The second trend that is often cited when describing the “new normal” is globalization (see Table 1.3). Massive global population and economic trends are fundamentally altering the world of business and work. On one hand, there are phenomenal opportunities for U.S. businesses and workers as the developing world advances economically, creating new markets for your products and services. On the other hand, the rapidly growing number of new global workers and businesses are major threats for U.S. businesses and workers as the competitive landscape significantly increases.
Table 1.3 Globalization Trends
Growing population/labor force trends
More global talent/offshoring
Globalization is truly a double-edged sword for the U.S. economy. The cheap imports from developing countries have helped to keep inflation and interest rates down, benefiting consumers and businesses. At the same time, countries such as China, India, and Brazil create huge markets for U.S. multinationals. However, low-cost imports have put significant downward pressures on U.S. workers’ wages and have put significant competitive pressure on manufacturers operating with higher costs. Furthermore, the global workforce is growing and getting much more educated, putting pressure on white-collar workers’ wages and incentivizing many U.S. businesses to move operations overseas and offshore back office and IT functions.
Growing Population/Labor Force Trends
The seismic population trends sweeping across the globe will shape global labor markets for decades to come. The developed economies of the world are experiencing slowing and declining population growth rates, whereas the emerging economies are seeing their populations significantly grow. According to a United Nations (UN) population research report, the world population surpassed 7 billion in 2011 and is projected to reach 9 billion people by 2050 and exceed 10 billion in 2100 (UN, 2011). However, there is a huge divergence in population growth rates between the developed and developing regions of the world. The developing countries are on track to see their populations increase from 5.7 billion in 2011 to 8.8 billion in 2100. In contrast, the population of the developed world is expected to change minimally, rising from 1.24 billion in 2011 to 1.34 billion in 2100. Significantly, the developed nations’ populations would have declined to 1.11 billion during this time period if it were not for the projected net migrations from developing to developed countries, which is expected to average 2.2 million people annually from 2011 to 2050 and 0.8 million from 2050 to 2100 (UN, 2011).
Europe and Japan are facing a devastating combination of rapidly aging populations and declining fertility rates. Over the next 40 years, countries like Germany, Italy, Spain, and Japan are projected to see population declines ranging from 15 to 25 percent (U.S. Census Bureau, 2008b). Other developed countries including the United States, Great Britain, Canada, and Australia, due to growth in immigration, will not experience declining populations but will have much slower population growth rates.
Growing populations present many unique challenges for developing countries. The population of the developing countries is young, with children under 15 accounting for 29 percent of the population and young persons aged 15 to 24 accounting for an additional 18 percent. The number of children and young people is at an all-time high (1.6 billion children and 1.0 billion young people). Typically having such a young population bodes well for a region because their labor force grows and dependency ratio falls. However, it also poses a major challenge for developing countries, which are faced with the necessity of providing education and employment to large cohorts of individuals.
The situation is quite different in the developed regions in which the issue is a rapidly aging population in which the population aged 60 and over is increasing at the fastest pace ever. Over the next 4 decades, the number of people 60 and over in developed nations will increase by more than 50 percent, rising from 274 million in 2011 to 418 million in 2050 and to 433 million in 2100. The percent of the population 60 years of age and older in developed nations will increase from 22 percent in 2011 to 32 percent in 2050. In time, the developing nations’ older populations will also increase. The rate of growth is faster than the developed nations (3 percent and 2.4 percent annually, respectively); however, as a percentage of the population, it will increase from 9 percent in 2011 to 20 percent in 2050, which is significantly less than the developed nations. Globally, the median age of the population is projected to increase from 29 to 38 years between 2011 and 2050 and to 42 years by 2100. Europe has today the oldest population, with a median age of nearly 40 years, which is projected to reach 46 years in 2050 and slightly decline to 45 years by 2100 (UN, 2011).
Within the developing world, there has also been a significant movement toward urbanization as large segments of the population migrate from the countryside to the cities where there are greater economic opportunities. China has been witnessing the largest migration of people moving to cities with roughly 40 percent of its population now living in urban areas, which is projected to increase to 73 percent by 2050. India, which is less than 30 percent urbanized today, is expected to be 55 percent urbanized by 2050 (Goldstone, 2010). Large migrations of people in these countries put severe strains on infrastructure and resources as well as on the capability of the economy to provide housing and work.
Not surprisingly, as the world’s population continues to grow, so too does the global workforce. One look at global population trends is all you need to see to understand where most of the world’s talent will come from. In both the developed and developing regions of the world, the number of working people aged 25 to 50 years of age is at an all-time high: 606 million and 2.5 billion, respectively. However, whereas in the developed regions that number is projected to peak over the next decade and decline thereafter reaching 531 million in 2050 and 525 million in 2100, in the developing regions it will continue rising, reaching 3.6 billion in 2050 and 3.7 billion in 2100. Significantly, the developing countries labor force is projected to add nearly one-half billion workers over the next decade.
The rapid growth in world population beacons the age-old concern, going back to Thomas Malthus’s famous 1798 “Essay on the Principle of Population,” of whether rapid population growth will outstrip the world’s resources creating widespread poverty and famine. These concerns were echoed in the 1972 Club of Rome’s report on the limits of growth. However, the continued advancements in agricultural technology and the increased productivity and discovery of new energy sources have dampened these concerns. Nonetheless, the continued increase in demand for critical commodities including food, water, energy, and minerals has created shortages and huge price fluctuations.
More Global Talent/Offshoring
As the developing countries’ populations and economies grow, the educational attainment of the global workforce has been significantly improving. As a result, the competition for the developed world worker has never been higher, particularly in the highly in-demand fields of science and engineering. When many people think about U.S. companies’ offshoring work, they typically think of the millions of factory jobs and other low-cost work that was sent overseas so that companies can hire cheap labor. A more startling trend for U.S. workers is the offshoring of white-collar work. As the world becomes increasingly more connected and more educated, it is both feasible and economically prudent to have work performed where wages and benefit costs are much lower than in the United States.
Jobs that are not candidates for offshoring typically require customer contact or extensive interactions with colleagues, such as many retail, managerial, support staff, and generalists’ type of work. The types of white-collar jobs amenable to offshoring include IT, engineering, finance, and accounting. The two largest sectors for offshoring are IT outsourcing (ITO) and business process outsourcing (BPO), which encompass a wide range of jobs including low-skilled back office operation positions to high-skilled IT positions. Many of these offshored jobs were previously filled by college graduates.
Nearly 50 percent of the Fortune Global 250 had offshored IT and business processes activities. In 2009, IT and business process outsourcing revenues exceeded $250 billion and $140 billion, respectively. India has dominated these markets, capturing 65 percent of the ITO and 43 percent of the BPO markets (Willcocks and Lacity, 2009). Forrester Research estimates that the number of U.S. legal jobs moved offshore will increase from 35,000 in 2010 to 79,000 by 2015 (Meister and Willyerd, 2010).
Today, India has more technology workers than any other country, and China is on track to pass the United States as the country with the largest number of R&D workers (Bisson et al., 2010). As the demand for high-skilled labor exceeds the supply in the United States, many U.S.-based multinationals have no choice but to tap into the growing number of educated workers globally. However, there is a significant variance in the quality of workers’ education within developing nations. For example, for entry-level corporate positions spanning a number of occupations including engineers, finance, accounting, and healthcare, there is a growing mismatch between the sort of graduates many Chinese universities turn out and the type of candidates who would interest local and multinational companies doing business in China. There is also a growing Chinese managerial and executive talent gap (Lane and Pollner, 2008). In a study conducted by McKinsey, researchers found that although nearly 50 percent of the engineers in Eastern European countries such as Hungary and Poland are suitable to work for multinational companies, only 10 percent and 25 percent of those in China and India, respectively, could do so (Farrell and Grant, 2005).
For many multinational firms, setting up operations around the world is not just about gaining access to lower cost and needed talent. Given the slowing population and economic trends in the developed world, many organizations want to be closer to the economies that are growing the fastest and hire local talent who understand the culture and intricacies of doing business in these countries. Expanding into new markets also gives these multinational organizations access to local supply chains enabling them to efficiently distribute their products and services.
As emerging-market economies grow, they will shift primarily from an export-driven economy to a more consumption-driven economy, making them prime markets for multinationals striving to increase revenues. As workers in India and China advance economically, their demand for U.S. products and services increases. By the end of this decade, China is expected to have 595 million middle-income consumers and 82 million upper-middle-income consumers (Laudicina, 2005). In a report by McKinsey and Company titled “The Great Rebalancing,” it’s projected that more than 70 million people mostly from emerging economies are moving into the middle class each year (Bisson et al., 2010). Middle-class consumers across a dozen emerging countries now number almost 2 billion people and spend an estimated $6.9 trillion annually.
These global trends are both a threat and an opportunity for U.S. companies. Clearly, there is more competition; however, there are many opportunities for U.S. companies to reach a growing number of consumers in maturing developing countries. In a global survey conducted by PricewaterhouseCoopers (PWC), nearly two-thirds of the CEOs surveyed were positive about the impact that globalization will have on their organizations in the upcoming years (PWC, 2006). These CEOs’ primary motivation for going global was not to reduce costs but to access new customers and better service their existing ones. Over the next decade, nearly 80 percent of the world’s middle-income consumers will reside in emerging economies. Not surprisingly, 71 percent of the CEOs surveyed by PWC indicated that they plan to do business in at least one of the BRIC (Brazil, Russia, India, and China) countries within the next few years.
There are tectonic shifts altering the global competitive landscape. Although the United States has the largest economy, 50 years ago the U.S. economy accounted for 53 percent of global gross domestic product (GDP), whereas today it accounts for less than 28 percent, or less than 20 percent in terms of global purchasing power parity (Central Intelligence Agency [CIA], 2010). The biggest competition has been from the BRICs, with China and India posing the greatest competitive threats. The headquarters’ locations of the Financial Times Global 500 rankings highlight these global business trends. From 2005 to 2009, the number of U.S.-based multinationals showed a sharp decline with a net loss of 38 companies, whereas companies located in the BRICs witnessed a dramatic increase. Brazil saw a net gain of four companies; Russia had a net gain of two companies; India had a net gain of five; and China had the largest increase with a gain of 35 companies (Meister and Willyerd, 2010).
The UN estimates that in 2010 there were more than 82,000 large multinational companies employing more than 77 million people worldwide (UN, 2010). The rising number of multinational firms located outside the United States is not just competing with U.S. firms on cost, but a growing number are making significant advances in innovation. In particular, there has been an explosion of R&D expenditures in Asia. The 10 largest economies in Asia (China, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Taiwan, and Thailand) in 2011 spent an estimated $399 billion on R&D, slightly less than the $400 billion spent in the United States, but well ahead of Europe’s $300 billion (National Science Board, 2012).
The Bloomberg Businessweek ranking of the 50 most innovative global companies highlights just how quickly the rest of the world is catching up with the United States. In 2006, there were only 5 companies in the top 50 that were located in Asia; by 2010, the number of firms had grown to 15. For the first time since the rankings began in 2005, the majority of the top innovative companies on the list were based outside the United States. The pace of change in this competitive space is also accelerating, as more than one-half of these companies were not on the list in 2009 (Society for Human Resource Management, 2011).
Today there is an interdependent global economy that is getting larger and more sophisticated by the day. In the coming decades, emerging-market economies will rapidly evolve from being minor players on the global stage into economic powerhouses. No longer will they be viewed as the world’s factory producing low-cost goods and services as they become large-scale providers of human capital and innovation.