Globalization has been a powerful force in shaping modern human history.
The world economy has become increasingly connected and interdependent over recent decades, and conventional wisdom suggests that this will only continue in the years ahead.
But while it’s tempting to extrapolate the past effects of globalization into the future, such a leap may also be a mistake. That’s because there is growing evidence that globalization itself is quietly transforming – and how it ultimately evolves may be markedly different from what most business leaders might expect.
How Globalization is Changing
Today’s infographic highlights the most recent research about globalization from the McKinsey Global Institute, the business and economics research arm of McKinsey & Company.
Below are five major shifts that have gone mostly unnoticed, as well as the countries and companies that could benefit:
The findings of the report show that globalization is not static or constant, and that structural changes in the nature of globalization have been occurring in the background over the last decade or so.
>> View the Complete Report Here:
“Globalization in transition: The future of trade and value chains”
The impact that these shifts could have on the global economy is substantial: international trade already adds up to $22.4 trillion each year, or about 28% of global GDP. Even a minor change in this paradigm could affect the list of countries, corporations, and workers that stand to benefit.
The 5 Ways Globalization is Changing
The report looks into 23 different industry value chains in 43 different countries, representing 96% of global trade.
From that comprehensive data, five major structural shifts have been identified:
1. A smaller share of goods is traded across borders
Trade is still growing in absolute terms, but a smaller share of the physical goods made worldwide is now being traded. More specifically, during the span of 2007 to 2017, gross exports as a percentage of gross output decreased from 28.1% to 22.5% globally.
2. Services trade is growing 60% faster than goods trade
When we think of trade, we often focus on the trade of physical goods (i.e. autos, aerospace, oil). However, services are becoming increasingly important to the global economy – and if accounted for properly, it’s possible that the value of services is closer to $13.4 trillion, which is higher than the total goods trade.
3. Labor-cost arbitrage has become less important
It’s a common perception that trade flows are driven by companies searching for low-cost labor. However, in value chains today, only 18% of the goods trade is based strictly on labor-cost arbitrage.
4. R&D and innovation are becoming increasingly important
Companies are spending more on R&D and intangible assets such as brands, software, and IP as a percentage of overall revenue. This spending has increased from 5.4% to 13.1% of revenue over the period of 2000-2017.
5. Trade is becoming more concentrated within regions
The geography of global demand is changing as emerging markets consume a higher percentage of total goods. Since 2013, intraregional trade has increased by 2.7 percentage points – a reverse from the longstanding trend.
The mix of countries, companies, and workers that stand to gain in the next era is changing.
– McKinsey Global Institute
Why These Changes Matter
What types of countries are likely to benefit from these shifts, and which will face headwinds?
|Type of economy||Possible opportunities or challenges|
|Advanced economies||Strengths in innovation, services, and highly skilled talent put advanced economies in a strategic position to benefit from changes in globalization|
|Developing economies with close proximity to large consumer markets||As production moves closer to consumers, developing economies in close proximity can take advantage|
|Developing economies that are less connected||The window is narrowing for low-income countries to use labor-intensive exports as a development strategy|
Policy makers and business leaders must understand how the trade landscape is shifting so they can prepare for globalization’s next chapter and the opportunities and challenges it will present.
An Investing Megatrend: How Emerging Wealth is Shaping the Future
Emerging markets are ascending on the global stage and wielding more economic power—and it’s drastically altering the investment landscape.
Globalisation is a rising tide that lifts all boats.
In an increasingly connected world, countries are engaging with global markets more than ever before. As a result, global wealth is shifting towards emerging markets. This megatrend—a global trend with sustained impacts—is profoundly influencing everyday life, society, and business.
Shifting Economic Power
Today’s infographic from iShares by BlackRock explains how emerging markets are classified, along with which countries are growing the fastest—and how investors can follow the money.
What Is An Emerging Market?
Every economy goes through five distinct stages of growth:
- Traditional Society: Based on primary industries, such as subsistence farming.
- The Pre-Conditions of Take-off: Spread of technology creates a more productive agricultural economy.
- Take-off: Industrialisation begins, and technological breakthroughs occur.
- Drive to Maturity: More complex manufacturing, and large-scale infrastructure investment takes place.
- Age of Mass Consumption: Urban society and a tertiary industry dominate, as disposable income grows.
Emerging markets fall into the transitory stages between ‘Take-off’ and ‘Drive to maturity’ as their economies modernise. Today, such countries offer lots of promise, but also come with a range of challenges:
- Pro: Greater return potential, growing middle class, increasing consumption
- Risk: Political instability, lack of infrastructure, lack of market access
Between 2000–2018, emerging markets’ share of global wealth has more than doubled from 10% to 24%. China is a major player in this transformation.
China’s Economic Might
China’s impressive trajectory from agricultural economy to global superpower cannot be ignored. The nation is on track to overtake the U.S. in terms of gross domestic product (GDP, nominal) by the year 2030.
|Year||🇨🇳 China GDP||🇺🇸 U.S. GDP|
China’s enormous growth has a ripple effect on its GDP composition. A more affluent middle class is buying higher-priced discretionary goods—such as cars and electronics—boosting the country’s domestic consumption.
Investors must keep an eye out for other emerging markets that are emulating China’s example.
One Piece Of the Puzzle
China is just one case study—several other economies are also making strides on the world stage. Each country brings unique advantages, but also barriers to overcome.
|Country||Real GDP Growth (2019E)||Strengths||Weaknesses|
|🇮🇳 India||7.4%||✔ Rapidly growing economy|
✔ Vast working-age population
|✘ Red tape
✘ Lack of infrastructure
|🇨🇳 China||6.2%||✔ Good infrastructure |
✔ High R&D spending
|✘ Ageing population
✘ High debt
|🇮🇩 Indonesia||5.1%||✔ Cheap labour|
✔ Diversifying economy
|✘Wide income gap
✘ Lack of infrastructure
|🇲🇽 Mexico||2.5%||✔ Integrated with global economy|
✔ Cheap and qualified labour
|✘ Political unrest
✘ Reliant on U.S. ties
|🇧🇷 Brazil||2.4%||✔ Diversifying economy|
✔ Strategic location
|✘ High production costs
|🇳🇬 Nigeria||2.3%||✔ High FDI|
✔ Diversifying economy
|✘ Political unrest
✘ Lack of infrastructure
|🇷🇺 Russia||1.8%||✔ Natural resources|
✔ Educated workforce
|✘ Political unrest
✘ Lack of FDI
|🇹🇷 Turkey||0.4%||✔ Cheap labour|
✔ Strategic location
|✘ Political unrest
✘ Red tape
Source: Global Finance Magazine
With these major emerging markets in mind, how can investors tap into the global wealth shift?
Where Are the Opportunities?
There are several avenues for an investor to play into this megatrend: structural solutions, consumer goods, and international investment.
Emerging markets are increasingly gaining access to technology. Growth in connectivity is closely linked with improved productivity, and many countries are ripe for a surge in online users.
However, much can still be done to speed up technological adoption, such as boosting 3G/4G network volume and coverage, and lowering the cost of data and smartphones to be more economical.
By helping solve some of these structural constraints through technological innovation, investors can tap into the economic growth of emerging markets.
As disposable income increases, a sizeable middle class will seek out products that elevate the quality of life. In India, domestic consumption is estimated to hit $6 trillion by 2023—four times its 2018 level.
The region’s spending will likely be propelled by higher-priced goods, as well as a wider variety of choices across food, transport, and fitness categories.
Global brands that plan to expand into emerging markets, or companies with a proven track record in these areas, are potential winners for investment.
Last but not least, investors can identify local winners in emerging wealth markets, through active or passive investing.
An active investment strategy would be to directly buy into individual company stocks, listed on a country’s stock exchange. Meanwhile, a passive investing strategy would be to seek out exchange-traded funds (ETFs) covering specific markets, and/or sectors within emerging markets. Many of these are also listed on major exchanges.
Diversifying either or both strategies across two or more countries can help mitigate risk. Investors can also choose index funds that broadly encompass all emerging markets.
As countries climb the economic ladder, the emerging wealth shift continues to gain momentum. By staying attuned to these macro changes, investors may unlock long-term growth from emerging markets.
An Investing Megatrend: How Demographics and Social Changes are Shaping the Future
As societies evolve, demographics and social change also evolve, reshaping the world and resulting in new investment opportunities.
For millennia, people have found support and community through defining factors, ranging from age and race to income and education levels.
However, these characteristics are not static—and drastic demographic changes are starting to create powerful ripple effects in the 21st-century economy.
The Impact of Demographics and Social Changes
Today’s infographic from BlackRock delves into the significant impact that demographics and human rights movements have on global markets. Of the five megatrends explored in this series, demographics are predicted to have the farthest-reaching impact.
What are Demographics?
Demographics are the characteristics of populations that change over time. These include:
- Birth and death rates
- Education levels
- Income levels
- Average family size
As a result, major demographic trends offer both unique challenges and opportunities for businesses, societies, and investors.
The Biggest Shifts
What are the biggest shifts in demographics that the world faces today?
1. Aging Population
The global population is aging rapidly─as fertility rates decline worldwide, those in the 65 years and older age bracket are steadily increasing in numbers.
2. Future Workforce
As the population continues to age, fewer people are available to sustain the working population. For the first time in recorded history, the number of people in developed nations between 20 to 64 years old is expected to shrink in 2020.
3. Immigration Increase
Immigration has been steadily increasing since the turn of the 21st century. Primary migration factors range from the serious (political turmoil) to the hopeful (better job offers).
In particular, areas such as Asia and Europe see much higher movement than others, causing a strain on resources in those regions.
4. Consumer Spending
A steadily aging population is slowly shifting the purchasing power to older households. In Japan, for example, half of all current household spending comes from people over 60, compared with 13% of spending from people under 40.
How Does Social Change Play a Part?
Demographics are the characteristics of people that change over time, whereas social change is the evolution of people’s behaviours or cultural norms over time.
Strong social change movements have often been influenced by demographic changes, including:
- Ending poverty and hunger
- Expanding healthcare in developing nations
- Reforming education quality and accessibility
- Championing gender and racial equality
Examples of major human rights movements include creating stronger environmental policies and securing women’s right to vote.
Opportunities for Investors
These changes pose some exciting opportunities for investors, both now and in the near future.
Global healthcare spending is predicted to grow from US$7.7 trillion in 2017 to over US$10 trillion in 2022. To meet the demands of age-related illnesses, companies will need solutions that offer quality care at much lower costs—for patients and an overburdened healthcare system.
With a declining working population, adapting a workforce’s skill set may be the key to keeping economies afloat.
As automation becomes commonplace, workers will need to develop more advanced skills to stay competitive. Newer economies will need to ensure that automation supports a shrinking workforce, without restricting job and wage growth.
By 2100, over 50% of the world will be living in either India, China, or Africa.
Global policy leadership and sales of education goods and services will be shaped less by issues and needs in the U.S., and more by the issues and needs of Africa, South Asia, and China.
—Shannon May, CoFounder of Bridge International Academies
In the future, education and training in these growing regions will be based on skills relevant to the modern workforce and shifting global demographics.
Spending power will continue to migrate to older populations. Global consumer spending from those over 60 years is predicted to nearly double, from US$8 trillion in 2010 to a whopping US$15 trillion in 2020.
Demographics and social changes are the undercurrents of many economic, cultural, and business decisions. They underpin all other megatrends and will significantly influence how the world evolves.
As demographics shift over time, we will see the priorities of economies shift as well─and these changes will continue to offer new opportunities for investors to make an impact for the future of a global society.
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