The decades marking the end of this century clearly represent a "mixed bag." Some nations, particularly in East Asia but also elsewhere, like Chile, enhanced their global business linkages and gained from rapid economic growth. However, other nations did not fare so well: "Economic decline or stagnation ...affected 100 countries, reducing the incomes of 1.6 billion people -- ... more than a quarter of the world's population." A recent World Bank book summarizes both the overall progress and its unequal global spread:
Developing countries as a group have participated extensively in the acceleration of global integration, although some have done much better than others...there are wide disparities in global economic integration across developing countries....Many developing countries became less integrated with the world economy over the past decade, and a large divide separates the least from the most integrated....Countries with the highest levels of integration tended to exhibit the fastest output growth, as did countries that made the greatest advances in integration.
The great challenge of the 21st century is to establish a more truly global international business network, one that can foster a much more comprehensive spread of economic progress than that which the world currently enjoys. The contrast between nations that rapidly grew their economies and trade linkages and those more numerous nations that failed to achieve this progress is discussed in the United Nations Development Program's Human Development Report (HDR). The 1996 HDR stresses the point that inequality is still the name of the game: "The world has become more polarized, and the gulf between the poor and rich of the world has widened even further." The HDR goes on to detail this widening inequality, stating that "the poorest 20% of the world's people saw their share of global income decline from 2.3% to 1.4% in the past thirty years. Meanwhile, the share of the richest 20% rose from 70% to 85%. That doubled the ratio of the shares of the richest and the poorest -- from 30:1 to 61:1."
That the richest 20% of the world's people amassed more than 80% of global income is a clear example of the "80/20 rule." This "rule" is well known to apply in many diverse situations. For example, teachers know that 20% of their students will be responsible for 80% of their headaches. Similarly, in business, it is often the case that 20% of customers render 80% of the complaints, special requests, and the like. On the other hand, wise executives and managers know that a special 20% of their customers typically generate more than 80% of their companies' profits. We will use the 80/20 rule later in our analysis of the current global economy.
THE WORLD ACCORDING TO TRADE
Let us begin our analysis by looking at the extent of international business as the 20th century draws to a close. A new perspective on the limited nature of the international trading network is provided by Figure 1�1. After many years of exhorting my students to buy an atlas and gain a focus on world geography, I now confuse them by offering this as my map of the world -- one with a very different scale from that of a typical atlas. Most atlases attribute power to land mass, using geographic area as the scaling factor. My map is entitled "The World According to Trade" because it scales the world using international trade as the crucial determinant.
How do we measure international trade for this map? We cannot use trade balance as the scaling factor, because some nations, including the United States, run massive trade deficits, and therefore have negative trade balances. It would be very difficult to show a negative number as a scaling factor. Alternatively, exports (what a country sells internationally) or imports (what it buys internationally) could be used as the scaling factor. But exports or imports by themselves would introduce a bias. For example, if we used exports, we would be favoring nations that rely heavily on exports, such as Japan, and be doing an injustice to nations, such as the United States, that are massive importers. More importantly, using exports or imports alone would show only half the picture of international trade, as a nation is participating in international trade if it is buying or selling across national borders. Thus, the most appropriate measure is total trade, calculated as a nation's exports plus imports.
What does this new perspective map show us? First, Western Europe is still the center of international business, as it is the largest single bloc in a global trading sense. This dominance is due to intra-European trade, as well as the tremendous trade Europe does with other regions of the world, and has done since the glory days of the Dutch East Indies Company. Note that the legacy of the earlier dominance of that company continues into the modern era, as the Netherlands appears much larger on this map than it does on a geographical map.
Second, although Europe is the largest regional trade bloc, the United States is the largest nation when measured by total trade. This surprises many people, who do not often think of the United States as very savvy about international business. But the United States has doubled its exports in less than a decade, and opened up to the world economy in dramatic ways, as was highlighted in this book's introduction. The fact remains, however, that the major reason we are the world's largest trading nation is the empirical reality that we import far more than any other nation. Still, one should not miss the big picture: U.S. exports are booming, and have been booming since the dollar started to decline from its peak values of early 1985, making this country the world's largest exporter as well as largest importer.
The incredible thing is not how big the United States is in this graph, but rather, how big nations such as Singapore, Hong Kong, Switzerland, Belgium, and the Netherlands appear. On an ordinary map, scaled by land mass, these nations would be mere dots. In this trading perspective, we see that these are major nations in the international business network. Singapore, of course, is an extreme case: its population is barely more than 1% of the United States, but it engages in massive trade. Obviously, Singapore's total trade is less than ours, but not all that much less, for a nation that has such a small land and population base.
The third thing to notice about Figure 1�1 is that there are three major focal points, or massive blocs, in the world trading picture. First, as noted above, Western Europe, at the center of the picture, is an immense trading bloc. Second, the United States is not only the largest trading nation, but is also part of a North American bloc that is noteworthy in this new global perspective. Finally, Japan anchors an East Asian bloc which is remarkably significant in this picture. Figure 1�1 illustrates the often-cited idea that international business essentially comprises a triad of three dominant focal points or regions: Western Europe, North America, and East Asia.
The fourth significant feature of this graph is a key to much of this book. Ever since the Cold War ended with Gorbachev disbanding the Soviet Union, commentators have talked about the end of the East-West divide. However, this new trade perspective makes it apparent that a major divide often talked about during the 1970s still exists. This is the divide between the "haves" in the Northern Hemisphere and the "have nots" in many parts of the Southern Hemisphere. This graph strikingly displays how much of the action in an international business sense takes place among the three blocs of the triad, and thus in the Northern Hemisphere. The contrast between this trade map and a hypothetical map of the "World According to Population" is compelling. A map that scaled the world by population would of course show China and India as the two largest nations, with several other nations in Africa, South America, the Mideast, and South Asia attaining huge dimensions. Thus, in a population sense, the major players are clearly south of the traditional triad.
We truly do have a North-South divide. Roughly 80% of the action, whether we define action in terms of total income, trade, or wealth, resides in the nations of the triad, and thus, in the Northern Hemisphere, north of the Tropic of Cancer. By contrast, most of the world's people reside in nations near or south of the Tropic of Cancer, often in the Southern Hemisphere or equatorial regions. Notably, the areas in which population is expected to explode are these same equatorial or southern nations, as we will see in Chapter 3. This picture is key to understanding the limited extent of international business as the 20th century draws to a close.
In his acclaimed book, Borderless World, the brilliant Japanese consultant and erstwhile politician, Kenichi Ohmae, talks about business opportunities in a world where national borders have become less important. Capital, goods, and people flow with low cost and rapid speed around the world. Although Ohmae's vision of a borderless world is enticing, a critical reader will notice he only talks about nations in the traditional triad. Hardly a mention is made in the entire book of Africa or the teeming populations of South and Southwest Asia. The world of capital and labor mobility may be borderless, but it exists only among a handful of the very richest nations. Paul Kennedy, in his prescient book, Preparing for the Twenty-first Century, more completely develops this comment on Ohmae's vision.
One of my main goals in this book is to put the 80% of the world's people located outside the wealthy traditional triad back in the vision of a borderless world. Through their own actions and policies, as well as a win-win strategy on the part of global business leaders, these people can become very much a part of the international business network as we move into the 21st century. To continue to ignore them is not only a human tragedy for these populous but poor nations, but also a tremendous lost opportunity for businesses that hope to expand. Global expansion is indeed the catchphrase of the 1990s. However, very few firms think about regions such as Africa and South Asia when they use the term global.
THE NEW FIRST, SECOND, AND THIRD WORLDS
It would be sheer madness to try in this book to provide detailed numerical analyses of every nation, or even, for that matter, of the almost 200 that participated in the 1996 Centennial Olympic Games in Atlanta. Thus, I created a "master spreadsheet" to help us analyze the international business environment in an efficient manner. I chose a subset of the world's countries, attempting to capture the great majority of global production, trade, and population. I also included those nations deemed most exciting for future business opportunity. Thus, we will examine more closely about one-fourth of the world's nations, grouped into three categories, which roughly translate to a new vision of the First World, the Second World, and the Third World.
The First World is captured by a construct very similar to the traditional triad of Western Europe, East Asia, and North America. I term our new First World the ITN. I first used this term to signify industrialized trading nations -- those nations that are prominent in total trade, as portrayed in Figure 1�1. However, these nations are also distinguished by being linked in a global information technology network. Thus, the ITN is our modern-day notion of the traditional triad, comprising 26 nations that conduct the bulk of world trade and contain the vast majority of the world's information technology resources.
Seventeen of the twenty-six ITN nations are in Europe: the current fifteen members of the European Union, as well as Switzerland and Norway. These two wealthy nations opted in the mid-1990s not to join the Union, but do maintain very favorable trade relations with the Union through their membership in the European Free Trade Area (EFTA).
The North American part of our ITN construct comprises only two nations: the United States and Canada. Although Mexico is in the North American Free Trade Agreement (NAFTA), it is not included in our ITN as yet, because it is at a much lower level of economic development than its two NAFTA partners.
Finally, the East Asian/Pacific component of the ITN is made up of seven nations. Three are clearly wealthy: Japan, New Zealand, and Australia. Note that Australia and New Zealand are two exceptions to the general rule that Southern Hemisphere nations are poor. The other four nations are the "little dragons" or "little tigers" of East Asia, the aptly termed newly industrialized countries (NICS). These nations are South Korea, Taiwan (which calls itself the Republic of China, but which the mainland Chinese call the Province of Taipei), Singapore, and Hong Kong. Hong Kong was politically subsumed into the Peoples' Republic of China in 1997, but it continues as a separate economic system and maintains its own economic accounts, so we count it separately here. Although small in land area and fairly small in population, we saw earlier that they are major influences in "The World According to Trade."
Hence, in total, the ITN, the world's economic first tier, is made up of 26 nations: 17 in Europe, two in North America, and seven in East Asia or the Pacific. In the days of the Cold War, people would think of something very similar to our ITN as the First World. The Soviet Union and its allied communist nations would be considered the Second World, and the poor, developing countries as the Third World. The end of the Cold War marked the collapse of the traditional Second World, which declined as an economic bloc as the Soviet Union disbanded its empire.
Notably, the Soviet Union was falling to Third World status even before it broke apart. Indeed, Paul Kennedy, in Preparing for the Twenty-first Century (p. 235), summarized the situation facing the Soviet empire as follows: "Overall, the economy and society were showing ever more signs of joining the so-called Third World than of catching up with the First." The U.S.S.R. was increasingly falling behind the industrialized capitalist nations; thus, Gorbachev chose to disband the failing communist economic system in the hopes of creating a new structure for an eventual First World economy. However, this massive economic transition to a new system resulted in the economies of the former Soviet Union suffering massive dislocation. The economic upheaval pulled these nations down to economic levels that truly reflect a Third World status.
Russia's economic decline has been extreme. A special box in the Human Development Report 1996, entitled "Russia -- into reverse" (p. 84), supports the claim that Russia has fallen into the Third World during its transition toward capitalism:
Since 1991 Russia's growth and human development have plummeted. Deep recession and hyperinflation sharply increased unemployment and poverty and exacerbated income inequality. Life expectancy, mortality and morbidity have worsened dramatically. Russia is now struggling to rebound from this downward spiral....In 1991�94 average real wages dropped by more than a third, and agricultural wages by more than half....In early 1995 the minimum pension was only about 30% of subsistence income....The Russian education system is also deteriorating.
Russia and its associated republics from the former Soviet Union clearly are at a Third World economic level. However, as we look to the 21st century, it is important to note that this current low status is partly attributable to the short-term costs of a painful but necessary transition toward an open capitalist economy. The former Soviet Union, as it was being economically surpassed by former Third World nations such as South Korea, Taiwan, and Singapore, had to make a change; even if in the short run the massive costs of this historic transition dumped it into Third World economic status. Indeed, the presence of significant assets, particularly educated people and abundant natural resources, indicates that these republics can greatly advance their status if they continue to embrace freedom and economic reform.
Our new view of the Second World is that it is made up of nations that are emerging as key players in international business. This grouping is highlighted by the U. S. Commerce Department's very useful category -- the "Big Emerging Markets," or BEMs. The Commerce Department originally started with ten BEMs: highly populated nations that were opening up to world trade and investment; good examples are China, India, and Mexico. Recently the Commerce Department has begun to recognize not only nations, but also regional groupings, and in particular, ASEAN, the Association of Southeast Asian Nations. So although the Commerce Department currently lists ten BEMs, these emerging markets actually comprise many more nations, at least 14 of which have such large populations and/or rapid trade growth and economic development that each deserves our own appellation of BEN -- "Big Emerging Nation." Thus, our Second World consists of 14 BENs: Indonesia, the Philippines, Thailand, Malaysia, Vietnam, China, India, Brazil, Mexico, Argentina, Chile, Poland, Turkey, and South Africa. Note that the first five nations listed are the largest economies included in ASEAN. In counting these five ASEAN nations separately, instead of as one big regional market, we move from the Commerce Department's ten BEMs to our 14 BENs. General Motors is an example of a firm that has a strategic focus on the BENs; the five new vehicle plants it is building are in Argentina, Poland, China, Thailand, and Brazil. In response to the recent financial woes in Asia, however, the company did decide to scale back and delay the opening of its Thailand factory.
Interestingly, our master spreadsheet shows that these 14 nations combined contain more than half the world's people. Although not nearly as rich as the 26 nations in the ITN, these nations have two compelling drivers on their side: the sheer scale and dynamism of their human resources as captured by demographic statistics, and the sustained economic growth that many of them are achieving. The rapid economic growth of big emerging nations is a subject we will analyze more deeply in Chapter 5. In Chapter 6, we will explore their 21st century economic potential; a massive potential that future business leaders must study and understand thoroughly.
Finally, we offer our version of the new Third World. We say "new" because some members of the traditional Third World, such as India or South Africa, have "graduated" to the Second World of BENs, while others have leapfrogged all the way to the First World of the ITN, notably South Korea and Singapore. Meanwhile, some nations, such as Ukraine and Russia, have slipped to a Third World level of despair, as the transition from command economies to a hoped-for capitalist revival bears a heavy economic cost. Again, our intent is to capture most of the world's people, as well as economic activity, in the subset of nations that we will study intensively. Therefore, in our third-tier grouping, we have selected the 13 relatively poor nations that the World Bank projects will each exceed 52 million people by the year 2030.
Tracking these 13 nations, although they are often ignored by business, is useful because huge or growing populations here should eventually command business attention. Our third tier contains Ukraine, Russia, Afghanistan, Burma (Myanmar), Egypt, Iran, Pakistan, Bangladesh, Nigeria, Ethiopia, the Democratic Republic of Congo (formerly Zaire), Tanzania, and the Sudan. Given the extreme poverty prevalent in these 13 nations, I have termed this tier the "Unlucky 13." Although blessed with many wonderful cultural and other attributes, I deem the term "unlucky" is appropriate, because people born into these nations currently face very dismal economic prospects. In many cases, even their life expectancy is tragically short. The unlucky starting point for most babies born in these populous, but poor, nations will be clear after we examine some of the dynamically linked problems that exist in this "Populous South Region" in Chapters 3 and 4.
Figure 1�2 shows quite clearly that the Human Development Report's description of a huge gulf of inequality present in today's world is correct. This figure contrasts our first tier, the 26 nations in the ITN, with the 13 unlucky nations that comprise our third tier. Interestingly, these two tiers each comprise 15.9% of the world's population. Since the two groups have a population ratio of 1, we can easily compare them without further numerical manipulation. Figure 1�2 shows the ratio of the values of some key variables in the ITN to the values of those same key variables in the Unlucky 13 nations.
The first bar simply makes the point that the two tiers have equal current populations; therefore the ratio is exactly 1. The second bar in the graph holds a key to the future. It shows us that businesses hoping for prolonged expansion must look beyond the rich nations of the ITN because, at least in a demographic sense, future growth appears brightest everywhere except in the ITN! This is a major point of Paul Kennedy's book Preparing for the Twenty-first Century: 95% of the world's current population growth is occurring in the developing world, whereas only 5% of global population gains are in the advanced nations of the traditional triad. What Figure 1�2 shows us is that by the year 2030, the Unlucky 13 nations will have a total population far exceeding the total of the twice as many nations that belong to our First World or ITN. Indeed, the ITN will total only 60% of the population that the Unlucky 13 is projected to reach in 2030. In other words, there will be five potential consumers or workers in the Unlucky 13 for every three in the ITN!
This stands in remarkable contrast to the remaining bars in Figure 1�2, which show the ratio between the two tiers for various relevant economic magnitudes. Readers can see from the third bar in Figure 1�2 why I term the 26 wealthy or triad nations in the first tier the "industrialized trading nations." Exports produced and sold by the 900 million people living in the ITN are more than 25 times the value of export revenues earned by the same number of people living in the Unlucky 13 nations. This 25:1 discrepancy certainly illustrates our point that at the end of the 20th century, certain nations are truly within an international trading network, whereas others are really not part of the too glibly cited "global village." This chapter is titled, "The Limited World of Business at the End of the 20th Century" because, despite the trends toward globalization described in the introduction, it is apparent that those great increases in total world trade mask a huge disparity between the first and third tiers.
DISPARITY ALONG THE GLOBAL INFORMATION HIGHWAY
Readers can also see from the final bar in Figure 1�2 why I say that the 26 rich nations in the ITN are members of an information technology network: they have nearly 11 times as many telephones as the equal number of people currently residing in the "Unlucky 13." It is exciting to talk about the power of commerce on the Internet, or how information technology is "making the world smaller," but it is important to realize that the Internet is not so empowering for someone in an African nation that has few or no host computers. The unequal ratio seen in the bar for telephones is an example of the gulf that we must cross if we are to have a truly global business environment.
A "teledensity" (phones per 100 people) 10.8 times higher for the rich ITN nations than for the poor nations comprising our unlucky third tier does indeed mark a large inequality. Note, however, that the ratio is actually much smaller than some of the other ratios reflected in Figure 1�2. The reason for this lesser disparity is that our third tier now contains some nations that actually were in the Second World, that is, in the former Soviet sphere of influence. These nations did build an extensive, albeit often inefficient and unreliable, infrastructure, and so today there are still many telephones in Russia and Ukraine.
The 900 million people in the ITN have 474 million main telephone lines available to them, or more than 50 per hundred people. This is in stark contrast to the fewer than 45 million phone lines available to the like number of people in the Unlucky 13, which is fewer than 5 phones per hundred people. An additional point I want to make here, however, is that even those 44.4 million telephones in the Unlucky 13 are dominated by the nearly 33.5 million in Russia and Ukraine. If not for the enhanced level of telephone access in these former members of the Second World, we would see a very stark disparity indeed.
This wide gulf in access to telecommunications, even basic telephones, let alone the Internet, is very apparent when we study the subset of the Unlucky 13 that are the five populous nations in the Heart of Africa: Nigeria, Ethiopia, Democratic Republic of Congo, Tanzania, and the Sudan. These desperately poor but highly populous nations have a mind-boggling lack of access to telephones. In fact, despite having 267 million people in 1995, these nations have fewer than 750,000 telephone lines, or one telephone per nearly 400 people. Saddest in this regard is the Democratic Republic of Congo which, with 40,000 telephone lines for over 43 million people, has less than one telephone per thousand people.
According to 1995 statistics, the combined population of the five nations in this subgroup is roughly the same as that of the United States -- about 265 million people. The similarity ends there. In the United States, residents have access to over 164 million main telephone lines, or 62.5 lines per 100 people. The number of telephone lines available in the Heart of Africa is a mere 740,000. In other words, the same number of people in the United States have more than 225 times as many telephone lines. Obviously, the nearly 11:1 telephone ratio bar in Figure 1�2 shows a large disparity, but not nearly as huge as when we focus on the very poor nations in the Heart of Africa.
Figure 1�3 is a convenient way to show that although international business is growing, with a cheap and effective communications infrastructure facilitating this growth, the extent of globalization has been strictly limited well into the 1990s. This figure isolates the nations that are truly "haves," portraying not the entire ITN, but just 20 wealthy nations at the core of the traditional triad. We see, for example, that the United States and Canada have more than one-quarter of the world's telephone lines, despite containing barely over 5% of world population. Similarly, the 15 nations in the European Union have 26% of world telephone lines, although they hold less than 7% of world population. If we isolate the most industrialized Asian nations that have fairly large populations -- Japan, Taiwan, and South Korea -- we see that they have fully 13% of the world's telephone lines despite having only 3.4% of world population.
The most interesting observation from a business perspective is that the entire rest of the world -- all those roughly 200 nations outside the core of the traditional triad -- contains only one-third of the world's telephone lines. This shows two very different things, depending on one's perspective. A pessimist can complain about the gross inequality existing in the world in the 1990s. The nations in the core of the traditional triad shown in Figure 1�3 have two-thirds of the world's telephones, yet they comprise less than 15% of world population. Indeed, if we add the other six nations of the ITN, such as Switzerland, Norway, and Australia, we find that less than 16% of the world's population has over 70% of its telephones.
But an optimist sees a great opportunity for business. Nations comprising over 85% of the world's population have only one-third of the world's telephones, and we will see in Chapter 5 that many of these nations are experiencing rapid economic growth. These nations will increasingly add consumers with the purchasing power to create an effective demand for more telephones. What a tremendous opportunity for companies that have anything to do with telecommunications or information technology, if only they would adopt a more global viewpoint! What we highlight here are literally billions of people without telephones, in nations which, although relatively poor now, demonstrate the potential to continue along the path of economic growth. What excites me is the notion that economic growth does not need to extend to the point where most of the citizens become wealthy, or even upper middle class. Instead, if economic growth proceeds to the point where the bulk of a nation's population just reaches lower-middle-class status, the demand for new telephony will be huge. We are already witnessing the start of this in nations such as China, which added 14 million new telephone lines during 1995, and is projected to add roughly 20 million new lines every year, well into the 21st century. Chapter 5 will look more deeply at the recent record of economic growth around the world and the implications for the emergence of a new lower middle class, which I believe can constitute "tomorrow's customers" for firms with the foresight to move toward a global strategy.
The Economist recently analyzed the discrepancy in telephone access around the world, pointing out that some developing countries, notably those in Asia, are experiencing rapid increases in the number of telephone lines. However, The Economist also notes that Africa is desperately underserved by telephones and on some measures is falling ever further behind:
Two out of three people have no access to a telephone. That is changing rapidly, but it is easier for countries to increase the availability of main lines if population growth is slow. China has been installing telephones at a tremendous pace, but it also has slow population growth by developing countries' standards. In Africa, by contrast, underfinanced telecoms operators struggle to keep pace with burgeoning members. In some they are losing ground. Many donors would like sub-Saharan Africa to have at least one line per one hundred people by the end of the century. At present the region, excluding South Africa, has only 0.48 lines for every one hundred people.
We can certainly sympathize with Africans or South Asians who are not very impressed by the argument that nearly costless communication is rapidly shrinking the globe and making global business a current reality. Many pundits forecast that business will increasingly shift to forms of electronic commerce as we move into the 21st century, with more and more business conducted directly over the Internet. But this exciting prospect, spotlighted in the Introduction, is not so exciting for those who live in African nations with a lack of Internet host computers and a paucity of network connections. For many Third World nations, the growth of electronic commerce raises the scary prospect that the economic information highway that will be built to the 21st century, will have virtually no on-ramps for their access. Thus, poor nations face the prospect of being excluded from the most dynamic area of growth in international commerce. As a result, these nations risk falling even further behind the nations that have more fully developed information technology networks.
Originally, I planned to include a graph showing the wide disparity between worldwide regional population shares and the corresponding regional shares of Internet connections or host computers. However, the Internet and the World Wide Web are growing so rapidly that any chart would be outdated by the time you read this book. Thus, I merely include suggestive figures to give you an idea that, in terms of linkages to the so-called global information highway, there truly are "haves" and "have nots."
The Wall Street Journal summarized the huge disparity in Internet access in a major article entitled "Web's Heavy U.S. Accent Grates on Overseas Ears." The article showed that nearly three-quarters of the world's users of the World Wide Web are residents of the United States. A further 10.8% are in Europe, while Canada and Mexico have 8.4% of total World Wide Web users. Interestingly, the English-speaking people in Australia and New Zealand constitute a full 3.6% of Web users. Here's the upshot: the countries just listed, with about one-sixth of the world's total population, represent over 96% of the globe's World Wide Web users. The same article cited estimates by the consulting firm Network Wizards that the United States accounts for 64% of the host computers on the Internet. Moreover, the first-tier economic powers in our ITN group contain nearly 98% of the world's Internet host computers. This total domination of the Internet by the 26 wealthy industrialized nations of the triad validates my alternative concept of the ITN as an information-technology-networked grouping. The Internet can become an information highway for global commerce, but its limited on-ramps currently exacerbate the global disparities highlighted in this chapter.
CONTRASTING MEASURES OF GROSS DOMESTIC PRODUCTION
Returning to Figure 1�2, an interesting distinction can be seen in the two bars that constitute the ratios of gross domestic production (GDP). GDP is the favorite measure of national income used by economists and analysts, as well as business people and investors, worldwide. There are two distinct ways to measure GDP when making international comparisons. Both start by measuring a nation's GDP in its own currency, and then convert it to a common standard, such as the U.S. dollar. The difference lies in the conversion step.
The first method translates a nation's currency to the U.S. dollar using current market exchange rates. For example, if the international banks and foreign exchange dealers that constitute the world's foreign exchange market are currently trading at a market exchange rate of eight units of a nation's currency for one U.S. dollar; then we would divide that nation's GDP, as measured in its own currency, by eight to calculate its value in market-determined U.S. dollar terms.
The second method pays less respect to the market-determined exchange rate, concentrating instead on the relative purchasing power of various nations' currencies. This method attempts to figure out what exchange rate would give "purchasing power parity" (PPP). That is, it determines what hypothetical exchange rate would make the purchasing power of the U.S. dollar the same if you bought a typical market basket of goods in the United States and then went to another country and bought the same goods in that nation's currency.
A practical example should help illustrate the difference. Assume a Big Mac costs $2.00 in the United States and 8 kroner in Denmark, and that Big Macs are generally representative of relative prices in these two nations. We could then use the relative price of a Big Mac in each nation's respective currency to calculate the "PPP exchange rate," that is, the exchange rate that would make our purchasing power the same whether we spent our money in the United States or in Denmark. In this case, an exchange rate of 4 Danish kroner for 1 U.S. dollar would mean that for $2.00, I could eat a Big Mac in the United States, or I could get the 8 kroner needed to buy a Big Mac in Denmark. Thus, 4 kroner per dollar would be the PPP exchange rate.
Now, assume the market exchange rate is only 2 Danish kroner for a U.S. dollar. This implies that it would take 4 U.S. dollars to obtain the 8 kroner needed to eat a Big Mac in Denmark. Eating in Denmark would seem twice as expensive as eating in the United States. Economists would say that the Danish krone is "overvalued," since it is relatively expensive to exchange dollars into kroner and purchase products in Denmark. Conversely, the U.S. dollar is "undervalued" by the market. This type of PPP exchange rate calculation is the basis of the very clever and quite useful "Big Mac index" maintained by The Economist magazine for many years.
The "Big Mac indexes" show that there are often large deviations of a nation's market exchange rate from the hypothetical PPP exchange rate. Not surprisingly to international travelers, many Western European nations and Japan are typically found to have exchange rates that are overvalued by the market; thereby making purchases in these nations relatively expensive. By contrast, nations in Southeast Asia or parts of the developing world have undervalued currencies; that is, to an American, purchases in these nations seem quite cheap, as their currencies seem very undervalued by the market.
The distinction between GDP measured using market exchange rates and GDP that is converted to U.S. dollars using the hypothetical PPP exchange rates is crucial in this book, particularly in Chapter 6. We see its significance directly in Figure 1�2. Many ITN nations have highly valued currencies, as investors favor or demand them because of the wealth and stability of such nations. Germany, Switzerland, and Japan are examples of nations whose currencies are very highly valued by the market, resulting in relatively high prices there. The ITN has more than 32.8 times the value of GDP of the 13 nations in our third tier. Of course, since the groups' total populations are the same, this means that per capita market income is 32.8 times as high in the First World as the Third World.
Interestingly and importantly, there is still a wide gap, but not nearly as large, if one measures GDP using the hypothetical exchange rates that yield purchasing power equality in any country in the world. When we convert nations' local currency GDP into U.S. dollars using the World Bank's purchasing power parity (PPP) exchange rate estimates, we see that the inequality is not nearly so great. The upshot is that a dollar goes very far in most places in Africa or rural India, and if we consider what people are eating, for example, rather than asking "What is their income in terms of dollars at market exchange rates," we see that the living standard in the Third World, although very poor, is not as nearly as unequal as when we use market exchange rates.
For example, if we converted India's currency at market exchange rates, the per capita income or GDP in 1995 was roughly $340. We may wonder how people could live for an entire year on $340 per person; but in fact, India's currency goes much further than $340 would go in the United States. Indeed, the World Bank, in its 1997 Atlas, estimates that India's per person income is more than four times higher if one looks at the actual relative purchasing power within India instead of the $340 based on market exchange rates. Thus, at a U.S. supermarket we pay a dollar for a few bananas, whereas in India we would be able to purchase those same bananas for about 25 cents. Because the purchasing power of a dollar goes so much further in India, converting Indians' incomes at market exchange rates and trying to make some comparisons about standard of living can be misleading. The rupees an Indian earns translates into few dollars at current market exchange rates, yet those rupees enable the person in India to buy bananas (and other necessities!) at prices that are relatively cheaper than prices in the United States.
We see similar ratios of three or four times higher incomes for the relatively poor nations in Africa and South Asia using the hypothetical PPP exchange rate, rather than market exchange rates. Hence, Figure 1�2 shows that the ratio of income when we look at relative domestic purchasing power (PPP) is more like 9:1 rather than 33:1. Nine-to-one still shows tremendous inequality, but at least now we understand how poor people in the "Unlucky 13" somehow manage to eat despite average per capita incomes below $300 a year when converted using market exchange rates.
Which measure of GDP is correct for making international comparisons -- one based on actual market exchange rates, or one based on the hypothetical exchange rates that would equate purchasing power (PPP) around the world? The simple answer is that neither one is perfect. Both have their advantages and the best solution probably depends on what you are trying to compare. If you want to analyze the power of a certain nation or its ability to command control over world products and world assets, then you should probably use GDP converted at market exchange rates, because it shows the actual ability of a nation to purchase products and assets on an international basis. Therefore, when we talk about world power at the end of the 20th century, it is important to realize that in terms of the actual ability to get U.S. dollars or other hard currencies, people in poor nations have very little global purchasing power.
The ratio of 33:1 gives us some idea of the gross inequality when it comes, for instance, to the ability to purchase a vacation home at a desirable spot in Europe or to send children to an Ivy League college. On the other hand, if we are concerned about the actual comparative living standards within the various nations, then the calculations using the PPP exchange rates that give equivalent purchasing powers can be quite useful. The gap is not nearly as wide as it seems when using market exchange rates, but a 9:1 ratio still shows that living standards in the ITN far surpass those in the nations we have branded the "Unlucky 13." In Chapter 6, we will further pursue this notion of measuring national economies based on equalized relative purchasing power, in order to get an idea of the standard of living of various countries and, more importantly, the future potential of such economies.
INTERNATIONAL TRADE: THE GLOBAL GAP
Returning once again to global trade, we will now see if the "80/20 rule" applies to the huge gulf in export revenue between the first and third tiers. Figure 1�4 illustrates the great challenge of more widespread economic development looming ahead for the world as we move into the 21st century. The massive inequality reflected by an 80/20 rule is quite apparent in world trade statistics, as nations with over 80% of the world population sell only 20% of total world exports. Conversely, nations with less than 20% of the world's people earn 80% of its export revenues. The left-hand pie chart in Figure 1�4 portrays this 80/20 split by distinguishing major regions of global export trade and their relative shares of world exports. Not surprisingly, the dominant trading tier (the ITN) is mainly composed of the triad of industrialized Europe, North America (excluding Mexico in this case), and industrialized Asia. Notice, as in "The World According to Trade," the prominence of Europe in world trade, as well as the growing importance of industrialized Asia.
The population pie chart is divided in a different way than the trade chart, and shows the key areas where over 80% of the world's people live. Because of a lack of economic development, these areas now have only a limited share of world business (in this case world trade). Obviously, no discussion of world population shares can ignore China and South Asia, but we also see that Africa has a large slice of the world population pie and that other developing countries, such as those in Southwest Asia and South America, have a very large slice as well.
It is important to note that in this chart I have expanded the definition of industrialized trading nations slightly to include not just the usual four East Asian Little Tigers but also two more potential East Asian Tigers: Malaysia and Thailand. Why have I done so here? Recall that our goal is to see if an 80/20 rule holds for world trade. The ITN, as discussed earlier, includes just under 16% of world population and earns 78% of world export revenue. By adding Malaysia and Thailand to the ITN, we create a group that accounts for over 80% of world exports, yet still comprises well less than 20% of world population.
Finally, when we think of power in the 21st century, we would do well to consider the massive influence of the world's largest firms. Fortune annually ranks the world's 500 biggest firms by total global revenues. An analysis of a recent "Fortune Global 500" ranking15 reveals that more than 97% of the world's biggest firms were headquartered in the 26 wealthy nations of the ITN. A mere thirteen, or 2.6%, of them were based in all other nations -- those comprising 84% of world population. Furthermore, only four, or 2%, of the global top 200, the truly powerful firms, are based outside the ITN.
Foreign Direct Investment Trends: Unequal Access
Despite the rather limited range of most international business characterizing the era up to the 1990s, recent signs indicate some significant causes for optimism. The arena for international business is suddenly expanding aggressively, and business leaders would be wise to continue shifting some of their focus toward developing countries and away from the traditional triad.
A recent edition of Trends in Private Investment in Developing Countries, a discussion paper by the International Finance Corporation of the World Bank, summarizes the crucial reasons for my optimism:
In the 1990s, private investment in developing countries has undergone a marked revival....Closer global integration of both the international trading and financial systems has meant that economically and politically stable developing countries have experienced unprecedented access to international goods markets and sources of international capital with the result that economic growth rates have accelerated.
Good news for some developing countries is not, however, relevant across the globe. The International Finance Corporation (IFC) paper also details marked disparities in investment, reporting that East Asia has the highest investment rates and sub-Saharan Africa has the lowest, and steadily decreasing, rates; while Latin America has seen rising rates of investment.
Thus, the two key trends are that more foreign investment is flowing into developing countries, but that the flows are concentrated in a few developing nations. The IFC report (p. 7) illustrates both trends, stating that while foreign direct investment flows (FDI) have risen during the 1990s, only five East Asian nations -- China, Indonesia, Malaysia, the Philippines, and Thailand -- received a total of half of the FDI flows to all developing nations since 1990. These trends are further confirmed in a recent World Bank book, 1996 Global Economic Prospects and the Developing Countries. Clearly then, firms are investing directly in the developing world, but are mainly targeting the five big "recently industrializing countries" (RICs) of East Asia, and to a lesser extent, the few major economies in Latin America, while essentially ignoring Africa and Southwest Asia. Using our construct, the second tier BENs are integrating into the global economy as they attract massive direct investments from globalizing firms, while the nations of the third tier are being largely left behind.
Foreign direct investment is a key to the continuing evolution of global business, as Edward Graham makes clear in his useful book, Global Corporations and National Governments. Graham begins by validating the existence of the global forces that we discussed in the Introduction, maintaining that "a massive surge in foreign direct investment (FDI) has led to the deepest integration of the world economy in history." Graham makes it clear that FDI is a powerful globalizing force for business and the world economy:
...FDI does not contribute only capital to the world economy. Foreign operations of large multinational firms also help to transform the economies in which they operate through technology transfer, and by introducing new and better management techniques, providing market access to other countries, and increasing competition.
Graham also points out that while developing nations once accused global corporations of exploiting the local economy, most nations now recognize "the positive contributions of FDI and global corporations to economic development in...raising growth levels, efficiency, and living standards."
Let us now look at the recent evidence on evolving trends regarding foreign direct investment flows. The United Nations Conference on Trade and Development (UNCTAD) summarizes the unequal flow of FDI in its World Investment Report 1996 (WIR 1996). This report shows that the inequality discussed above continues:
Investment flows are concentrated in a few countries. The ten largest host countries received two thirds of total inflows in 1995 and the smallest 100 recipient countries received only 1%....In the case of outflows, the largest five home countries (the U.S., Germany, the U.K., Japan, and France) accounted for about two thirds of all outflows in 1995.
Almost 90% of the 1995 increases in FDI inflows (and outflows) were registered by developed countries. Because of this the share of developed countries in world inflows increased from 59% in 1994 to 65% in 1995 while outflows rose from 83% to 85%.
Recent data confirm the continued dominance of the triad (ITN) in world FDI flows. The United States remained by far the largest recipient of FDI inflows in 1996, as its total inflow of $80.5 billion nearly doubled China's inflow. The U.S. FDI inflow was up 41% from 1995, reaching three times its 1993 value! Furthermore, a full 90% of the FDI flowing to the United States came from just a few countries, representing a core subset of the ITN: Canada, European nations, Japan, and Australia.
In absolute terms, FDI flows into emerging nations did rise sharply each of the past few years. However, even these increased FDI flows to developing countries are not at all uniformly distributed.
South, East and South-East Asia continued to be the largest host developing region, with an estimated 65 billion of inflows in 1995, accounting for two thirds of all developing country FDI inflows.
The size and dynamism of developing Asia have made it increasingly important for TNCs from all countries to service rapidly expanding markets, or to tap the tangible and intangible resources of that region for global production networks....China has been the largest developing-country recipient since 1992....China has been the principal drive behind Asia's current investment boom.
WIR 1996 contrasts this Asian boom with Africa, noting that Africa has remained marginalized (see p. xviii). Not only has Africa received a small and declining share of total FDI, but the trends show that southern Africa has had its share diminished substantially, in contrast to the increasing share in North Africa. The surge of private capital into emerging markets in the 1990s has almost entirely missed sub-Saharan Africa. Between 1990 and 1995, the net yearly inflow of foreign direct investment (FDI) in developing countries nearly quadrupled, to over $90 billion; but Africa's share of this fell to only 2.4%. In 1995, the whole of sub-Saharan Africa, excluding South Africa, received less than $2.2 billion in net FDI. That amount is less than the sum invested in Chile alone.
My own research shows that the United States is a prime example of a nation that contains many so-called global corporations, yet does little to integrate Africa into the global economy through foreign direct investment. Recent data26 show that Africa's share of the total stock of FDI invested by U.S. firms has fallen below 1%, a startling drop from an already low 3% share of the total stock in the early 1980s. In addition, African firms or investors hold only 0.2% of the stock of FDI invested in the United States. Thus, so-called global firms are doing little at this time to integrate Africa with the United States.
I conclude by offering three key trends. First, the vast majority of FDI still originates in the wealthy triad of developed nations and remains mainly invested in other nations in this wealthy network. Second, developing countries are generally attracting a rapidly increasing flow of FDI; but third, these increased FDI flows to the developing world show a great deal of concentration or inequality.
SUMMARY AND IMPLICATIONS
Obviously, trends such as the massive flows of private foreign direct investment to China and ASEAN nations indicate there are reasons for optimism in major portions of the developing world. Wide disparities continue, however, not only between the advanced and the developing world, but increasingly within the broad grouping called the developing world. Business is most interested in the big emerging markets, particularly those in East Asia and Latin America. These markets seem set to join the global trading club, an exciting development for business, as we will see in the next chapter.
The important point, from the perspective of businesses that hope to grow, is the vast potential stemming from a more global approach to business. First, we have seen that going beyond one's own nation to do business throughout the nations of the traditional triad can open up a huge level of economic and international business activity. Traditionally, business has been able to expand internationally and gain access to a large proportion of world purchasing power through a focus on only two dozen nations. That is the strategy, for instance, implied by most of Kenichi Ohmae's writings. However, the intent of this book is to show that a strategy aiming to ensure growth well into the 21st century needs to embrace a more truly global perspective. Although up until recent years a vast majority of the action in international business was confined to the traditional triad, we have seen in this chapter that big emerging nations are becoming increasingly interesting to business.
Furthermore, most of the world's population, and almost all of its population growth, are in nations outside the traditional nexus of international business. Thus, in the next few chapters we will study the likely evolution of the global economy, focusing on the most probable growth pattern for the international business network. We will examine those countries most likely to graduate into the more advanced economic status captured by our concept of the ITN. Recall that for the ITN depicted in Figure 1�4 to achieve fully 80% of world exports and closer to 20% of world population, we needed to add Malaysia and Thailand to it. This foreshadows what I hope to do in Chapter 2, where we develop our strategic theory that the traditional triad is becoming an outdated concept, and introduce the new concept of an "Extended Triad." Then, in Chapter 3 we will examine the many nations that are still not a part of the network of international business, be it trade or investment, to any significant extent.
Copyright © 1998 by Jeffrey A. Rosensweig.