The Global Business Environment

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note 1-428-651

07 August 2004

The Global Business Environment
Globalization has changed us into a company that searches the world, not just to sell or to source, but to find
intellectual capital - the world’s best talents and greatest ideas.
Jack Welch, former General Electric CEO
We are moving toward a global economy. One way of approaching that is to pull thecovers over your head.
Another is to say: It may be more complicated - but that’s the world I am going to live in, I might as well be
good at it.
Phil Condit, former CEO and Chairman of Boeing

The global economy has undergone a vast transformation in the past 20 years:
• Economic linkages among countries are growing rapidly. Since World War II, the growth rates of both
trade and cross-borderinvestment have consistently exceeded the growth of economic output at the
global and regional levels, and for nearly all countries.
• Since the late-1980s, economic liberalization has spread around the world. After decades of economic
isolation, countries such as China, India, Russia, Brazil, Egypt, Mexico, and others have joined the
global economy (see Figure 1 on page 5 for a graphical depictionof this phenomenon).
• Nearly half of global Gross Domestic Product (GDP) growth is projected to occur in developing countries
in the next 25 years (see Table 5 on page 7). In a recent study, Goldman Sachs projected that China,
India, Russia, and Brazil will all be among the world’s six largest economies by 2050 (this study is
discussed in more detail below).
• The past decade has witnessed therise of developing country-based multinational firms in sectors
as diverse as pharmaceuticals, brewing, banking, white goods, and information technology. Until
recently, nearly all global firms were based in the United States, European Union, or Japan (see the
Going Global case series for several examples).
• Globalization is now occurring rapidly in service activities. Globalization hastraditionally been
concentrated in the natural resources and manufacturing sectors, which employ about 16% of U.S.
workers. The services sector provides 78% of employment. (See Exhibit 3 for a depiction of cost
savings from moving an activity “offshore.”) The globalization of services is causing firms to actively
reengineer their global operations to better access and leverage global resources.

Toprovide context, Exhibits 1 and 2 present world maps scaled by, respectively, economic output and
population. The patterns evident in these maps indicate the challenge and opportunity that globalization

Professor Robert E. Kennedy developed this note. ©2008, Robert E. Kennedy.

The Global Business Environment


creates for managers. For example, the United States has only 4.6% of theworld’s population but produces
about 26% of global economic activity. At the other extreme, India has about 16.5% of the global population,
but produces only about 1.4% of global output. As India enters the global economy through closer trade and
investment linkages, it will affect the global economy in many ways. Its customers represent vast potential
markets. Its workers are skilled and very lowcost. And its firms will create tremendous pressures for global
industries to restructure. These effects will unfold over decades and will have a profound impact on nearly
all sectors of the economy and every prominent manager’s career.

This note provides a brief profile of the global business environment. It is organized into four sections.
The first discusses how economic performance is measuredand presents comparative figures for a sample
of countries. The second reviews why firms trade and invest across borders and why governments generally
encourage such activity. The third section discusses global economic trends. The fourth presents several
projections for how the global economy will evolve in the next few decades.

Measuring Economic Performance

Economic performance is often...
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