Featured Article 01 Feb 2012

January 31st
Finance Dublin

Ireland is the world’s second most globalised nation in term of GDP, and remains the most globalised nation in the western world according to Ernst & Young’s 2011 annual Globalisation Index, published
today. The report also says that Ireland is forecast to maintain its overall second place ranking until at least 2015.

In the 2010 edition of the annual global report, which is drafted in collaboration with the Economist Intelligence Unit (EIU) and issued at the World Economic Forum in Davos, Ireland was reported to have displaced Singapore to become the world’s second most globalised economy. In the 2011 edition, the report confirms that in addition to retaining its second position overall, Ireland is the most globalised western economy and the most global economy worldwide in two key categories: Global technology exchange and global movement of finance and capital.

Despite faltering prospects for the world economy, the report confirms that globalisation is still increasing among a majority of the world’s 60 leading economies as they so far avoid descent into protectionism. However, 90% of business executives surveyed as part of the index ranking expect to see an increase in protectionist measures if the global economy slides into a double-dip recession.

While Ernst & Young forecasts that global GDP growth will be just 3.4% in 2012, the index predicts that globalisation will continue to advance this year and up to 2015. This is most pronounced for medium-sized emerging markets like Vietnam, Malaysia, Mexico and Colombia and smaller European countries like Ireland, Belgium, Slovakia and Austria.

The UK and the United States are the only major markets where the index forecasts a modestly declining globalisation score in the next three years due to both countries introducing immigration rules that will impact on the hiring of foreign nationals.

The current top ten most globalised nations now include (1) Hong Kong, (2) Ireland, (3) Singapore, (4) Belgium, (5) Sweden, (6) Denmark, (7) Netherlands, (8) Switzerland, (9) Finland, (10) Hungary. In 60th position, the least globalised nation on the index is Iran, closely followed by Algeria and Venezuela.

The Globalisation Index has five measurements to assess a country’s individual global ranking including: openness to global trade, global capital movements, global exchange of technology, global labour movements and cultural integration. Each of the criteria’s weighting was validated by the 1,000 global business leaders surveyed.

Exports key to current and future ranking
The report finds that the increase in Ireland's score between 2010 and 2011 was mainly the result of greater movement of goods and services as a proportion of GDP. Ireland remains in second place overall despite seeing an improvement in its globalisation scores across all five categories with the exception of movement of labour, where it scores the same as last year.

Speaking on the Irish results, Mike McKerr, Managing Partner, Ireland, with Ernst & Young commented, “"Despite having been hit hard by the global recession the research confirms that Ireland is and is perceived to be a leader in international trade. This globalisation ranking demonstrates just how well positioned Ireland is to build on this brand and grow its fledgling trade links with the fast growing emerging economies of China and India."

Ireland was ranked 3rd in the overall index, first issued in 1995, and has never fallen out of the top three most globalised nations. It has always held solid scores in all five categories but it is in the area of exchange of technology and ideas that Ireland has performed strongest over the time period – indeed, the index confirms that Ireland has become three times more globalised in this category alone since 1995, largely driven by its rising trade in R&D.

McKerr said: “In the last decade Ireland has attracted a disproportionate amount of foreign direct investment in high value added export-orientated sectors. This has driven the strong growth in R&D trade and has helped underpin Ireland’s top ranking in the category of exchange of technology and ideas”.

He added “Ireland’s consistently strong performance in the category of openness to movement of capital and finance has benefited from rises in foreign direct invesntment flows and portfolio capital flows since 1995. Ireland is forecast to maintain its global attractiveness into the immediate future and protect its second place ranking as the most globalised western economy.”

The global report confirms that steps taken by the Irish policy makers over the period of the economic crisis have helped improve Ireland’s globalisation ranking. Loosening of labour markets to help prevent skills shortages for employers, enhancements to the R&D tax schemes and measures aimed at positioning Ireland as a destination for holding companies - have all helped to boost Ireland’s global attractiveness.

Where will economic growth come from?
The performance of the emerging markets, led by the BRIC countries, continues to offset sluggish growth in the developed world. Ernst & Young forecasts that the combined GDP of the emerging markets is set to grow by 5.3% in 2012, continuing to outpace the developed world and increase their share in world GDP. The GDP of emerging markets could overtake that of the developed economies as early as 2014, with about 70% of total world growth in the next few years coming from the emerging markets, of which over a half will be from China and India.

The outlook in Europe, where Ernst & Young forecasts essentially flat growth in 2012 even if the sovereign debt crisis is resolved, and in the United States, where Ernst & Young is forecasting modest if below par growth of 2.5%, is less positive.

The business executives surveyed were understandably nervous about the current business outlook, highlighting a looming squeeze - slowing growth, increasing competition, significant operational complexity and shortages of talent in key markets - that they believe is diminishing business prospects. They were also more pessimistic than most economic forecasters. While they remained optimistic about the medium-term potential for emerging markets, slightly more than half of the senior executives questioned believed that the global economy is likely to fall back into recession by the end of 2012. Almost two-thirds consider it likely that there will be a new global financial crisis, triggered by eurozone debt defaults.

As well as the prospect of an increase in protectionism, the sovereign debt crisis in the eurozone and the global economic slowdown have also raised the possibility of a new credit crunch as banks scale back lending against a backdrop of declining confidence in interbank markets.

McKerr commented :”This daunting scenario presents many problems for global companies, not all of which possess the flexibility, responsiveness or skills needed to overcome them. Our research for this report has uncovered four fundamental business challenges that companies must navigate in the years ahead. These are complex and unlikely to be resolved quickly, but we believe that businesses can tackle them with new responses that rely on flexibility, speed and unconventional thinking.”

Four challenges:

1) Succeeding in rapid-growth markets is harder than it used to be
Succeeding in rapid-growth markets is becoming more difficult because costs are rising, competition is becoming more intense and growth, while still rapid compared with that of the developed world, is slowing. Companies will have to shed their organisational baggage, devise innovative strategies that will secure a quick payoff and take a broader stakeholder view toward the investment.

2) One size does not fit all markets
As companies diversify into markets with vastly different prospects and business environments, they face increasing operational complexity. Companies will have to integrate networks according to logically grouped markets, rethink approaches to outsourcing as well as investigate the benefits of near-sourcing.

3) Policy has become more important and less predictable
An uncertain and dynamic policy environment - especially rising protectionism - is causing considerable concern. Companies should engage with policy-makers to make the right decisions, combine local knowledge with global coordination and build stronger relationships with tax administrations.

4) Good people are hard to find
Companies everywhere find it increasingly difficult to match suitable candidates with available positions. To help deal with the problem, companies should put the best talent in the most promising markets, promote managers in line with the pace of the market and revamp the expatriate model.

Long-term winners:
Ernst & Young says that to be a long-term winner in this increasingly uncertain world companies will have to adapt a different mindset. In particular they should understand that managing across highly divergent and fast-moving markets requires focus on execution and operational excellence. Companies must develop highly flexible business models that enable them to respond to new opportunities and threats. And they must understand why inclusive leadership is increasingly important to thrive in constantly changing conditions.

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