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Doing Business in Globalized Economy Dr hab. G. Jedrzejczak March 28, 2015 1 Doing Business in Globalized Economy Business new challenges • Global financial crisis highlited a number of fundamental changes in the global economy which have profound impact on the business activities. • The lecture will address the impact on business of the economic and social changes due to globalization 2 Doing Business in Globalized Economy Great Moderation • From the early 1980s on, most advanced economies experienced what has been dubbed the “Great Moderation,” a steady decrease in the variability of output and its major components— such as consumption and investment. • There were, and are still, disagreements about what caused this moderation. – Central banks would like to take the credit for it, and it is indeed likely that some of the decline was due to better monetary policy, which resulted in lower and less variable inflation. – Others have argued that luck, unusually small shocks hitting the economy, explained much of the decrease. 3 Doing Business in Globalized Economy Before storm • The mid-2000s was a period of strong economic performance throughout the world. Economic growth was strong; inflation low; international trade and financial flows expanded; and the emerging and developing world experienced widespread progress and a notable absence of crises. • This favorable trends was underpinned, however, by three trends that appeared increasingly unsustainable as time went by: – real estate values were rising at a high rate – a number of countries were simultaneously running high and rising current account deficits – leverage had built up to extraordinary levels in many sectors across the globe among consumers and financial institutions 4 Doing Business in Globalized Economy Impact of globalization: • Flows of goods, services, and finance rose from 24 percent of global output in 1980 to a peak of 52 percent in 2007 • In 1990, 60 percent of trade in goods was among the high income economies, another 34 percent was between high income and emerging market economies, and just 6 percent was among emerging market economies. By 2012, these ratios were 31 percent, 45 percent, and 24 percent, respectively. • In 1980, FDI was negligible. Today, it is a large flow averaging 3.2 percent of global output between 2005 and 2012 • Total cross-border financial flows peaked at 21 percent of global output in 2007, before collapsing to 4 percent in 2008 and 3 percent in 2009. • By 2014, the world had 96 mobile phone subscriptions and 40 Internet users for every hundred inhabitants from zero 20 years earlier 5 Doing Business in Globalized Economy Globalization: Ricardo’s Comparative Advantage at Work: • Developed countries have comparative advantage in high value added parts of the production stream: design, financing, marketing • Developing countries have comparative advantage in low value added parts of production • Technological progress in transport and communication make it feasible 6 Doing Business in Globalized Economy Impact of energy revolution • Not long ago, the prevailing concern was that there wasn’t enough energy to power the world. Now, among players from oil producers to electric utilities to multinational manufacturers, there’s a new worry: that a proliferation of new energy technologies and supplies is starting to undermine world powers. • From a boom in fossil-fuel production to a flowering of renewable energy to the rollout of an array of contraptions and business models to cut energy waste, the new energy riches of the 21st century are destabilizing the old economic order. • The energy revolution is starting to remake the global energy landscape: – They’re shifting the center of gravity of global oil production westward, to North America from the Middle East. – They’re reorienting the adolescent renewable-energy industry eastward, to China from the United States and Europe. 7 Doing Business in Globalized Economy Impact of global politics: • Sanctions • Global warming (fosil fuels) • Human rights (access to net) • Local conflicts (blood money) • New trade blocks 8 Doing Business in Globalized Economy Trade channels of global economy • In 1990, 60 percent of trade in goods was among the high income economies, another 34 percent was between high income and emerging market economies, and just 6 percent was among emerging market economies. By 2012, these ratios were 31 percent, 45 percent, and 24 percent, respectively. • Before World War I, the big opportunity was to incorporate undeveloped land, particularly in the Americas, into production for the global market. This time, the biggest opportunity is incorporating billions of previously isolated people as workers and then consumers and savers. 9 Doing Business in Globalized Economy Traditional approach to production function Q = f (L, K ) where L is a quantity of labor, K a quantity of capital and Q an output of commodities. • Augmented with Total Factor Productivity Y = A x 𝐿𝛼 x 𝐾𝛽 A - residual “black box” good enough when small impact 10 Doing Business in Globalized Economy Forces at the firm level “The defining challenge for competitiveness has shifted, especially in advanced countries. The challenges of a decade ago were to restructure, lower cost, and raise quality. Today, continued operational improvement is a given, and companies in many countries are able to acquire and deploy the best current technology. In advanced nations with relatively high labor costs and equal access to global markets, producing standard products using standard methods will not sustain competitive advantage. Instead, advantage must come from the ability to create and then commercialize new products and processes, shifting the technology frontier as fast as their rivals can catch up.” National Innovative Capacity; Porter, Stern 11 Doing Business in Globalized Economy Knowledge role in the economy: • Knowledge as a dominating substance of a product (e.g. DVD, apps, software) • Knowledge as source of monopoly (pharmaceuticals) • Knowledge as source of competitive edge (lower costs, better product functionality) 12 Doing Business in Globalized Economy How scarce is knowledge? – more in use it becomes more valuable – temporarily when legally protected – scarce by costs of replication (reverse engineering 13 Doing Business in Globalized Economy PERSONBYTES • The amount of knowledge in the world has increased tremendously, but our individual capacity to hold it has not. • Knowledge is now divided into chunks — personbytes—and distributed across people. • How does the personbyte economy work? 14 Doing Business in Globalized Economy WHO HAS MORE PRODUCTIVE KNOWLEDGE? An Eskimo? Or a modern man? 15 Doing Business in Globalized Economy Modern man: but WHY? The answer: progress in division of labor • Division of labor in the archaic societies: NONE • Each Eskimo could provide food, clothing and build a shelter (igloo) but societal value just a sum of individual efforts • Cooperation regulated by tradition 16 Doing Business in Globalized Economy Division of labor in industrial societies • Division of labor in the past centuries in developing societies by profession oriented on a single product: butcher, baker, teacher, doctor, soldier. • Economy built on the exchange of products - each participant had a product to offer. • Societal value increased by specialization but still the sum of individual productivity • Coordination mostly via market 17 Doing Business in Globalized Economy Division of labor now 18 Doing Business in Globalized Economy Post-industrial societies • Functional, knowledge-based division of labor • None of professional able to produce a product ready to use • Societal value of labor increased by synergies across the economy between specialized firms • …but only in well functioning systems 19 Doing Business in Globalized Economy The main difference between a postindustrial knowledge-based economy and a traditional economy using knowledge is in the way knowledge is generated, introduced as innovation and rewarded 20 Doing Business in Globalized Economy Modern economy is based on smoothly functioning networks of networks. • A modern firm is a network of people with different expertise: production, logistics, marketing, sales, accounting, human-resource management, and so on. But the firm itself must be connected to a web of other firms – its suppliers and customers • Firms and households need access to networks that deliver water and dispose of sewage and solid waste. They need access to the grids that distribute electricity, urban transportation, goods, education, health care, security, and finance. Lack of access to any of these networks causes disproportional declines in productivity. New approach to economic problem: how to create synergy between available resources (positive feedbacks) 21 Doing Business in Globalized Economy How individuals acquire productive knowledge? • Increased schooling alone is not generating the expected income pay-off • Even the science-based jobs require apprenticeship • The tricks of the trade are acquired from experienced senior workers 22 Doing Business in Globalized Economy How do firms acquire productive knowledge? THE BIRTH OF SUCCESSFUL INDUSTRIES • a successful firm is established • employees learn from the firm • employees leave the firm to set up new firms • spin-offs are often much more successful than other firms… • ... and generate a new wave of spin-offs A CLUSTER OF HIGH PERFORMING FIRMS ARISE 23 Doing Business in Globalized Economy HOW DO SOCIETIES ACQUIRE PRODUCTIVE KNOWLEDGE? – – – – Productive knowledge is tacit: very hard to acquire Knowledge resides in the brains of people. It is easier to move the brains than the knowledge As a result, knowledge diffuses only slowly and across narrow channels – ... and requires teams with complementary skills – In a world of increasing complexity, teams become more and more intricate – This makes the coordination problem exponentially harder What the world needs is mobility, diversity and stability 24 Doing Business in Globalized Economy Bad news 1: throwing money on the problem is not a solution More money spent on R&D will not generate more knowledge to be used by producers to build knowledge based economy Embarrassing failure of Lisbon Agenda 25 Doing Business in Globalized Economy Bad news 2: Social capital which has profound impact on development changes very slowly and changes may have unexpected outcomes: Cultural dimension: Trust Tolerance Dialogue Diversity Mobility Institutional dimension: Good laws Effective institutions Professional administration staff 26 Doing Business in Globalized Economy Size the moment: Ireland • Challenge: become a competitive EU member • Opportunity: English, educated young population, US Diaspora • Risks: marginalized late comer in EU • Response: Opening to ICT FDI, using EU structural funds 27 Doing Business in Globalized Economy Size the moment: Israel • Challenge: accommodate 1 million immigrants from FSU • Opportunity: highly educated professionals • Risks: no market skills, disappointment • Response: Technological Incubators Model provide support services and resources in advancing ideas from a conceptual stage to viable, working enterprises. 28 Doing Business in Globalized Economy Size the moment: Finland • Challenge: collapse of the SU market • Opportunity: excellent education, hard-work ethics, Nokia • Risks: cut-throat competition in ICT markets, high labor costs, market rigidities • Response: top-level ownership of KE Agenda, Foundation for Finnish Inventions, spreading KE beyond Nokia 29 Doing Business in Globalized Economy Internet economy is different • Market transaction: • who is: – seller? – buyer? • what is: – commodity? – price? 30 Doing Business in Globalized Economy Busines consequences of Internet Economy: • Some vital parts of the Internet Economy barely register in the GDP. While GDP measures the market value of all goods and services produced within a country, many stars of IE (think Wikipedia, Facebook, Twitter, Mozilla, Netscape, and so on) produce no goods and provide free services. • IE tend to undercut both, the traditional and IE businesses. Skype is killing the international phone calls. Free navigation apps have shrunk sales for Garmin, the GPS pioneer that was once one of the fastest-growing companies in the US. 31 Doing Business in Globalized Economy Gene from the bottle: • In the last decade the global business environment has changed radically. EU industry competes with China, Brazil, India and other emerging economies also on high-value products. Hope to put it back: • You can produce comparatively expensive product in developed countries b/c of automatization and robotization reduce dramatically labor component of costs 32 Doing Business in Globalized Economy Reindustrialization as a challenge • Reindustrialization a sustained increase in both the share of manufacturing in total employment and the share of manufacturing in GDP. • Reindustrialization, not simply a case of ‘inverse deindustrialization’ as there would be different dynamics at work • There is an asymmetry in that reindustrialization is less likely to ‘just happen’ under market forces than is the case with a similar magnitude of deindustrialization 33 Doing Business in Globalized Economy Work in the time of robots • As computer-processing power grows and artificialintelligence software advances, machines are increasingly able to perform complex tasks requiring abstract thinking, such as inferring meaning and making judgments, far beyond routine physical and clerical activities. • As a result, companies are beginning to automate more highly skilled knowledge-based jobs in fields like law and medicine. • While this process will generate a significant amount of value – more than $5 trillion in 2025, according to MGI estimates – it will not be distributed evenly. McKinsey Global Institute 34 Doing Business in Globalized Economy Robotization 1st step: Robots and automation have been in many types of manufacturing for decades. In the US and China fewer people work in manufacturing today than in 1997. Robotization 2nd step: A change with a potentially far larger impact on employment, is taking place in clerical work and professional services. Countless traditional white-collar jobs, such as many in the post office and in customer service, have disappeared. Robotization 3rd step: Technologies like the Web, artificial intelligence, big data, and improved analytics are automating many non-routine tasks. 35 Doing Business in Globalized Economy 36 Doing Business in Globalized Economy 37 Doing Business in Globalized Economy IE and Labor Market • Generates new type of entrepreneurs: – Experience does not matter – Formal education does not matter – university dropout – “Instant rich” motivation • Employees: – Brainy kids – No loyalty to the firm 38 Doing Business in Globalized Economy Labor and capital in IE: • One consequence is the striking phenomenon of huge wealth creation with very little labor and capital input. • Facebook has an equity valuation of $170 billion but employs only around 6,000 people. • The investment that went into building the software that runs it entailed no more than around 5,000 software engineer man-years. 39 Doing Business in Globalized Economy trust index 100 90 indulgence 80 GNP/capita 70 60 50 40 30 20 pragmatizm inn. index Poland 10 Germany 0 UK uncertainty power dist. masculinity individualizm 40 Doing Business in Globalized Economy 2010 or latest available year 2000 or first available year 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 41 Doing Business in Globalized Economy 42