Friday, May 7, 2010

Five forces reshaping global economy

The core drivers of globalization are alive and well, but executives are still grappling with how to seize the opportunities of an interlinked world economy.

McKinsey Quarterly - Strategy

MAY 2010

Strategy, Globalization article, Five forces reshaping global economy survey

An ongoing shift in global economic activity from developed to developing economies, accompanied by growth in the number of consumers in emerging markets, are the global developments that executives around the world view as the most important for business and the most positive for their own companies’ profits over the next five years. Executives also identify two other critical positive aspects of globalization: technologies that enable a free flow of information worldwide and, increasingly, global labor markets. These four trends, of the ten we asked about, also are the ones that the biggest share of respondents—around half—say their companies have taken active steps to address.

In this sixth annual survey asking executives about the forces shaping the world economy,1 there is little change in how respondents view the importance of global trends compared with previous years—either for business in general or for their own companies’ profits (Exhibit 1). … Continued faith in the positive effects of globalization combined with a move away from short-term planning likely reflects rebounding optimism about global economic prospects and is consistent with the findings of other McKinsey surveys on the economy.2

In addition to our annual questions on individual global trends, this year’s survey explores for the first time five interconnected themes that highlight the opportunities and challenges faced by global economic integration itself and by companies seeking to profit from it: growth in emerging markets; labor productivity and talent management; the global flow of goods, information, and capital; natural-resource management; and the increasing role of governments.

The findings show that the global economy faces significant challenges as it continues to integrate. For example, the majority of respondents … expect increased overall volatility to become a permanent feature of the global economy, and another [one quarter] see sharply higher levels of volatility that will undermine the economy’s robustness. In addition, high levels of public debt are a headache in Europe and North America, where most executives fear the debt will have a negative impact on GDP growth.

There are specific corporate challenges too. Half of the respondents are only somewhat optimistic they will be able to find the right talent to meet their companies’ strategic goals. Likewise, only half of the executives reported that their companies have taken steps to address the shift in global economic activity from developed to developing economies—the force that is reshaping the global economy more than any other.

Growth and risk management in emerging markets

Emerging markets, with populations that are young and growing, will increasingly become not only the focus of rising consumption and production but also major providers of capital, talent, and innovation. This will make it imperative for most companies to succeed in emerging markets. …

To capture growth from emerging markets, the actions most often taken … are building a local presence, developing partnerships or joint ventures with local companies, recruiting talent from emerging markets, and developing new business models (Exhibit 2). …[Large] and public companies significantly outpace small and private ones in pursuing actions to capture emerging-market growth.

On risks faced by their companies in emerging markets, executives cite breach of intellectual property …, volatility of currency or exchange rates …, geopolitical instability …, and lower safety and quality standards … as the top four. …

Labor productivity and talent management

Low birth rates and graying workforces in most developed economies will make it hard for them to achieve steady growth unless they continue to make sizable gains in labor productivity. …

Nonetheless, developed and developing economies alike must become more innovative at sourcing talented employees, whether by tapping global labor markets or making better use of older workers. …

The greatest projected talent shortfalls are in three functions—management, R&D, and strategy—with significant variations between executives in different regions (Exhibit 3). Interestingly, executives in China are much more concerned about a shortage of management talent than they are about R&D specialists. For India, it is the reverse.

Companies are shifting their strategic planning from crisis mode to a more balanced consideration of short-term profitability and long-term strategic issues: one-third now focus equally on the short and long terms, compared with one-fifth in 2009.

When indicating where their companies will find the talent they need, executives most often cite talent from emerging markets to work there …, new talent entering developed labor markets …, and talent from developed markets deployed to emerging markets … . North American companies, … are counting more than all others on sourcing talent in developed economies … .This is consistent with the lower number of actions North American companies are taking to capture emerging-market growth.

Global flows of goods, information, and capital

Executives are generally optimistic that the relatively free flow of goods and capital … will survive the financial crisis and the economic downturn. However, few see much further progress occurring in the next five years, …

The free global flow of information has already resulted in radical pricing transparency and new networks of engaged consumers, and this probably is only the beginning. Disruptive changes in consumer behavior could have great impact on business over the next five years. Executives expect that the most powerful effects on their companies will be increased innovation, greater consumer awareness and knowledge, and increased product and service customization (Exhibit 4).

Natural-resource management

Executives’ concerns about the impact that increasing constraints on the supply or usage of natural resources will have on their companies’ profits appear to be subsiding despite the prominence of these issues in the public debate today. …

Energy and manufacturing continue to be outliers. Forty-five percent of manufacturing-sector executives expect negative effects on profits. Among energy executives, few are indifferent: 34 percent expect a negative impact, but a much larger share—59 percent—see a positive impact on profits.

… When executives select the actions their companies are taking to ensure access to the resources they need, the most common response is that they are conserving energy to reduce the need for natural resources (Exhibit 5).

The increasing role of governments

Executives in Europe and North America are haunted by the perception of crippling public-debt levels… In contrast, 45 percent of respondents in China and 24 percent in India expect that the level of public debt will have a “positive” impact or “no impact” in their home markets.

In a pattern consistent across nearly all regions, executives view government’s role in their companies’ home markets over the next five years somewhat differently … For instance, 64 percent of all respondents characterize the Chinese government as the principal actor in that country’s economy (Exhibit 6), compared with only 49 percent of respondents based in China.

Respondents were also asked whether government actions in the previous 12 to 18 months have increased the likelihood of companies to invest in certain countries. China scored highest, …. Smaller groups of respondents say the same for India …, Brazil …, and the United States … . Russia fares the worst, with only 9 percent saying their companies are “more likely” to invest there; …

Finally, only between 20 and 30 percent of executives say multilateral cooperation (governmental and nongovernmental) will be “very” or “extremely effective” in addressing the following big global issues: climate change, financial crises, free trade, nuclear proliferation, and terrorism. Respondents in North America hold out the dimmest hopes for success. Executives in emerging markets are much more optimistic about multilateral institutions’ ability to achieve progress on each of these issues.

Looking ahead

  • Capturing the opportunities offered by growth in emerging markets … will require retooling existing business models and reconfiguring companies’ price/value equations.
  • Managing the risks of that trend also will be crucial: respondents express a great deal of trepidation about geopolitical instability and market volatility in emerging markets, …
  • Technology will continue to materially reshape consumer awareness, choice, and interactivity models, and companies should be striving to tap the power of technology to improve their competitive advantage.
About the Authors

The contributors to the development and analysis of this survey include RenĂ©e Dye, a consultant in McKinsey’s Atlanta office, and Elizabeth Stephenson, a principal in the Chicago office.

The authors would like to acknowledge the contributions of Ian Bremmer, president of Eurasia Group, to this analysis.


1 The online survey, in the field in March 2010, generated responses from 1,416 executives around the world, representing the full range of industries, regions, functional specialties, and seniority.

2 See, for example, “Economic Conditions Snapshot, April 2010: McKinsey Global Survey results,”, April 2010.