IS ASIA THE NEW ENGINE-ROOM FOR GLOBALIZATION?

IS ASIA THE NEW ENGINE-ROOM FOR GLOBALIZATION?

Singapore skyline at night from waterfront

Key takeaways

Despite a growing shift towards protectionism in Europe and America, public policies in Asian countries continue to embrace greater globalization.

Greater global connectedness often goes together with higher levels of innovation and economic productivity, but can render highly-connected economies more exposed to risks outside their control.

Business leaders and policymakers should build a diversified basket of international trade connections to avoid being overexposed to any one market or country.

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What are the risks of a more globalized Asia? 

The world’s economies remain highly connected despite rumors of globalization’s demise. That’s one of the main findings of DHL’s latest Global Connectedness Index (GCI), which charts the progress and current state of globalization using hard data about trade, capital, information, and people movements worldwide. The latest GCI discovered that despite growing protectionist sentiment in some parts of the world, globalization has continued to advance.

“Asia Pacific economies have grown increasingly connected to the rest of the world as their industries and talent bases mature,” says globalization expert Professor Pankaj Ghemawat, who led the research on the GCI. “Given the rhetoric that we’re seeing in Europe and America, businesses should expect an even greater role for Asia in globalization moving forward, creating significant opportunities for sales and supply chain networks based in the region.”

The region’s geography and cultural commonalities have lent themselves well to greater interconnectedness. Of the five countries that outperformed expectations most on the depth dimension of global connectedness, four of them hailed from South East Asia: Cambodia, Vietnam, Malaysia, and Singapore. Countries in East Asia and the Pacific also have, on average, the second-highest intra-regional share of international flows in trade, capital, information, and people. And Singapore turned out to have both the deepest and largest international flows of any city surveyed, with Hong Kong close behind.

“Initiatives like the ASEAN Economic Community (AEC) and Belt and Road foreshadow greater cross-border economic ties between East Asian countries, supported by increasing integration across supply chains and migration policies,” says Ghemawat. “At the same time, Singapore and Hong Kong have engineered a renaissance in digital investment that’s seen them become hubs for information flows as well as more traditional trade and capital. All this bodes well for businesses operating in East Asia: from here, they can extend their reach into numerous other markets while taking advantage of increasingly vibrant local conditions.”

The deeper your connections to other countries, the more likely you are to find yourself exposed to global economic trends, for better or worse.

Diversify, don’t over-rely

The benefits of greater global connectedness extend beyond higher foreign investment and broader talent bases. Highly-connected economies, for example, tend to also encourage innovation: 8 of the Index’s top 10 most connected countries overlap with Bloomberg’s Top 20 countries for innovation. There are, however, risks associated with high levels of connectedness: businesses and economies may find themselves more sensitive to conditions and events in other markets that are outside their direct control. Vietnam’s exports, for example, took a major hit last year due to a single event: the recall of the Galaxy Note 7 by Samsung, whose exports make up around 20% of the entire nation’s shipments.

“The deeper your connections to other countries, the more likely you are to find yourself exposed to global economic trends, for better or worse,” says Ghemawat. “It’s essential for policymakers and business leaders to consider both breadth and depth in how they connect globally, to avoid becoming over-reliant on the fortunes of one economy or company.”

Ghemawat points at Singapore as a good example of how to prudently manage globalization: the country’s leaders recently unveiled plans to significantly ramp up investment in the skills and digitization, while also maintaining fiscal reserves in the event of worsening economic conditions abroad. “Hubs like Singapore and Hong Kong have seen the effects of global downturns amplified on their shores in the past few years,” he says. “They can’t afford to cut off their economies, but they can take measures to cushion the impact.”

The same lessons apply to businesses: investing in a diversified “basket” of markets and maintaining lean infrastructure can unlock the benefits of greater connectedness while minimizing their risks. New technologies like e-commerce have made it easier to connect with customers worldwide – more than 900 million of them by 2020 – than ever before, but companies shouldn’t be in a rush to expand.

“Our Index’s results suggest that the future of globalization is not only ambiguous, but more contingent on policymakers’ choices than ever before,” says Ghemawat. “Test out local conditions before making significant investments, diversify your sales across multiple markets, and find partners with highly-connected supply chain and data networks instead of trying to build your own from scratch. To thrive in today’s conditions, global businesses need to be more agile and adaptable to change than ever before – as do the policymakers who dictate the future of globalization.”

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