Looking beyond the obvious: globalization and new opportunities for ...

About this reportLooking beyond the obvious: globalization and new opportunities for growth draws on threesources of original research: the 2012 Globalization Survey, an online survey of 730 globalbusiness executives from around the world conducted for Ernst & Young by the EconomistIntelligence Unit; in-depth interviews with senior executives and high-level experts conducted atthe end of 2012; and data from Ernst & Young’s 2012 Globalization Index, which was developedby the Economist Intelligence Unit for Ernst & Young to measure the 60 largest countries/territories by GDP according to their degree of globalization. Among the respondents to the2012 Globalization Survey, 433 were from developed markets and 297 from rapid-growthmarkets; of the latter group, 139 were from Brazil, Russia, India and China and 158 from otherrapid-growth markets. Among the companies surveyed, the reported annual revenues were asfollows: 23%, US$10 billion or more; 24%, US$1 billion to US$9.9 billion; 49%, US$100 million toUS$999.9 million; and 4%, under US$4 million.ContentsIntroduction................................................................................ 1Executive summary.................................................................... 2Section 1Section 2Section 3Section 4Section 5Section 6Globalization continues, but it’s different this time around........... 4Companies must make “big bets” on markets they may nothave considered before............................................................... 6The BRICs are still reliable options — for now … ......................... 10… But the momentum is shifting to other hot spots.................... 12Are developed markets worth betting on?................................. 18Operational changes are essential to picking the right big betsand increasing their chances of a payoff.................................... 24The 2012 Globalization Index ................................................... 30Growing Beyond

Executive summaryExecutive summaryThe changing face of globalization willpresent new challenges for companies inthe coming years. Our research for this report,based on Ernst & Young’s 2012 GlobalizationIndex and Survey, reveals a businesslandscape of uncertainty and ambiguity, setagainst a backdrop of slowing cross-borderintegration. In this uncertain world, companieswill need to look for growth in new ways andfrom new places. The trends and issues theymust consider include the following:Globalization continues, but it’s differentthis time around. Although globalization —the cross-border integration of business — willcontinue in the years ahead, its pace willslow, with the financial crisis and subsequentrecessions providing a tipping point. Trade,technology, culture, labor and capital willintegrate at different rates across the 60countries measured in the Index.Companies must make “big bets” onmarkets they may not have consideredbefore. To stimulate the global economy,head off competitors and ride the next waveof opportunities, businesses will need to beton markets or regions of the world that maynot be obvious choices today. This may meanconsidering not only rapid-growth marketsoutside Brazil, Russia, India and China (BRIC)but also developed markets, as well ascreating nuanced and customized strategiesfor different markets, sectors, areas, regionsand countries. Taking “big bets” on carefullychosen markets, categories or technologies— those that match a business’s existingcompetencies — offers the best chance ofsecuring a sustainable competitive advantage.The BRICs are still reliable options — fornow … For many multinational companies,Brazil, Russia, India and China were thebig bets of the past decade. And there’s noquestion that these powerhouses will continueto be major players in the world economy. Butas their growth slows over the next few yearsand their operating environments becomemore challenging, companies must look foradditional engines of growth.… But the momentum is shifting to otherhot spots. Increasingly, non-BRIC rapidgrowthmarkets (such as Mexico, Turkey,South Africa and Vietnam) are emergingas attractive locations for global business.Despite their risks, these markets are moreglobally integrated than the BRICs on arange of trade, investment, cultural andtechnological criteria, and in the past threeyears have improved markedly in termsof ease of doing business, infrastructure,government policies and labor productivity.In particular, several countries and regions inAfrica are shaping up to be among the mostdynamic parts of the world for investment.2 Growing Beyond

Executive summary“To compete in a volatile and dynamic business landscape,organizations must invest in continuous learning so they canrespond to change quickly and effectively. Turning diffuse datainto usable information has never been more important.Using information technology and social media well helps — itallows organizations to capture the information they needfaster and use it more collaboratively.”Mark Weinberger, Global Chairman and CEO-elect, Ernst & YoungAre developed markets worth betting on?It may not seem like it, given the problemsin the Eurozone, uncertainty over the US’stax and budget policies, and the slow growthprospects for most of the world’s advancedeconomies. But there are pockets of excitingopportunities in some developed markets,which can leverage their technologicaladvantage. The penetration of broadband,social, digital, mobile and other advancedtechnologies is much higher in matureeconomies, allowing them to have a largeshare in the export of goods and services andmaintain their dominant position in certainmarkets. The US, which is already benefitingfrom a wave of re-shoring and a resurgenceof domestic manufacturing, may see growthin some industries thanks to the tremendoustechnological advances in the development ofunconventional oil and natural gas resources,such as shale gas and “tight” oil, which couldsignificantly move the country towards thelong-held goal of energy independence. Theavailability of domestic energy at an affordableprice will have a profound effect on globalcompanies’ decisions about where to locateproduction.Operational changes are essential topicking the right big bets and increasingtheir chances of a payoff. To choose the bestopportunities from a wide variety of markets,companies must adapt their operations to anew growth cycle — one that requires highlydisciplined and rigorous strategic planning,execution and learning, all supported andenhanced by technology. A possible approachto this new growth cycle might include:• Strategic planning: allocate resourcesin a bold and focused way. Deciding howto apportion scarce resources involvesresolving many trade-offs and conflictsbetween slow-growth and rapid-growthmarkets, short-term and long-termreturns, and volume-to-margin ratios. Oncecompanies decide on the right balanceof these elements, they must settle on ahandful of key investments that offer thebest promise of future growth. Makingthese bets clearly requires a high degreeof confidence that an investment will work.Technology plays a big role here: businessanalytics, for example, can help companiesbuild an investment case, evaluate risks,look at potential scenarios and simulateoutcomes.• Execution: make your big bet investmentsas local and granular as possible.Succeeding in the world’s new marketsmeans being immersed in them — tailoringofferings to meet the exacting needs oflocal customers, forming close relationshipswith local officials and communities,manufacturing locally or establishingregional supply chains, and empoweringlocal managers to make decisions so thatthey can act on opportunities swiftly. Again,technology can help by providing corporateparameters for decision-making.• Learning: transform your company intoa “learning organization.” It’s no news toanyone that rapid change is the new normalin business today and that many outcomeswill remain unpredictable. Yet companiescan learn to manage change better. This iswhere the power of technology really comesinto play. Applications such as businessintelligence and analytics, mobility solutions,and social networking allow businessesaccess to a wealth of data that they can feedinto future strategic planning and use tobecome lean and flexible organizations thatare well positioned to thrive in the globaleconomy of the future. An organizationwith a mindset of continuous learning willbe best equipped to manage successfullyin a turbulent and ever-shifting businesslandscape.Looking beyond the obvious: globalization and new opportunities for growth3

Section 2Companies must make “big bets” on marketsthey may not have considered before6 Growing Beyond

Section 2In this world of changing globalizationpatterns, extensive technology integrationand rapidly shifting demographics,organizations are faced with great complexityand uncertainty. It’s not always clear wherethe next big opportunity lies, and it may betempting for companies to play it safe andstick to proven investment destinations. Butto ride the next wave of growth, businesseswill need to bet on markets or regions of theworld that may not be obvious choices today.Our 2012 Globalization Survey, conductedalongside the Globalization Index research,shows that leading companies are adoptinga multi-market approach. While the BRICsremain critical to their strategy, they’re alsolooking closely at opportunities in non-BRICemerging markets and developed markets.They’re discovering that a standard strategyfor a group of markets — e.g., an “emergingmarkets” strategy — no longer works.Instead, what they will need are nuanced andcustomized strategies for different markets,areas, regions, sectors and countries.HeathrowGlobal decision-making takes offOver the past decade, the profile of the passengers passing throughUK airports, such as Heathrow, Stansted and Glasgow, has changed.Travelers from rapid-growth regions of the world, including Asia andthe Middle East, were once rare visitors, but as economic weight shiftsto the South and East, the number of passengers touching down fromthese regions has increased significantly.It is not just the passenger profile that has changed for Heathrow AirportHoldings Limited, formerly BAA, which owns Heathrow Airport. Its capitalstructure has also moved in line with changes to the global economy,becoming more heavily weighted toward rapid-growth markets.These new investors add to a base that is already international.Ferrovial, the Spanish building company, owns more than one-thirdof Heathrow Limited’s shares, following the company’s £10.4 billionacquisition in 2006. Heathrow Limited also has significant investorsfrom Canada, the US and Singapore.“Heathrow Limited has a well-diversified investor base with a globalgeographical focus and a range of strategic and financial perspectives,”says Matthews. “Having a global investor base allows us to raise equitycapital at a low cost, reducing our cost of capital. And our internationalinvestors’ support has also allowed us to continue developing our airports.”In October 2012, CIC International, a subsidiary of China InvestmentCorporation, China’s main sovereign wealth fund, acquired a 10%holding in Heathrow Limited. This deal followed an investment by QatarHolding — the direct investment arm of Qatar’s sovereign wealth fund— that, assuming the deal is approved by European Union competitionauthorities, would make it the second-largest shareholder in thecompany with 20%.“As growth has moved to the emerging markets, they have beenaccumulating trade surpluses year after year, and they have the cash toinvest,” says Colin Matthews, CEO of Heathrow Limited. “At the sametime, foreign pension funds have been attracted because the long-termreturns available in the airport industry match their liabilities.”International investors also own Heathrow Limited’s debt, with bondsissued in sterling, Swiss francs, euros, and Canadian and US dollars.“In the current context, companies like ours offer attractive returns toinvestors who otherwise might have lent money to governments,” saysMatthews.The Qatari and Chinese investments will mean that representativesfrom these investors will gain a seat on the airport’s operating board.For Matthews, this heralds a new phase in the company’s globalization,in which its decision-making will also become international. “It’s goingto be interesting having a group of investors sitting around the boardtable who are plugged into a very global set of views on investment andtrade,” he says.Looking beyond the obvious: globalization and new opportunities for growth7

Section 2“We do not align ourselves with markets inthe traditional way of thinking about emergingversus developed,” says Maher Al-Haffar,Senior Vice President of Communications,Investor Relations and Public Affairs at MexicobasedCEMEX, one of the world’s leadingmanufacturers of cement, concrete andrelated building materials.“What we try to look at is the structure ofthe market. Sometimes you have emergingmarkets that do not have a high-growthtrajectory, and you also have high-growthmarkets that are not particularly profitable.China, for example, has high growth butis much lower on the priority list thansomewhere like Mexico or India because thestructure of the market is different.”With many investment possibilities availableworldwide, companies will need to considerwhere they allocate their scarce resources.Not every opportunity needs to be seized.Taking “big bets” on carefully chosen markets,categories or technologies — those thatmatch or complement a business’s existingcompetencies – offers the best chance ofsecuring a sustainable competitive advantage.The National Football LeagueScoring with technologyThe National Football League (NFL) has experienced numerous bumpson the road to globalization. Efforts to make American football aglobal sport began in the 1970s with occasional exhibition gamesplayed in various countries around the world. The following decade,the NFL established a European League, but closed it down in 2006,disappointed by its performance. “Ultimately, our European fanswanted to access the best product, and that was the NFL games thatwere played locally in the US,” says Chris Parsons, the NFL’s VicePresident of International Business.Since then, the NFL has sought to bring the real product to the fansdirectly in key markets, by playing regular NFL season games overseas.“We focused on a number of strategic geographies, like the UK, Mexicoand Canada, where we felt we could create forward momentum,”says Parsons. “These are markets with good scale, a sizable businessopportunity, and a competitive media market with strong demand forgood sports content.”At the same time, the NFL built up local organizations in thesekey markets to drive fan interest and engagement throughout thecourse of the season. “The aim was to create local events, bring onboard sponsorship, and work with our licensing partners to createcomprehensive marketing strategies that activate fan engagement,”says Parsons. “This has been key to succeeding in overseas markets.”But perhaps the biggest enabler of all has been technology. In the past,the NFL relied on broadcasting as its primary route to market, but newchannels, such as social media and online, have created powerful newways through which the NFL can distribute its product to a growinginternational fan base. “Technology has allowed us to have much morelocalized messaging and communications,” says Parsons. “In addition tobroadcasting games, we now have multiple digital products that allowour fans to access the NFL, such as subscription products to streamgames and websites in local languages.”8 Growing Beyond

Section 3The BRICs are still reliableoptions — for now …10 Growing Beyond

Section 3For many multinational companies, Brazil,Russia, India and China were the big betsof the past decade. And there’s no questionthat these powerhouses will continue to bemajor players in the world economy. Notonly will the BRICs’ gross domestic product(GDP) grow faster than that of the othercountries included in the Index (see Figure3), but the BRICs will also integrate furtherwith the global economy. Yet the challengesof operating in the BRICs are increasing, astheir slowing real growth, rising inflation andlabor costs, political instability, infrastructureshortfalls, and bureaucratic obstacles chipaway at business confidence.“Emerging markets have had a bit of arough ride over the past 12 months, provingonce again that on a cyclical basis they arevulnerable to disappointments in other partsof the world,” says Stephen King, ChiefEconomist at HSBC. “China wobbled this year,but with more stimulus, its growth shouldcome back on track. India has struggled witha lack of supply, reform and investment inthe right areas. Brazil, always a very cyclicaleconomy, slowed significantly through thecourse of this year, and its recovery willdepend to some extent on growth in otherparts of the world.”Gavyn Davies, a macroeconomist and formerhead of the global economics department atGoldman Sachs, notes that over the courseof 2012, GDP projections for the BRICs havedropped substantially for the first time inmany years. “The financial markets havebeen adjusting to slower growth in general,but slower growth particularly in the BRICs,where there have been downgrades of atleast 1% to GDP in 2012,” he says. Growingprotectionism is yet another threat to theFigure 3: BRIC countries continue to grow at a faster pace than other marketsAverage real GDP growth (%)121086420-2-41995 1997BRICs’ attractiveness. Nearly half of therespondents to our 2012 Globalization Surveysay they expect declining growth, along withincreased global competition, to spark moreprotectionism among the BRICs (see Figure4). In fact, companies based in the BRICsare themselves looking beyond their homemarkets for opportunities to sustain growth,as Ernst & Young’s Beyond Asia series ofreports reveals. 1GDP all index countries GDP BRIC countries1999 2001 2003 2005 2007 2009 2011 2013 2015Source: International Monetary Fund, World Economic Outlook Database, October 2012 outlook, accessed December 2012Figure 4: Protectionism is more likely to increase among the BRICs compared withother rapid-growth marketsIncrease No change DecreaseFootnote1. Beyond Asia: strategies to support the quest forgrowth, Ernst & Young, July 2012; Beyond Asiahighlights (individual market reports) for MainlandChina, Hong Kong (SAR), Indonesia, Malaysia,Singapore, South Korea, Taiwan, Thailand, Vietnam,Ernst & Young, July-August 2012; Beyond Asia:developed-markets perspectives — meeting thechallenge of changing global competition,Ernst & Young, October 2012BRICRapid-growth marketsexcluding BRIC23%32%32%33%35%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: How do you expect the level of protectionism in the following markets to change in the next 12 months?46%Looking beyond the obvious: globalization and new opportunities for growth11

Section 4… But the momentum isshifting to other hot spots12 Growing Beyond

Section 4Against this backdrop, it’s critical forbusinesses to look for alternatives –and the search may well involve makingunconventional choices. Increasingly, non-BRIC rapid-growth markets are emerging ashot spots for global business. These marketsare more globally integrated than the BRICson a range of trade, investment, culturaland technological criteria, and this is set tocontinue through 2016, as our Index datashows. Many of these markets also showconsistently high economic growth close tothat of the leading BRICs. For example, Turkey,Mexico and Indonesia closely shadow Chinaand India in terms of GDP growth from 2000through 2015. Other promising locationsinclude Peru, Colombia, Venezuela, Malaysiaand Vietnam, as well as several countries andregions in Africa that are shaping up to beamong the most dynamic parts of the worldfor investment.In our survey, the number of executives whoview rapid-growth markets other than theBRICs as the most important source of newrevenue nearly doubles from 26% today to45% in three years. And they’re followingthe money. Executives from all geographicregions expect to increase investment in thesemarkets — 82% plan to do so, and 4 in 10expect to increase it by more than 10%. Ourrespondents believe Indonesia, Mexico, SouthAfrica and Turkey to be the most competitivelocations because of their access to nearbymarkets, political stability, and transport andtechnology infrastructure (see Figure 5). Infact, our survey shows a significant shift infundamentals: a vast majority of executivessee improvement in non-BRIC rapid-growthmarkets in terms of ease of doing business,infrastructure, government policies and laborproductivity.Figure 5: Top three competitive drivers for non-BRIC rapid-growth marketsIndonesiaMexicoSouth AfricaTurkeyAccess to nearby markets40%49%34%40%Political stability36%30%29%41%Labor costs37%45%30%23%Technology infrastructure9%21%34%40%Quality of talent8%25%24%24%Transport infrastructure19%14%24%16%Access to natural resources25%13%24%10%Protection of foreign investors’ rights8%20%17%19%Regulatory environment12%6%16%13%Taxes4%7%3%4%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: Which of the following non-BRIC rapid-growth markets will be the most promising for your company over the next three years? For your number one rated market,please indicate what makes it most competitive in its peer group. Please select up to three.Looking beyond the obvious: globalization and new opportunities for growth13

Section 4This can be seen as part of a broader cycleof economic development. As an increasingnumber of emerging markets aroundthe world develop the capability to bemanufacturing leaders, they leapfrog othercountries — a cycle driven by the developmentand dispersion of new technologies. “Astechnology has became more accessible, andas their education base grew, certain countriessuddenly found themselves in the positionwhere they could build things that historicallythey would never have been able to,” saysColm Reilly, Head of the UKTI InvestmentServices group. “And that is why you’restarting to see the growth of markets beyondthe BRICs, like Mexico, Indonesia or somecountries in Africa, where you’re starting tosee a propensity for them to leapfrog becauseof technology. Mexico, for example, is now theNo. 1 producer of flat-screen TVs. And as longas they keep educating their young people,which they are doing very successfully, thenyou would expect that to continue. Thesecountries have available capacity in skills at arelatively low cost, which is not something thatevery country can claim at the moment.”Businesses are also looking to non-BRICrapid-growth markets primarily to grow theirdemand base, rather than to cut costs. This isan important shift in mindset. It reflects therelatively attractive economic fundamentalsin these markets, such as favorabledemographics and the potential for incomegrowth, although higher inflation is alteringthe equation on production costs (see Figures6 and 7).Tata PowerEnergizing the communityTo succeed in rapid-growth markets, companies that invest in themmust do more than just deliver a product or service tailored to theneeds of the local population. They must also contribute to societyin ways that often go well beyond the scope of making a profit. Withmany of these markets in urgent need of health care, education,infrastructure and other basic services, global companies would be welladvised to work closely with local governments and communities tocombine commercial interests with long-term social development.Tata Power, India’s largest integrated power company, pays closeattention to how it can help the communities in the rapid-growthmarkets where it operates. In recent years, the company has beenexpanding its geographical reach into four key regions: Africa, theMiddle East and Turkey, South Asia, and the ASEAN region.“When we are expanding into a new geography, there is one keyconcern at the top of our mind: not to act like a foreign company,”says Anil Sardana, CEO of Tata Power. “We try to behave like a localcompany by partnering with government and local players and bydeveloping a genuine sustainability program. This encompassescorporate social responsibility, biodiversity and engaging with everystakeholder. And all of this goes hand-in-hand with a long-termcommitment to the markets.”Underlying this strategy is a deeply held belief that companies need togive back to society before they earn the right to expand. “You have tomake sure you make a positive impact before you can expect societyto share their land or resources,” says Sardana. “Otherwise, you don’tearn the entitlement to stay.”A year ago, for example, Tata Power embarked on a 50/50 jointventure with Exxaro, a South African mining group, to develop aportfolio of renewable and non-renewable fossil-fuel based projects.As part of the investment, Tata committed to developing schools andsupporting village programs, water projects and other communityrelatedefforts. “Working closely with the local government helpsdevelop long-term relationships based on trust,” says Sardana. “Peoplehave faith that we have not come to take advantage of them. There is asense of equality and of being all in it together.”This philosophy is at the heart of Tata — and is embedded in thecompany’s governance. Approximately two-thirds of the equitycapital of Tata Sons, the parent company of Tata Power, is held byphilanthropic trusts endowed by members of the Tata family. “Themain goal of these trusts is to invest the dividends back into society,”emphasizes Sardana. “And they have been doing this every year for thepast 100 years. It is literally in our DNA.”14 Growing Beyond

Section 4“It will take strong and decisive leaders to stimulate global economicgrowth. And those leaders must come from diverse backgroundsand have international experience, as well as a global mindset.That is the key challenge for organizations today: developing apipeline of the type of leaders we need for the future.”Beth Brooke, Global Vice Chair, Public Policy, Ernst & YoungSub-Saharan Africa, in particular, is a magnetfor investors. The International MonetaryFund estimates that foreign direct investment(FDI) in the region has surged 50% since2005. FDI projects abound in manufacturing,infrastructure and services. Seventy-threepercent of respondents to Ernst & Young’s2012 Africa attractiveness survey of morethan 500 investors and business leadersanticipate that Africa’s attractiveness willimprove over the next three years. 2“There is a lot of pent-up demand acrossAfrica, whether it’s for manufacturedgoods, white goods, consumer productsor technology,” says Austin Okere, CEOof Computer Warehouse Group, based inNigeria. “If you look at a region like WesternEurope, almost everybody has a fridge, almosteverybody has a television set and they arecovered by medical insurance of one sortor another. In Western Europe, it’s all aboutreplacements, whereas in Africa it’s aboutfirst-time acquisition. This means that Africahas more headroom for growth.”Footnote2. Building bridges: Ernst & Young’s attractivenesssurvey 2012 — AfricaFigure 6: Non-BRIC rapid-growth markets offer a major end-demand opportunity …Contribution to boosting revenue growthContribution to boosting market share31%61%To follow clientsSpreading risk across different locationsAccess to new distribution channelsTap a gap in the market for newproducts/servicesCutting costs23%23%23%22%20%Access to natural resourcesAn increasingly important base for R&D and innovationMore attractive regulatory environmentReduce tax burden10%10%9%7%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: What are the main drivers for your company’s investment in these frontier markets over the next three years? Select up to three.Figure 7: … And their business environment has improved markedly in the past three yearsWorseImprovedEase of doing businessInfrastructure, roads, electricity, technologyGovernment policies that make investment easierLabor productivitySupport for entrepreneurs and business start-upsTalent attractionEducation system12%5%7%6%6%8%6%57%53%52%51%47%63%77%Access to creditLabor costs32%16%33%43%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: How have the following aspects of the business environment in frontier markets changed in the past three years?Looking beyond the obvious: globalization and new opportunities for growth15

Section 4“In the next decade, growth will be very substantial in Africancountries. They are the potential BRIC economies of the future.”Michael Lalor, Lead Partner, Africa Business Center, Ernst & Young South AfricaIn the 2012 World Bank Doing Businessrankings, eight African countries rank aheadof China, the highest-ranked BRIC country, 14ahead of Russia, 16 ahead of Brazil and 17ahead of India. In comparison with theErnst & Young Emerging Markets Center’sportfolio of 25 rapid-growth markets, 3 SouthAfrica would rank sixth in terms of the relativeease of doing business, behind South Korea,Saudi Arabia, Thailand, Malaysia and theUnited Arab Emirates.“Other countries are slowing, but Africa isan exception to the rule – it is the one brightspot in an otherwise depressing forecast,”says Michael Lalor, Lead Partner of the AfricaBusiness Center at Ernst & Young SouthAfrica. “In the next decade, growth will bevery substantial in African countries. They arethe potential BRIC economies of the future.”Yet, Africa and other non-BRIC newmarkets clearly present their own particularchallenges. Respondents to Ernst & Young’s2012 Globalization Survey overwhelminglycite several factors, including politicalcorruption, as a great risk in these markets(see Figure 8). Indeed, global risk consultancyControl Risks has increased the political riskratings in nearly a dozen African states overthe past five years. In part, this increasedrisk can be ascribed to the huge inflowsof money into sub-Saharan Africa andgovernments’ desire to “acquire” a share ofit through institution building, according toMichael Denison, Research Director at ControlRisks and former Special Adviser to the UKForeign Secretary. “Before, the regulatoryenvironment was relatively open or evenunregulated in certain sectors,” he says.“Now governments are beginning to build aframework of commercial law and regulationsthat will allow the state to recover more of therevenues that have been obtained. This thenraises a whole range of second-order risks.”Footnote3. Argentina, Brazil, Chile, Colombia, Czech Republic,Egypt, Ghana, Greater China including HongKong (SAR), India, Indonesia, Kazakhstan, Korea,Malaysia, Mexico, Nigeria, Poland, Qatar, Russia,Saudi Arabia, South Africa, Thailand, Turkey,Ukraine, United Arab Emirates, VietnamDriving toward a granular approachBy Mike HanleyGlobal Automotive LeaderErnst & YoungThe automotive industry is embarking on a new wave ofgeographical expansion. For the past few years, car makers havefaced significant challenges in developed markets and havetargeted their investment at the BRIC economies, especially thehuge consumer markets of India and China. These will remaincritically important over the next decade, but automotivecompanies recognize that they cannot become too dependenton them. Growth across the BRICs is slowing and the market hasbecome extremely competitive. The operating environments inthese economies are also challenging.As a result, what we see today is a much greater emphasis onnon-BRIC rapid-growth markets. A key reason for this relatesto demographic change and economic growth. Many of thesecountries are undergoing a very rapid rate of urbanization. InAfrica, for example, we see the growth of mega-cities, such asLagos, Cairo and Kinshasa. This is creating an emerging andfast-growing middle class, with citizens who see car ownership,or sometimes car sharing, as an important component of theirnew lifestyle. Automotive companies are looking very closely atthese markets and also playing an active role in helping citiesthink about urban mobility.Automotive companies have learned that when investing inany large rapid-growth market, they need to take a granularapproach. In China, for example, the needs of customers in themajor cities of the Eastern Seaboard may be very different fromthose of the population in the interior. As a result, automotivecompanies often segment these markets, targeting luxury carsat the bigger coastal cities, and smaller, value models at thesecond-tier or third-tier cities.16 Growing Beyond

Section 4Figure 8: Political corruption tops list of risks in non-BRIC rapid-growth marketsPolitical corruptionIncreased protectionism30%Weak infrastructure30%Failure to sustain domestic consumption growth28%High inflation23%Asset price bubbles20%Inequality of income20%Collapse in export demand18%Weak capital markets18%Competition from domestic companies in target countries17%Slow uptake of technology12%Source: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: What are the key risks that could derail these frontier markets over the next three years? Select up to three options.54%The impact of political risk also dependson the particular industry, its investmenttime horizon and its relationship with localgovernments. There is great political risk, forexample, in investing large sums of money ina volatile regime where no one knows who thenext head of state is going to be.“If you go tothe resources sector, particularly mining andoil and gas, these are enormous issues,” saysJulian Birkinshaw, Professor of Strategy andEntrepreneurship at London Business School.“If you ask a BP or a Rio Tinto what are thethings that keep their chief executive awake atnight, it will essentially be around the politicalrisk or challenges of doing business in Russia,Brazil or various parts of Africa.”Companies that invest in rapid-growth markets often usepartnerships and alliances, both as a means to obtain the licenseto operate and to build on-the-ground knowledge. Local partnershave a deep understanding of customer needs and know howthese are evolving. This can be extremely valuable so companiesdon’t make the very expensive mistake of setting up a factoryin a new market only to find that the models being built do notmeet the needs of customers. Many automotive companies havelearned valuable lessons from their experience of investing inthe BRICs and will be able to apply this knowledge in the nextwave of their investment.Looking beyond the obvious: globalization and new opportunities for growth17

Section 5Are developed marketsworth betting on?18 Growing Beyond

Section 5So, while many of the non-BRIC rapidgrowtheconomies are worth a big, mostlylong-term bet, they’re only part of the picture.To create a well-rounded portfolio, investorswill need to diversify their bets to includeseveral mature markets, which are making acomeback in certain areas and sectors. Thatmay seem surprising in view of the currentbleak economic outlook for the G7, butit’s important to note that although rapidgrowthmarkets are picking up output share,developed markets are still major drivers ofworld economic activity (see Figure 9).For the respondents to our 2012 GlobalizationSurvey, North America and Western Europeremain critical to protecting the bottom line(see Figure 10). Although new investment inthese regions is still slow to take off (and thepotential impact of the fiscal uncertainty inthe US could affect corporate investment),high energy costs and shorter product lifecycles are driving global organizations topursue near-sourcing (see Figure 11). In thenext three years, the number of respondentswho expect to outsource more operationalfunctions to providers in mature markets willrise to 36% from 22%; the number that plan tonear-source previously outsourced activitieswill more than double, from 14% to 35%.Figure 9: Advanced economies remain important drivers of world economic activity40353025201510502010 2011 2012 2013 2014 2015 2016G7 GDP — currentinternational dollars (trillions)G7 GDP — share of world total (%)Source: International Monetary Fund, World Economic Outlook Database, October 2012 outlook, accessed December 2012Figure 10: Developed markets are highly important to companies’ bottom lines in the next three yearsTop three (by respondent market)Developed marketsRapid-growth marketsRapid-growth markets (exc. BRIC)Western EuropeEmerging Asia(exc. China, India)39% BRICs41% Emerging Asia(exc. China, India)38%37% Emerging Asia39% BRICs(exc. China, India)32%BRICs32%North America27% North America28%North America32%Source: Ernst & Young 2012 Globalization Survey Shown: Percentage of respondents in developed markets (433); rapid-growth markets (297) and non-BRIC rapid-growth markets (158)Question: Which of the following markets is likely to be the most important for your company’s bottom line in the next three years?Looking beyond the obvious: globalization and new opportunities for growth19

Section 5Mature markets offer several pocketsof promise. Innovation and exchange oftechnology and ideas give these markets anedge over their rapid-growth counterparts,as our 2012 Globalization Index shows.Advanced economies that can leveragethese capabilities are at an advantage. Thediffusion of broadband, social, digital andmobile technologies is much higher in maturemarkets, enabling them to use it to theiradvantage and retain a high share in theexport of goods and services, maintainingtheir dominant position in certain markets.Our Index data reveals a correlation betweena strong integration score on technologyand ideas and a superior share of worldgoods exports, suggesting that countriesin this group are able to leverage theirtechnological strengths to dominate exportmarkets (see Figure 12). The UK, for example,is regaining its competitiveness, rankingeighth in the World Economic Forum’s GlobalCompetitiveness Report 2012-2013, afterhaving fallen from seventh to 12th between1997 and 2010. As the report highlights,the UK continues to have a sophisticated andinnovative business environment.Figure 11: Companies plan to bring production capability back to developed marketsAll respondentsManufacturingOil and gas% of executivesSource: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)14%16%21%23%TodayFigure 12: Top export markets take advantage of technology integration31%In three yearsQuestion: For each of the following, please indicate whether it is applicable to your company today and/or will be in three years’ time.Percentage of executives selecting, “we are planning to bring production capability back to developed markets.”Share of world goods exports (%)10987654Lower tech/higher exportsUSAJapanGermany35%Higher tech/higher exportsFor developed markets with hightechnological integration, thereis great opportunity for growththrough exports32ItalyFrance NetherlandsCanadaUnited KingdomBelgiumSingaporeLower tech/lower exportsSpainAustraliaHigher tech/lower exportsSwitzerland Markets in this quadrant1Swedenshould leverage theirAustria Norwaytechnological strengths to growPortugalIreland Denmarkthrough exportsFinlandNew Zealand01 2 3 4 5 6 7Exchange of technology and ideasSource: Ernst & Young 2012 Globalization Index20 Growing Beyond

Section 5“The global economic environment is going to be challengingfor some time to come, and issues such as the Eurozonecrisis will not be resolved in the short term. Yet the world’snew markets, particularly those in Africa, offer enormouspotential. With strong business and government leadership,these markets can grow significantly.”Mark Otty, EMEIA Area Managing Partner, Ernst & YoungWith a strong revival of domesticmanufacturing, the landmark discovery of newshale gas reserves (which is driving low energycosts for US producers), increasing high-techand export-fueled growth, and narrowing laborcost differentials, the US may be a surprisinglyattractive investment destination. The countryperhaps best exemplifies the resurgence ofdomestic manufacturing, which could revivesome industries and spark new ones. A2011 study by the business consulting firmAlixPartners estimates that 10% to 30% of themanufactured goods that the US now importsfrom China could shift back to US productionby 2020, adding between US$20 billion andUS$55 billion to GDP on an annual basis.Many US-based multinationals have alreadyre-shored some manufacturing capacity. Forexample:• NCR Corporation is moving all of its ATMproduction from China, India and Hungaryback to a facility in Columbus, Georgia, tocustomize products and get them to clientsfaster.• Carlisle Transportation, a division ofCarlisle Companies, brought tire productionformerly done in China back to two plants inthe US. Carlisle’s Jackson, Tennessee, plantis becoming more efficient and it is nowcheaper to produce tires in the US as certainChinese subsidies have disappeared.In 2012, GE re-shored its domestic appliancemanufacturing business to the US fromMexico. “We brought back the manufacture ofrefrigeration units from Mexico to the US forone very simple reason,” says NaniBeccalli-Falco, President and CEO of GEInternational. “It takes eight hours to make arefrigerator in Mexico; it takes two hours tomake a refrigerator in Louisville.”Colm Reilly of UKTI identifies two keyphenomena underlying the recent trendtoward in-sourcing. “First, technologycontinues to drive change,” he says.“So companies find that if they takeinto consideration new manufacturingtechnologies and the total cost of logistics,including management time and the overheadof managing a location on the other side ofthe world, they’re able to manufacture at alower cost than the outsourcers can in somecases. We can now, for example, manufacturecertain products without the large capitalexpenditure needed to manufacture the sameproducts a decade ago. The second reasonis that the outsourcing of manufacturing hasmeant that companies have lost an inherentcapability that they want to get back.”• Coleman announced in June 2011 that itwas canceling plans to outsource some ofits operations to China, instead choosing tobuild more factories in Kansas. The strategicpurpose of the decision was to move itsproduction base closer to the end marketand reduce inventory pressures.Looking beyond the obvious: globalization and new opportunities for growth21

Section 5Near-sourcing and in-sourcing are lesscommon in Europe than in the US. Thereare some examples – Steiff, a German toymanufacturer, recently decided to moveproduction back to Europe from China, citinghigh transportation costs and problems withquality — but in general, the practice is notwidespread. Part of the reason may be thatmanufacturing never really left in the firstplace. For example, in Germany, the familyownedMittelstand companies, which aresmall to midsize businesses that account foran estimated 50% of the country’s GDP, haveretained a strong manufacturing capabilityand been more resistant to outsourcingthan many large multinationals. Europeancountries’ less flexible rules governing laborcan also be an impediment to offshoring.Figure 13: Leading gas users, especially the US, will benefit from low gas pricesBrazilChinaOECD EuropeUS3%5%10%9%25%26%32%33%0% 5% 10% 15% 20% 25% 30% 35%Source: US Energy Information Administration, accessed December 20122008 2035By Dale NijokaGlobal Oil & Gas LeaderErnst & YoungRedrawing the global energy mapThe next few years will see a complete transformation in theglobal oil and gas markets. The discovery, development andexploitation of the huge reserves/resources of shale gas in theUS — estimated at between 500 and 1,000 trillion cubic feet —will reshape the energy map. The International Energy Agency(IEA) expects that by 2020, the US will claim Saudi Arabia’scurrent position as the world’s largest oil producer. The IEAforecasts that a decade after that, North America (i.e., the US,Canada and Mexico combined) will be a net oil exporter.So what will this mean for the global economy and business?One clear implication is that natural gas prices in the US willbe much lower than in Asia. Countries across Asia know thatto grow their economy, they need to have a source of energyto run factories, plants and infrastructure. They are thereforedoing all they can to make the necessary investments.Cheap energy in the US will change the calculation thatcompanies make when considering where to locate energyintensiveactivities like manufacturing. There is a growingadvantage for companies to locate these facilities in the USbecause of the low price of natural gas there, compared tothe relatively high price in Asia. That is a major shift that willmake US manufacturing more competitive than it has been fordecades.Within the next decade, we are likely to see a substantialnumber of coal-fired plants in the US retired and replaced bynatural gas-fired plants. With its distinct price advantages,we also expect to see an increasing use of natural gas as atransportation fuel, displacing some gasoline and diesel fuel.Vehicle manufacturers are expanding the production of trucksand automobiles that are fuelled by natural gas, and the22 Growing Beyond

Section 5“Rapid-growth markets can be highly rewarding, but inmany cases they are a long-term proposition. To reaprewards in these markets, businesses must be preparedto make an extended commitment to them while alsoputting in place mechanisms to deal with short-termvolatility and uncertainty along the way.”Rajiv Memani,Country Managing Partner, Ernst & Young India“If you look at vertical integration, Europehas been more effective at retainingmanufacturing compared to the US, andpart of this is that there is closer integrationbetween the manufacturing and servicefunctions,” says Javier Gimeno, Professorof Strategy at INSEAD. “In some Germancompanies, labor has more of an influenceon company strategy and, as a consequence,these companies do not just quickly cutheadcount every time the profits are down.That means they are not losing capabilities asfast as some of the American companies do.”putting the US on track to become moreenergy independent and increasing growthin a variety of related industries such asagriculture and petrochemicals. In particular,the US shale gas “revolution” means farcheaper feedstock costs for US manufacturersthan in recent years and an advantage for USfirms over markets — including China — thatrely on more expensive fuels (see Figure 13).The availability of domestic energy at anaffordable price will have a profound effect onglobal companies’ decisions about where tolocate production.But American businesses may reverse thattrend in short order, thanks to the US’s biggestturnaround story in decades: the tremendoustechnological advances in the development ofunconventional oil and natural gas resources,such as shale gas and “tight” oil. This windfallwill not only reduce domestic energy costsbut will shake up the energy picture globally,refuelling infrastructure is gradually being built out. Naturalgas’s penetration into the vehicle fleet is currently being drivenby its use in heavy trucks, buses and local commercial fleets,but we expect the personal vehicle market to start to showstrong growth over the next decade.At some point, the US will also start to export natural gas toother parts of the world. It’s very difficult to rationalize notdoing that when prices are so much higher in Asia and evenEurope. There will be barriers, of course. Natural gas is still nota global commodity, like oil, because the infrastructure is notnearly as developed. That will take time, but the incentives arecertainly there to make it happen. And while there have beensome political issues raised with regard to US energy exports,we would expect those issues to be successfully resolved, giventhe expected net economic benefits.Looking beyond the obvious: globalization and new opportunities for growth23

Section 6Operational changes are essentialto picking the right big bets andincreasing their chances of a payoff24 Growing Beyond

Section 6Companies have already learned manyof the lessons of globalization, such asthe need for flexibility, agility and localization.But as globalization enters its next phase, theymust prepare to make decisions on marketsand investments without always knowingall the possible outcomes. The case studiesand examples of the companies featuredin this report are by no means applicableto all multinationals or industries, but theyoffer creative approaches to dealing withthe many unknowns that characterize globalbusiness. No matter their size or sector, tochoose the best opportunities from a widevariety of markets, companies must adapttheir operations to a new growth cycle — onethat requires highly disciplined and rigorousstrategic planning, execution and learning, allsupported and enhanced by technology. Thefollowing are some recommendations for apossible approach to this new growth cycle:Strategic planning: allocate resources ina bold and focused way. Deciding how toapportion scarce resources involves resolvingmany trade-offs and conflicts between slowgrowthand rapid-growth markets, short-termand long-term returns, and volume-to-marginratios. Once companies decide on the rightbalance of these elements, they must settleon a handful of key investments that offer thebest promise of future growth. Because therisk is so concentrated, making these betsclearly requires a high degree of confidencethat an investment will succeed.This is a tough call to make, particularly inrapid-growth markets, which are not onlyvolatile but also, in many cases, a long-termproposition. Businesses need to be willing tomake an extended commitment to the marketto reap rewards — and to live with early startuplosses and other short-term volatility alongthe way. “Foreign markets are a long-termgame,” says Julian Birkinshaw of the LondonBusiness School. “So profits are likely to takea hit in the short term as companies learnhow to make the investment work. Markets— famously short-term — are looking for thechief executive to tell them a story of how thecompany is going to succeed over the longterm.”It’s also important to look at the big picturewhen allocating resources. Oracle’s Alfonsodi Ianni advises taking a balanced regionalapproach to emerging economies, focusingnot on company performance in anyspecific market but rather on a portfolio ofcountries and prioritizing accordingly. “Seniormanagement wants to see consistent overallgrowth in Oracle’s designated emergingregions in the Eastern Central Europe, MiddleEast and Africa region,” he says. “The regionmay include developed countries that willemerge from recession and developingcountries experiencing better growth.However, we apply a strategy of establishingcommon regional business support structuresthat lower barriers to entry, reduce risk andallow us to work our markets efficiently withina broad growth band. This means that evenif a particular market does not grow at theexpected rate, or if another experiences aspike, we are well placed to continue doingbusiness successfully. Within the budget, I candefine my priorities. I recommend that wehave a portfolio of assets to balance the upsand downs.”Looking beyond the obvious: globalization and new opportunities for growth25

Section 6Of course, with market conditions changingso quickly, what at first seems like an optimalresource allocation strategy may soon becomeless than optimal. The challenge, therefore, isto maintain as much flexibility with resourcesas possible while keeping an eye on thebottom line. Companies need the flexibility notonly to make strategic bets but also to changecourse or exit if an investment doesn’t panout. Technology plays a vital role in decisionmakinghere: business analytics, for example,can help companies build an investment case,evaluate risks, look at potential scenarios andsimulate outcomes. Nearly half of our 2012Globalization Survey respondents say thatbusiness intelligence and analytics will havethe greatest impact on their internationalexpansion strategy (see Figure 14).Execution: make your big bet investmentsas local and granular as possible. Succeedingin the world’s new markets means becomingimmersed in them — tailoring offerings tomeet the exacting needs of local customers,forming close relationships with local officialsand communities, manufacturing locallyor establishing regional supply chains, andempowering local managers to make decisionsso that they can act on opportunities swiftly.Again, technology can help by providingacceptable risk parameters for local decisionmaking.In fact, the ability to “go local” seamlessly mayvery well be the key to making strategic betsyield positive results. One way to do this is toconnect with local markets by contributingto their economic development, says AndrewKakabadse, Professor of InternationalManagement Development at the CranfieldUniversity School of Management. “A vastmajority of smaller markets are fundamentallylacking in infrastructure, even in basicslike police, education and health,” he says.Figure 14: Business intelligence and analytics will have the most impact onglobal expansion strategiesBusiness intelligence and analytics (managingglobal supply chain, etc.)Mobility solutions, e.g., use of smart phones forbusiness purposesBusiness process managementRisk and compliance systemsVirtualization, e.g., webinars and e-commerceCollaboration and social networkingSource: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)Question: Which technological advances are likely to have the greatest impact on your company’s strategy for international expansion?“Companies need to think long-term in thosemarkets and create an investment patternthat will maintain their presence but alsoindicate their commitment by investing in theinfrastructure that is relevant to their businessin those markets. That will create a sustainableinvestment platform, but that is a very longtermstrategy.”The drive to localize brings up a longstandingdebate: how do companies find theright balance between localization andglobalization, between the search foreconomies of scale and differentiation,between centralization and decentralization?The companies we interviewed offer a varietyof responses, but the overall theme is thesame: become granular, specific, customized.Of course, a granular approach increasescomplexity, particularly because mostcompanies now recognize that marketing andcustomer relationships need to be handled atthe local level. Therefore, businesses need tothink about commonalities across markets andhow to take successes from one and repeatthem in another to derive economies of scale.19%26%25%33%36%46%26 Growing Beyond

Section 6“Only those companies that stand out as innovators arelikely to succeed in a slow-growth environment.To capitalize on pockets of growth, businesses needto be bold, entrepreneurial and willing to take riskson new products and services.”Maria Pinelli, Global Vice Chair, Strategic Growth Markets, Ernst & Young“Our business of ready-mix concrete isextremely local,” says Maher Al-Haffar ofCEMEX. “The radius of an effective marketis somewhere between 50 and 75 miles andthe shelf-life of the product is four hoursmaximum. But while our business is local,we recognize that there is enormous valueto be gained by identifying best practices,globalizing them, standardizing them andallowing the local units to add value in termsof the innovation and improvement of thesebest practices.”Finding commonalities might includecreating platform technologies that can bedeveloped centrally and then adapted locallyto suit market needs. Hubs offer one wayfor companies to develop a core presence tocentralize service delivery across a region andbuild a basis to expand at the local level. “Hubsare very important in large territories,” saysOracle’s Alfonso di Ianni. “In Central Asia, forexample, we use Istanbul, Baku and a little bitof Almaty. In the hub, we try to hire peoplewho potentially can then move on into thecountry that they serve remotely, becausewe know that those countries are critical andwe may open an office there. So we havecontinuity in our own investment in terms ofpeople.”Successful companies often centralize corefunctions, such as financial control, andrelease operational control more and moreto the local level. This sets up a structurethat supports the core pillars of the businesswhile setting clear expectations for thelocal outcomes required. “But beyond that,local managers do what they need to do,and that helps the innovation cycle as well,”notes UKTI’s Colm Reilly. Innovation, in fact,is another vital component of success inexpanding globally, as our respondents pointout: most agree that innovation – largelyenabled by technology – will help them bettercompete with companies of all sizes and fromall geographies (see Figure 15).Figure 15: Companies believe innovation lowers geographical barriersInnovation better enables us to compete withcompanies of all sizes and geographiesKnowledge-sharing across my organizationwill be critical to sustained innovationMost innovation at my firm flows fromadvances in technologyInnovation at our company is decentralized;organizational structures and hierarchies arenot barriers to new ideas emergingAdvances in technology have had no impacton our rate of innovation24%54%63%78%85%Source: Ernst & Young 2012 Globalization SurveyPercentage of all respondents (730) who responded “Strongly agree” and “Somewhat agree”Question: Do you agree or disagree with the following statements on the role of innovation in your business?Looking beyond the obvious: globalization and new opportunities for growth27

Section 6Figure 16: Technology investments are set to increase markedly in the next 12 monthsIncrease No change DecreaseBusiness intelligence and analytics(managing global supply chain, etc.)4%26%71%Learning: transform your company intoa “learning organization.” It’s no news toanyone that rapid change is the new normalin business today and that many outcomeswill remain unpredictable. Yet companies canlearn to manage change better. This is wherethe power of technology really comes intoplay. Applications such as business intelligenceand analytics, mobility solutions, and socialnetworking allow businesses access to awealth of data, both global and local. They canfeed that data into future strategic planningand use it regularly to become lean andflexible organizations that are well positionedto thrive in the global economy of the future.Over the next 12 months, a majority of oursurvey respondents expect to increase theirinvestments in a variety of digital technologiesthat promote mobility, collaboration andknowledge sharing (see Figure 16).Mobility solution, e.g., use of smartphones for business purposesBusiness process managementCollaboration and social networkingRisk and compliance systemsVirtualization, e.g., webinars ande-commerceSource: Ernst & Young 2012 Globalization Survey Shown: percentage of all respondents (730)6%6%6%6%8%Question: How is your company’s investment in technology across the following categories likely to change over the next 12 months?31%38%38%40%41%54%54%53%57%64%Understanding the four transformational forces of technologyBy Pat HyekGlobal TechnologyIndustry LeaderErnst & YoungTechnology has long been one of the fundamental driversof globalization, but in the years ahead, its role will becomeeven more important. Underlying this trend are fourtransformational forces that are having a profound impact onhow businesses operate and engage with their customers andhow other communities/netwoks engage with each other.The first of these disruptive forces — mobile — is creating anentirely different relationship between employers and theirworkforce, and gives companies the opportunity to interactwith customers in new and powerful ways.Social media, the second transformational force, also enablescompanies to build new relationships with customers.Businesses can understand how customers perceive theirbrands, products and services, and engage in two-wayconversations that can help to pave the way for refinements orinnovations.Digital video and emerging technologies like social mediacreate huge amounts of data, but much of it is still in a formthat cannot be easily analyzed. Over the next few years, thethird transformational trend — big data — will change this. Byanalyzing data from social media and many other sources,companies can better understand where they should investtheir capital and resources and how they should customizetheir offering to suit customers.Huge amounts of data require storage and large complexsoftware applications to analyze it all. These are among theroles that one of the four transformational trends, the cloudwill play. The cloud allows companies to access storage andmany other powerful computing resources without the need toinvest in infrastructure/application software, giving them theflexibility to scale up or down depending on their needs.These four transformational forces are powerful enablers of28 Growing Beyond

Section 6“You constantly have to look over the horizon, but thehorizon is changing so quickly and what you thoughtwas on the horizon today is suddenly so much closeror has moved somewhere else.”Ian Hudson, President for Europe, Middle East and Africa, DuPontThe term “continuous learning” may be acliché, but without it organizations cannotthrive in the new growth cycle, which requiresthem to learn quickly, apply that knowledge totheir strategic plan, execute on the plan, andthen begin the cycle again. Although it cannotpredict the future, a learning organizationcan make effective use of real-time digitaltechnology to react to changes moreefficiently, bypassing traditional hierarchiesto enable faster decision-making andimplementation of key strategies.landscape. Ian Hudson of DuPont best sums upthe monumental challenge of navigating thisterrain. “You constantly have to look over thehorizon, but the horizon is changing so quicklyand what you thought was on the horizontoday is suddenly so much closer or hasmoved somewhere else,” he says. “Humanshaven’t necessarily evolved quickly enough tokeep pace with such rapid change.”A learning organization also will be bestequipped to manage successfully in a VUCAworld – a volatile, uncertain, complex andambiguous world – a US military termoften used in the private sector to describethe turbulent and ever-shifting businessglobalization. But they also have the potential to change thecompetitive landscape dramatically and at an unprecedentedspeed. We have already seen entire industries, such as retailor the media, being disrupted by new competitors leveragingtechnology. Over the next decade, we are certain to see moredisruption as new, agile, technology-savvy firms displace themore traditional incumbents.The scale of these opportunities and challenges emphasizesthe importance for business leaders to understand thesefour transformational forces. Technology is a fundamentalcompetitive force that should be at the heart of C-suite andboardroom discussions. If companies are not thinking aboutthese transformational forces, then there is a good chance thattheir competitors are. The lesson of the past few decades isthat disruption happens quickly. If companies do not keep pacewith technology, they will put their business models at risk.Looking beyond the obvious: globalization and new opportunities for growth29

Index rankings2012 Globalization Index30 Growing Beyond

Index rankingsGlobalization has become more nuanced since 2011 as different aspects of theErnst & Young Globalization Index have become more important in driving globalintegration. The performance of the major Index components shows higher growth in theintegration of goods and services, technology, and capital in the medium term. By contrast,labor and cultural integration are expected to show less progress toward further integration thanin the five years before the financial crisis. The biggest increases in cross-border integrationcontinue to be driven by technology, particularly global connectivity through broadbandpenetration and internet access, as well as increases in R&D trade.While integration in mature markets appears to be slowing down, reflecting the already highpenetration levels of technologies such as the internet and broadband, it is ramping up forrapid-growth markets. This suggests that the BRICs and other emerging economies can reapparticularly big opportunities from further technological integration through 2016.Updated Globalization Index methodology and variables for 2012Ernst & Young’s annual Globalization Index was developed in 2009 in conjunction with theEconomist Intelligence Unit. The Index is based on a comprehensive understanding of theunderlying drivers for globalization across five main pillars: openness to trade, capital flows,exchange of technology and ideas, labor movements, and cultural integration. With these keycategories, the Index incorporates a broad range of sub-indicators for 60 countries and spans theyears 1995 to 2016. www.ey.com/globalizationAs globalization evolves, and new and better datasets become available, it is appropriate toreview the index data and methodology to accurately reflect these developments. In 2012 weintroduced revisions to the Globalization Index scoring system and included several new subindicatorsto better reflect the state of play in the global economy, technology and markets.The new scoring system uses a dynamic normalization technique. In addition, the followingvariables are included in the 2012 Index: share of main trading partners in total trade, as apercentage of GDP (trade in goods and services); trade in information and communicationstechnology (ICT) goods, as a percentage of GDP (technology); foreign direct investment (FDI)stocks, as a percentage of GDP (capital and finance); and total international fixed telephonetraffic (culture). The last two of these variables are substitutions for FDI flows as a percentage ofGDP (capital and finance) and international outgoing fixed telephone traffic (culture). The subindicatorweights in the Index have been redistributed to reflect the changes in the variables.The purpose of these changes is to better capture relative country performance andperformance over time across the five main drivers of globalization. The changes are reflectedin some larger-than-normal historical revisions to the 2011 rankings, but the updated Indexmethodology better captures the nuances in globalization in the world today, suggestingimproved forecasting capability and insights into key business opportunities and challenges.Looking beyond the obvious: globalization and new opportunities for growth31

32 Growing Beyond2012 Globalization Index1234567891011121314151617181920212223242526272829307.816.315.635.495.305.194.964.944.754.744.724.664.624.584.554.554.554.534.514.454.444.374.364.344.334.284.234.224.214.200.06-0.020.080.110.040.020.010.010.070.030.030.090.030.040.000.010.020.070.030.000.050.040.010.040.020.070.060.040.010.031.961.011.201.171.490.920.970.921.020.630.871.530.710.870.730.540.880.910.730.840.681.250.850.570.660.381.270.600.140.798.578.276.636.476.396.326.316.296.276.246.246.216.155.895.895.885.865.825.755.745.735.685.655.615.605.495.425.425.415.418.466.646.046.045.645.595.335.295.074.954.904.814.794.594.584.574.554.484.464.424.374.364.244.184.164.154.064.024.013.976.155.905.605.575.545.545.535.505.205.195.035.024.974.884.834.834.824.814.804.804.774.774.764.674.614.564.534.514.514.478.545.564.494.334.274.264.134.124.074.033.973.963.943.923.903.893.843.823.813.753.743.683.623.593.493.323.263.173.113.118.896.356.315.064.894.604.294.224.214.124.124.084.064.054.024.003.923.873.873.863.853.793.773.683.633.633.563.523.513.48Hong Kong (SAR)*SingaporeIrelandBelgiumSwitzerlandNetherlandsSwedenDenmarkHungaryUnited KingdomGermanySlovakiaFinlandFranceCanadaIsraelTaiwanCzech RepublicAustriaSpainNew ZealandBulgariaNorwayAustraliaUnited StatesMalaysiaPolandChilePortugalItalyCountry/territory 2012scoreChange inscore since2011Change inscore since1995Trade Capital Labor Technology CultureOverallIndex rankings*Special Administrative Region of China

33Looking beyond the obvious: globalization and new opportunities for growth3132333435363738394041424344454647484950515253545556575859604.104.074.023.943.903.833.763.623.623.593.583.563.543.533.513.463.313.243.233.213.193.193.173.173.163.122.982.882.632.160.050.090.030.110.010.070.050.010.060.040.03-0.010.030.020.060.020.060.050.030.010.050.040.030.060.030.060.030.040.000.051.270.841.180.950.131.080.890.490.180.450.300.370.720.880.580.261.000.530.420.220.040.26-0.160.270.610.780.170.280.02-0.015.365.335.325.325.305.305.255.225.165.155.095.065.014.934.834.804.804.734.564.564.204.204.143.923.813.693.633.433.343.343.893.743.733.723.663.653.573.553.523.513.493.483.423.413.353.273.233.203.142.752.682.642.532.522.382.372.352.091.921.404.454.424.414.394.384.364.244.244.194.164.144.084.054.023.993.933.873.833.743.613.603.473.443.373.363.293.233.002.942.773.102.912.662.662.612.582.552.552.522.502.432.402.322.292.202.202.172.132.111.961.951.901.651.651.491.481.431.431.371.363.443.423.413.383.363.353.333.323.293.133.112.752.692.672.632.622.612.612.582.532.532.522.522.502.121.871.831.791.781.76RomaniaThailandSouth KoreaPhilippinesGreeceVietnamMexicoPeruSri LankaColombiaSaudi ArabiaEgyptJapanChinaBrazilTurkeyUkraineRussiaEcuadorPakistanAzerbaijanSouth AfricaArgentinaIndiaNigeriaKazakhstanIndonesiaVenezuelaAlgeriaIranCountry/territory 2012scoreChange inscore since2011Change inscore since1995Trade Capital Labor Technology CultureOverallIndex rankings

Index rankings2012 Globalization Index — indicators, sources and weightingsErnst & Young’s 2012 Globalization Index was developed by the Economist Intelligence Unit forErnst & Young to measure the 60 largest countries/territories by GDP according to their degree ofglobalization. The table below shows, for each of the headline categories, the individual indicatorsused and their source. The categories were then weighted.Indicators Weight SourceMovement of goods and services (Business leader weighting: 22%)Total trade (exports and imports)Trade openness (5=very high)Tariff and non-tariff barriers (5=very low)Ease of trading (cross-border) (5=very easy)Current-account restrictions (5=very low)Share of main trading partners in total trade (%)Movement of capital and finance (Business leader weighting: 21%)FDI stocks (in and out, % GDP)Portfolio capital flows (in and out, % GDP)Government policy towards foreign investment (5=very encouraging)Expropriation risk (5=non-existent)Investment protection schemes (5=very good)Domestic favoritism by government (5=no favoritism)State control/ownership (5=no state interference)40.0%10.0%10.0%10.0%10.0%20.0%50.0%8.3%8.3%8.3%8.3%8.3%8.3%National accountsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsNational accountsIMF International Financial statisticsIMF International Financial statisticsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsScored on 1-5 scale by EIU analystsExchange of technology and ideas (Business leader weighting: 21%)Trade in ICT goods (exports and imports) as % of GDPTrade in creative goods and services (exports and imports) as % of GDPBroadband subscriptions (per 100 people)Internet subscribers (per 100 people)30.0%30.0%20.0%20.0%UNCTADUNCTADInternational Telecommunications UnionInternational Telecommunications UnionMovement of labor (Business leader weighting: 19%)Net migration rate (per 1,000 population)Current transfers (in and out, as % GDP)Hiring of foreign nationals (5=very easy)Cultural integration (Business leader weighting: 17%)Tourism (in and out, per 1,000 population)International total fixed telephone traffic (minutes) per capitaOpenness of national culture to foreign influence (5=very open)40.0%40.0%20.0%33.3%33.3%33.3%United NationsIMF International Financial StatisticsScored on 1 - 5 scale by EIU analystsWorld Tourism OrganizationInternational Telecommunications UnionScored on 1-5 scale by EIU analysts34 Growing Beyond

Related Ernst & Young thought leadershipGrowing BeyondGrowing BeyondGrowing BeyondBeyond Asia:developed-markets perspectivesMeeting the challenge ofchanging global competitionGrowing painsCompanies in rapid-growth marketsface talent challenges as they expandParadigm shiftBuilding a new talent management modelto boost growthBeyond Asia: developed-marketsperspectivesThis report examines how companiesbased in developed markets can explorethe implications of Asian overseasexpansion, coping with changing globalcompetition and maximizing newopportunities.Growing Beyond: how high performersare accelerating aheadThe shocks of 2007 and 2008heralded one of the longest periodsof economic retrenchment in history,but high performers have learned tomaster the new economy. This reportshows you how.Growing pains: companies in rapidgrowthmarkets face talent challengesas they expandGetting the talent equation rightis proving exceptionally difficult ascompanies globalize. Learn about fourmajor talent-related challenges that thisreport identifies.Paradigm shift: building a new talentmanagement model to boost growthBusinesses are on the brink of atalent crisis. Only a major shift inthinking can help tackle the talentshortfall. This report offers some keyrecommendations.Growing BeyondGrowing BeyondGrowth, actuallyErnst & Young’s 2012 European attractiveness surveyGrowing BeyondAfrica by numbersAssessing market attractiveness in AfricaGrowing BeyondBeyond AsiaStrategies to support the quest for growthBeyond AsiaNew patterns of tradeBeyond Asia: strategies to support thequest for growthThis report explores the practical issues— and ways to resolve them — that bothregional and global Asian companies willneed to consider in order to succeed inthe next few years.Beyond Asia: new patterns of tradeThis report examines how trade in andbetween the nine largest or most rapidlygrowing economies in Asia-Pacific willaffect global business. It presents avariety of scenarios.Growth, actually: Ernst & Young’s2012 European attractivenesssurveyThe Eurozone crisis continues, butEurope’s fundamental strengthsendure. Western Europe rankssecond only to China as a foreigninvestment destination. Read thisreport to learn why.Africa by numbers: assessing marketattractivenessForeign direct investment in Africa hasincreased significantly over the lastdecade, and this trend is set to continue.Our latest report sets out the risk profileof 17 of the most popular countries forinvestment in Africa.Looking beyond the obvious: globalization and new opportunities for growth35

Growing Beyond Borders (GBB)Ernst & Young’s Growing Beyond Borders (GBB)is an interactive tool that helps you navigate thechallenges and opportunities in doing businessacross the globe. During a GBB session you’llexplore publicly available data depicted in heatmaps, competitive footprint views and comparisontables, both regionally and globally, to help youmake better business decisions.Your GBB session will help you:• Identify and analyze risks tailored to yourindividual priorities and displayed visually to giveyou instant insights• Seize opportunities for profitable growth basedon a clear overview of your competitors’ currentposition and gaps in the market• Accelerate your decision-making, freeing up timeto focus on implementing your strategy36 Growing Beyond

Looking beyond the obvious: globalization and new opportunities for growth37