globalization
The world is more connected than ever, whether that’s through a stream of cross-border capital flows or this new wave of digital disruption. In the past, globalization was confined to trade between advanced economies or resource-heavy countries. This gave consumers in the U.S. and Europe access to items made by people in developing countries for a third of the cost. Over time, trade barriers were dropped to support economic gains in all industries ranging from industrials to technology.
Apple (AAPL), for example, manufactures pieces of the iPhone all over the world, is legally headquartered located in Ireland and is the best selling phone of all time thanks to globalization.
There is no question globalization has also been beneficial for developing countries. Countries like India and China are now classified as two of the fastest growing economies largely due to exporting cheap goods, access to our markets and open trade barriers.
Digital Globalization
it was only a matter of time until technology usurped conventional globalization. Today a more digital form of globalization has opened the door for small companies and startups to access billions of individuals around the world. A number of small to midsize enterprises have turned themselves into global e-commerce exporters, joining the likes of Amazon (AMZN) and eBay (EBAY). Currently, 12% of global trade is conducted via e-commerce channels and about 86% of tech based companies report some type of cross-border activity.
Since 2005, the global flow of data has grown 45 times, equaling 25,000 gigabits per second used between borders. Virtually every type of transaction from finance to video streaming now has a digital component and should grow 9 fold in the near future. Technology has disrupted the nature of goods and services providing firms the capital and scale required to operate globally.
The low overhead costs of dealing with digital communication and transactions also marginalizes the competitive advantage large economies once had. Companies based in developing countries are able to overcome generic market constraints and easily connect with suppliers, customers and financing around the world.
It should not be taken as a given that the internet will seamlessly transform an economy into a more efficient one. The internet itself cannot deliver such improvements unless countries develop the infrastructure and talent necessary to connect the world’s population. Unfortunately, at the end of 2015, only 43% of the world’s population had readily available internet access.
So while the internet has been a wonderful thing, many developing countries simply don’t have the ability to take full advantage of it. Moreover, education systems will need to keep up with the labor demand for engineers and data scientists. The large education and wage gaps around the world leave developing countries at risk of falling even further behind in the rapidly evolving tech sector.
Winners
Digitization has not only made strides among consumers, but with investors as well. Many of the world’s largest companies and some lesser known ones have made waves thanks to globalization. In Facebook’s (FB) Q4 2015 earnings report, the social media company reported a 17% increase in daily active users to 1.04 billion.
To put this in perspective, about 15% of the global population is connected on any given day thanks to technology.
Meanwhile, technology provides startups with the means of competing on a global stage against large cap multinationals. Today, a customer in the United States can purchase artwork from an artist across the world in India through websites like Etsy (ETSY).
However, digitization has made its biggest impact on information technology, including enterprise software solutions and cloud computing. Even well established companies like Alphabet (GOOGL) and Amazon are seeing robust year over year growth in these segments.
Final Take
It is no secret that digital technology has changed virtually every aspect of the way we live. However, we have only scratched the surface of where it can take the global economy. Over the next 10 years, technology and globalization will play a huge role in both stimulating growth and influencing how we communicate.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
