The Changing Face of Globalization

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Each year, the World Economic Forum ranks countries in the Global Competitiveness Index — a rough gauge of which nations are best positioned to squeeze efficiency out of their businesses and to attract companies and investment from overseas. But if you look beyond the index and examine what countries are actually doing to earn their rankings, the bigger take-away is that globalization, inextricably linked to economic development, is very different from what it was only a few years ago.

The globalization that we intuitively know — call centers in India, toy factories in China — is just one piece of an increasingly competitive landscape. As manual work becomes more automated and trade barriers fall, companies chase knowledge workers and efficiency just as much as they do cheap labor and access to new markets. In this new calculus, it is often surprising who comes out ahead. According to the Business Competitive Index, the Global Competitive Index's sibling measure developed by Harvard economist Michael Porter, the countries with the lowest wages relative to competitiveness — that is, the best values as investment locations — are Taiwan, Hong Kong and India, followed by Chile, Singapore, the Czech Republic and the US.

And so we are left with a world that even just five years ago would have seemed topsy turvy: an Indian software firm that employs 500 people in Puerto Rico, a Chinese auto-parts maker with R&D centers in Detroit and Ontario, Calif. If you're a region trying to hang on to business, geography offers little protection anymore, especially as free-trade zones proliferate in countries from Dubai to Mauritius, and burgeoning heavyweights like Turkey take out full-page ads in US magazines boasting about their university graduates and gains in GDP. "Your competitors are in your backyard now in a way they never were before," says Alec Hansen, president of the Economic Competitiveness Group, an outfit that advises governments, companies and development organizations. "The world has gotten a lot scarier."

The best way for a region to overcome those fears and win out is to figure out how its talents best fit into the global supply chain, says Eduardo Tugendhat, president and CEO of Carana Corporation, a company which designs economic development programs. In Macedonia, a land-locked country with a small domestic market, Tuhendhat's firm suggested harnessing the nation's long tradition of metal working and pushing into the machining and automotive parts sectors in order to take advantage of the growing auto industry in neighboring Slovakia and Romania — two countries that have become a hot spot because of their inexpensive labor and access to the markets of the European Union.

But with transportation costs continuing to plummet and markets becoming freer, there are many more places for companies to set up shop, and traditional advantages such as cheap labor or a lack of tariffs mean less and less in many industries. Multinationals are increasingly opening major operations in second- and third-tier cities — GlaxoSmithKline in Posnan, Poland, Google in Belo Horizonte, Brazil — places that plenty of people have never even heard of. "Companies are adopting an all-shore strategy," says Dennis Donovan, principal of Wadley Donovan Gutshaw Consulting, which helps companies decide where to locate.

Searching for an edge, many regions are applying the concept of clustering with renewed zeal. The idea of focusing a geographic area on a particular industry in order to achieve economies of scale has been kicking around since at least 1890, when the economist Alfred Marshall coined the term "industrial district" to refer to neighborhoods that contained both factories and all their workers. In the 1990s, Harvard's Porter started using the word "cluster" to get at the usefulness of companies in close proximity sharing infrastructure, ideas and employees — like high performance cars in Germany. Some predicted that a globalized company's ability to cherry pick regions would kill the notion of clusters, but countries are trying to establish industrial niches for themselves more than ever.

Turkey established a textiles cluster to try to fend off lower-cost rivals. Jordan has positioned itself a regional center for medical services. Singapore is making a play for biotechnology. Of course, there is always a risk in spending massive amounts of focus and money on one sector since so many factors have to align for economic development to work. "Is Singapore really where the top scientists in the world want to be working?" asks Carana Corp.'s Tugendhat. "Just because you build a great campus doesn't mean they're going to come to it."

When clustering does work, though, it's gold. Consider Yokkaichi, Japan, a city of 300,000 people that is the premier place to make NAND flash memory, which is used in cell phones and MP3 players. Sandisk, a Milpitas, Calif.-based company that designs, manufactures and sells memory cards, moved its manufacturing base there from Manassas, Virginia a few years ago, partly to be closer to Toshiba, a company it partners with. Yokkaichi already had the infrastructure for both manufacturing and for the large R&D outfit that goes along with making memory cards. "By having it all in close proximity, it reduces overhead costs," says Sandisk president and COO Sanjay Mehrotra, "and that's the name of the game, to be able to produce product at the lowest possible cost." (Notice that had nothing to do with cheap labor.)

Now Sandisk is building a new factory in Yokkaichi to produce 40% more wafers a month, which will significantly increase the $1 to $1.5 billion the?company already annually invests to keep its fabs on the cutting edge. And that leads to another major reason Sandisk is in Japan: the country's?advanced capital structure and low interest rates let the company borrow money cheaply. Clustering may work well, but other aspects of a country's competitiveness — like its macroeconomic fundamentals — still matter. "The bottom line," says the Economic Competitiveness Group's Hansen, "is you have to do everything right."

In today's economy, a big part of that everything is being able to produce a desirable workforce. "If we're hearing a mantra today, it's workforce — finding the qualified people," says Rob DeRocker, executive vice president of Development Counsellors International, a firm that helps regions position themselves. The global chase for talent is just as true for manufacturing workers — you have to find skilled labor if all your machines are computer-controlled — as it is for PhD scientists.

Microsoft knows a thing or two about the latter. The Seattle computer giant has six high-end research centers — three in the US, one in the UK (abutting the Cambridge University computer science department), and two newer outposts, in Beijing and Bangalore. The strategy is partly to go where the world's great universities are: the Beijing lab is placed squarely between Beijing and Tsinghua universities, the so-called Harvard and MIT of China. But part of it is also a recognition that as more countries move from developing to developed, with the amenities and job opportunities that used to only be found elsewhere, the talent in many cases would rather stay home. "We realize that increasingly we will not be successful in recruiting the best people in the world and getting them to come to and stay in the US," says Craig Mundie, Microsoft's chief research and strategy officer.

Of course, the world doesn't completely change over night. Many of the classic reasons companies set up shop in far-flung locales, like gaining a foothold in a new market, are still in the mix. Nissan, for instance, is among the carmakers now building a plant in Russia, a country flush with money from the skyrocketing price of oil. In 2003, Nissan sold 8,000 cars in Russia, a number that jumped to 24,000 in 2004, and to 50,000 in 2005. "We started thinking, if this isn't a fluke, we need to think about localization," says Dominique Thormann, Nissan's senior vice president for administration and finance in North America — both because of how expensive cars are to ship and because of the 25% tariff charged at the border.

That's a very traditional way for a company to think about reaching overseas. But even the auto industry isn't immune from the evolution of globalization. These days, it's not uncommon to source auto parts for a particular car from around the world: cast iron from India, seat fabric from Tunisia. The competition continues to deepen.