Economic Developments in a Rubic's Cube World
Foreign Direct Investment in the Age of the Globally Integrated Enterprise
Global Centre for Economic Development Institute for Business Value IBM Ireland
Ronan Lyons, from IBM’s Global Centre for Economic Development, takes a look at large-scale trends at work
over the next decade, and their implications for economic development and foreign direct investment.
For economic development professionals, with the pace of change in the world so fast, the primary challenge is to understand how the world is changing and the powerful forces at work. These changes can be thought of as similar to a Rubik’s Cube – on one side lie forces, ormegatrends, that, when changed, bring changeto businesses.- a second dimension of thecube. As the business world of the future isbeing formed, so, too, are the winners among Investment Promotion Agencies (IPAs) and Economic Development Organisations (EDOs), whichrepresent the third dimension of the Rubik’s Cube.
What are the forces at work in changing the world? Six mega-trends can be identified asshaping the world of 2020. These trends areneither new nor unknown, but their individual and collective impact will be pivotal as the world changes over the coming decade or so. Inparticular, economic development professionalsneed to be aware of how business is responding to the trends, as business moves from the multinational of the twentieth century to the globally integrated enterprise of the twenty-first.
Six Mega-Trends Shaping 2020
These six trends are:
- Deepening globalisation: Globalisation now encompasses people, companies and ideas, not justtrade and economics. With tariff barriers falling, trade is growing rapidly, intensifying globalcompetition. There are more businesses, doing more business in more locations, while greater international flows of capital, and increasingly labour, are furthering global integration.
- Large scale population trends: The global labour force and consumer base is profoundly changingin age and location. People are living longer and living in cities, meaning more workers andconsumers in the world economy. As the world’s population increases over the coming years, that increase will be entirely concentrated in developing countries.
- Accelerating technological progress: Technological progress is more pervasive than ever. It isaccelerating and it is transforming the modern economy. It is also more widespread and deeper than ever before. As the not-online population comes online, that global mix onlinewill also change.
- The “Omni Consumer”: The new consumer thrives on knowledge and wields unprecedented power.Consumers are busier. As a result, they are demanding – and receiving – more information beforemaking their decisions. Consumers have more power to reward or punish and want their consumption to match their values.
- The corporate social responsibility imperative: Corporate social responsibility is no longer anoptional extra, it is a corporate imperative, as consumers, workers, investors and regulators heightentheir expectations. Businesses are facing increased scrutiny from consumers about previously ‘non-market’ attributes of their goods, while at the same time governments are increasing thescope and effectiveness of environmental regulation, nationally and internationally. Investors tooare paying more attention to environmental and responsibility factors that affect long-term returns.
- Unpredictable risk: Uncertainty is a more significant factor in the calculus for society and businessesthan ever. On the one hand, businesses face higher direct and indirect costs from political uncertaintyand terrorism, affecting strategic decisions by businesses. On the other, global integration brings opportunity but also greater exposure to risk, e.g. financial risk, as recent developments have shownaround the world.
The Globally Integrated Enterprise
For businesses, the implication of the megatrends is that global integration is becoming reality. The deepening of global trade, capital and information flows, enabled by a “flat world,” is changing whereand how business value is created. This is driven by the core principle of global integration: Wheneverything is connected, work flows – where it flows and how it gets integrated is shaped by threeforces:
Open Standards... ...Enable Global Componentization… …With Seamless Integration
- Economics: profit potential, including labour markets
- Expertise: access to talent, ideas and innovation
- Open business environments: the degree of open systems, standards and approaches
The principle of global integration and open business environments is that work flows to where it can best be done. From growth to operations to culture, globally integrated enterprises are differentto multinationals. In relation to growth, globally integrated enterprises (GIEs) partner for scale, ratherthan build scale, allowing them to target both growth and profitability in global markets. Operations are no longer just interconnected – they are integrated, with work flowing to where it’s done best. As a result, the GIEs organisation culture is moving from a siloed structure with geographical domainsto a collabourative one, with domains of expertise.
To become a globally integrated enterprise, the organisation must undergo a strategic review, identifying where the company is now and to which model it would like to change. This involvesidentifying which components of activity the corporation will keep and where it will do those. Thisinvolves a highly structureed component business model (CBM) approach. The CBM process provides the organisation with an overview of the business based on logical groupings of data, process, andpeople, rather than traditional organisation structure.
As more and more businesses respond to global trends by innovating in this way, this response has implications for those working in investment promotion and economic development. A look at recenttrends in Foreign Direct Investment (FDI), undertaken by IBM’s Plant Location International unit, highlights some of these implications.
Trends in Foreign Direct Investment
Final figures for 2007 show that overall FDI fell from 2006 highs, but both the profile of FDI sources and of FDI hosts diversified. There were approximately 10,000 foreign investment projects announcedin 2007, created just over 1.2 million jobs around the world: a 20% fall on 2006. There are significantdifferences across continents, however. Jobs created by FDI increased (considerably) in Africa and Latin America, decreased in Asia and North America, and remained fairly stable in Europe.
Africa and Latin America are now emerging as important geographic regions, together receiving approximately 17% of the global jobs created from foreign greenfield and expansion projects in2007, compared to 13% in 2006. In Europe, the widening of the global economy manifested itselfin increasing investment activity outside the EU, with countries in South-East Europe emerging as locations for investment. A growing number of companies are also widening their activity to theMiddle East and North Africa as locations to serve European markets. This can be largely explained bythe rapid tightening of labour markets and rising cost levels in new EU member states. Central and Eastern Europe is becoming the international hub for production jobs created by FDI.
Looking specifically at Ireland, between 2006 and 2007, Ireland fell from 12th to 17th in Europe for gross job creation from FDI projects. With transport having a bumper year, ICT no longer generatesmost FDI jobs. Ireland remains in the top five countries in the world for service jobs per capita createdby FDI. Ireland also comes in the top 3 for R&D jobs created per capita. However, there is a significant gap between Ireland’s performance and that of the top two countries, Singapore and Israel.
The Response for Economic Development Professionals
With the mega-trends already at work, and with business engaging in fundamental innovation its underlying model, economic development professionals must understand clearly and respond effectively to thechanging world around them. In a Rubik’s Cube world, the challenge is getting all the pieces to work together.Economic development professionals must understand how their clients, businesses, have changed. Competitiveness is being redefined as a result of the rise of new business architectures and theglobally integrated enterprise. Firms of all sizes are now able to capitalise on global trends, such asoutsourcing – so perhaps it’s time to widen the focus. The importance of partnerships is growing, also, both between governments and companies and between governments.
Those involved in economic development must also understand their environment. They must keep a focus on the most important markets – the top four or five countries remain the source for themajority of FDI projects. Nonetheless, new sources and new FDI activities are emerging. It is importantwin a share of projects coming from new and emerging sources, and also to adapt strategy tocapitalise on the changes in the sectoral distribution and the mix of activities that make up FDI.
Lastly, economic development professionals must understand their competition. Intense competition rewards truly unique selling points – a survey of organisations involved in economic developmenthighlighted that often within regions there were common ‘unique’ selling points. While there arecertain fundamentals that are important to stress, IPAs and EDOs need to understand the countries with whom they are competing, the criteria on which they are being benchmarked and their truedifferentiators. An opportunity exists to leverage new priorities in location decisions.
By understanding the mega-trends at work, and by responding to consequent changes in business, the FDI environment and competitors, economic development organisations can emerge among thewinners of 2020.
Ronan Lyons is Managing Consultant at the IBM Global Centre for Economic Development, Dublin, a part of IBM’s Institute for Business Value, ibm.com/iibv. He addressed the American Chamber of CommerceGlobal Investment Symposium on October 22nd. For a copy of ‘Economic Development in a Rubik’s CubeWorld’, visit: ibm.com/gbs/megatrends2020. For more on IBM PLI Global Location Strategies or for a copy of ‘Global Location Trends 2007’, visit: ibm.com/bcs/pli.
For more on the Globally Integrated Enterprise, visit: ibm.com/enterpriseofthefuture.