Singapore ranked third in Globalization Index 2010

Hong Kong took the first place, followed closely by Ireland on Ernst & Young's Globalization Index 2010.

According to Ernst & Young, the index measures the world's 60 largest economies according to their degree of globalisation relative to their GDP.

The Globalization Index is one of the two original researches done for the report “Winning in a polycentric world”, which was released today by Ernst & Young in cooperation with the Economist Intelligence Unit. The other research in the report was a survey of more than a thousand senior business executives worldwide, conducted in late 2010, canvassing their thoughts on globalization.

The Globalization Index, which covers the period from 1995 to 2014, has five criteria: openness to trade, capital movements, exchange of technology and ideas, labor movements and cultural integration. Each of the criteria's weighting was validated by the business leaders surveyed. The index measures the relative level of global engagement of a country. It does not measure the absolute or relative impact a country has on global commerce or the global economy.

Singapore has continued to perform strongly in terms of openness to trade and capital movements. The country saw an improvement in score for cultural integration, but reduced scores for labor and technology compared to last year. Hong Kong, which takes the top spot, saw improvements in all categories except technology, and is particularly strong in trade.

Steven Phan, Country Managing Partner, Ernst & Young LLP says: “The lower net migration, as well as reduction of trade in R&D as a proportion of GDP, has reduced Singapore’s score for labor mobility and exchange of technology and ideas. However, we expect Singapore's globalization score to steadily improve between 2011 and 2014. Scores for trade, capital, technology and cultural integration are expected to improve over this period, while the movement of labor will remain flat, declining marginally.”

Globalization set to pick up steadily

The survey shows that, after a brief pause in 2009 and a modest rebound in 2010, the world’s largest 60 economies will continue to globalize steadily between now and 2014, driven by the continued global economic recovery, technological innovation and the rise of the emerging markets.

The report also highlights the tension between the flattening effect of globalization and significant variations across international markets. While the former encourages companies to roll out business and operating models globally, differences between markets will demand a more localized approach.

Steven Phan comments: “It is incumbent on business and governments to continue to make the case for globalization as a positive force and avoid any descent into protectionism. The future challenge for business will be to strike the balance between these opposing forces of globalization and national markets and achieve both scale and local relevance.”

“The convergence of market potential between the developed and emerging world means that the number of markets that multinationals must consider as “strategic” has increased. But, at the same time, the nature of the opportunities in those markets can be fundamentally different. In the developed world, companies have well established business models and asset bases but face weak growth prospects. In the emerging economies, this situation is often reversed.”

Long-term winners?

To be a long-term winner in this new globalized world, multinationals must essentially operate at multiple speeds in order to fit their strategies to both fast-growth and slow-growth markets. Success in the former requires rapid-fire decision-making and the capacity to experiment, learn and scale at speed. For large multinationals, this may require a re-think of reporting lines in order to bypass bureaucracy and maximize agility. Developed markets, on the other hand, will require a different approach, which is more dependent on efficiency and incremental growth.

To succeed in today’s polycentric world requires companies to focus on four priorities. Steven Phan comments:“Corporates will have to first, redefine global and local; second, develop a “polycentric” approach to innovation; third, rethink relationships with government and tax administrations; and fourth, build leadership teams with strong global experience.”

Where are businesses today?

Our survey of over a thousand business leaders suggests a mixed picture in how far corporates were currently engaging with these four priorities.

Business is certainly getting more international in its aspirations. Nearly 70% of those surveyed said that their foreign direct investment (FDI) would increase in the next three years. Seventeen per cent of respondents said FDI would increase by more than 20%.

The executives are already re-thinking their approach to innovation in emerging markets. Currently, the companies in our survey conduct a relatively small proportion of their R&D in emerging markets, despite the importance of these economies to their growth prospects, with only 16% of respondents saying that more than one-quarter of their R&D expenditure is invested in emerging markets.

But, over the next five years, this picture will change. The proportion of respondents that will conduct more than one-quarter of their R&D in emerging markets will almost treble in Western Europe and more than double in North America. Nearly 30% of companies will spend more than a quarter of their R&D investment in emerging markets five years from now.

Understanding the political environment, and how it might affect the company’s ability to do business, has become a core competence for global corporates. And yet, according to our survey, companies pay a relatively small amount of attention to policy as part of their investment decisions. The only aspects of government policy that more than half of respondents consider to be influential when planning an investment are economic growth projections and tax rates.

Finally, on the need to build leadership teams with strong global experience, respondents to our survey generally share this view. Just over half agree that there is a link between diversity of teams and experience, and superior reputation and financial performance. Only 15% think that diversity does not have a positive impact on either reputation or performance.