A Speedy Global Tour
In fact, to set the scene, it might be a good idea to take a whirlwind tour around the world. During our trip, we will see examples of the global economy in action. So, as we began this chapter in China, let us also begin our "Cook's Tour" of the globe there.
The city of Dalian is situated near the southeastern tip of the Liaodong peninsular that hangs down from the coast of northeast China, the region formerly known as Manchuria. It is a part of China, but it faces into the Yellow Sea toward Korea and Japan.
The climate guarantees year-round ice-free status to its ports, so Dalian and its neighbors were always destined to enjoy the fruits of trade, communist or not. Dalian's immediate hinterland, on the Liaodong peninsular, is dominated by a beautiful coastline and a landscape of hills, valleys, and forests rich in natural resources, such as coking coal and iron ore. Yet Dalian has always known that it must look outward for its prosperity.
The port was established by the Russians in the late nineteenth century. The Japanese later introduced heavy industry. Dalian adopted a role as an entrepot for northeast China. But in the past decade, the city has changed from being a sleepy port into one of China's most important and dynamic industrial centers, with a population surpassing five million. It has combined its old industrial base in Liaoning Province, centered on steel making and chemical and machine-part manufacture, with new service- and technology-related ventures. There is a reservoir of skilled personnel, supplied by a number of universities and technical institutes. Its demand for labor appears insatiable.
The city continues to grow in physical size and population. It attracts immigrants from throughout northeastern China, drawn by wage levels that, while low by Western standards, are far higher than those available in rural China. Its citizens live in a city with its own commuter train system, as well as good housing, many parks, and leisure facilities, and, above all, clean air and water.
The city's inhabitants have more sophisticated needs than those of their grandparents. In the heyday of Maoist orthodoxy, the workers were badly paid, badly housed, and badly fed. They were given no opportunity to complain. Their leisure hours might be spent attending showings of revolutionary films or, in warmer weather, reading from Chairman Mao's Little Red Book.
Today's employees are provided with far better and more interesting facilities. Dalian's shops are stocked with an international range of consumer goods: everything from designer fashion to the latest DVD players. Far more people can buy these, thanks to the city's growing prosperity. Cinemas show the latest commercial blockbusters, but many residents prefer to watch DVDs, available in the city's many electrical and TV emporia.
Dalian has benefited from the seismic change that has swept aside official Chinese thinking on the economy since 1992, when Deng Xiaoping proposed the "one country, two systems" development blueprint. Long gone are the days of central planning. Instead, regional governors and bosses are encouraged to track their own course for the future. This sometimes involves bending the rules, but as long as the exceptions allowed by local bosses remain localized&8212;and they are successful&8212;breaches of discipline are ignored. This has been especially true after the even more drastic reforms launched by then-Premier Zhu Rongji in 1998. Mayors and other local bosses also know that if they fail to deliver annual growth rates in excess of 7 percent for two successive years, their employment will be terminated. Imagine if Michael Bloomberg in New York, Shintaro Ishihara in Tokyo, or Ken Livingstone in London faced such strictures.
In the person of Mayor Bo Xilai, Dalian possessed an extraordinary local ruler. Bo stood out from the crowd&8212;literally&8212;for in a land where smallness of stature is the rule, he stood well over 6 feet tall. He hailed from the western borderlands of China in Shanxi province. He came from a family with respected political pedigree: His father had taken part in the grueling Long March of the early 1930s, when Mao led his small group of followers on a two-year forced evacuation by foot from southern to northern China. Bo Xilai studied at Beijing University, newly reopened after the madness of the "Cultural Revolution" had seen students and faculty members sent to work in the fields. He was also young, in his late 40s, a comparatively brash young upstart in a land whose political leadership was dominated by 70-somethings. He joined the Communist Party in 1980 and worked in its various branches. His diligence and skill were rewarded when he was appointed mayor of Dalian in 1992. As the city opened to the outside world, Bo and his team attracted inward investment from throughout the world, especially from Japan. Today, there are estimated to be 3,000 Japanese firms operating within Dalian's city limits.
Bo redefined the job description of the typical Chinese city mayor. No longer content with managing sewerage and housing, he became his city's chief architect and marketing officer, establishing close links with the cream of Japanese industry and business. But his role did not end after the businesses were established. He recast himself as something akin to the manager of a five-star hotel, keenly and solicitously interested in the welfare of his guests. Foreign businesses were regularly contacted to find out how they were doing and whether they were encountering any difficulties that might be ironed out.
Bo was rewarded for his success in Dalian by being kicked upstairs. He was appointed governor of the whole province of Liaoning. At the time of his departure in February 2001, vast crowds of city residents (particularly women) gathered to see him off. They seemed genuinely sad. In a land long used to choreographed mass hysteria, this might have been dismissed, but the sorrow appeared spontaneous. Bo's rise continues: In early 2004, he was named the Minister of Commerce for the whole People's Republic at the age of 53.
Helped by the charismatic Bo, Dalian, along with over a dozen other regions in China, has become a de facto regional state, setting its own economic agenda. While still a part of China and, in theory, subject to the rule of Beijing, it is largely autonomous. The reality is that its ties with Beijing are weaker than those with business centers throughout the world.
Success breeds success, and companies that do well in Dalian act as catalysts attracting other businesses, not necessarily from the same sector. As in similar regions of China, there has been an explosion in the provision of services, whether financial or technical. Dalian is almost a self-sufficient economic entity, with many services being available to business and residents on their doorstep. Dalian has also been at the forefront of the provision of cross-border business process outsourcing (BPO) services in China, in particular in areas such as direct data entry, often for Japanese businesses. These newer developments have been spearheaded by Bo's protégé, Mayor Xia Deren. The historical memories of the Japanese in this part of China might not always have been positive, but these are left in the past, where they belong. Japanese language courses are popular and are regularly oversubscribed. As a consequence, an estimated 50,000 Dalian residents speak fluent Japanese.
It is curious that Dalian, a modern business and economic center, should also enjoy a vibrant tourism industry. Its beaches and watersports facilities have been protected. A special tourist zone, the Golden Pebble Beach, has been erected, with marinas, two golf courses, and hotels catering for all budgets. Many of Dalian's visitors fly in from elsewhere in China. They form part of the vast and still growing consumer class in China. They have money to spend, not just on automobiles and consumer electronics, but on other aspects of the "good life," such as leisure and private education for their children. Dalian attracts visitors from outside China, too. Many Korean and Japanese tourists now prefer Dalian to Singapore.
Dalian's success relies on its willingness to engage in the new cyber-based and borderless economy. It has also benefited from being allowed to pursue its own path. It reacts directly with the rest of the world, not at the level of part of a nation-state, but instantaneously and directly, as a region. For many decades, Dalian, along with the People's Republic of China, turned its back on the world. The rest of the world was controlled by China's enemies. Now Dalian and other Chinese region-states have enthusiastically embraced the world economy. There are 13 other cities within the province of Liaoning alone whose population exceeds one million. They are all seeking to take their place on the global stage or, at a minimum, to become part of the Yellow Sea Economic Zone. They resemble a flock of flying geese headed by Dalian.
China is probably the country that is benefiting the most from the global economy. China now has the second-highest foreign exchange reserves ($432 billion) in the world (topped by Japan at $817 billion) and domestic savings of $2.5 trillion. More than any other country, it is setting the pace in the global economy. Its 2003 GDP was estimated at $1.3 trillion, and the communist state has been ranked number seven in the world (number two in terms of purchasing power). Its economy grows at a rate seldom lower than 7 percent annually. Most recently, it has been in excess of 9 percent, a figure for the whole country that includes the richest and the poorest areas.
If we remember the theatrical metaphor, we can see China as being like a rented theater. It is an arena that is being used as a rehearsal studio, a testing ground for global economic realities. But a little disconcertingly, different parts of the stage are being used for varying types of performance. These differ in skill and expertise and, consequently, in audience approval.
As we shall see throughout this book, we must try to divest ourselves of old mindsets. One of the most oppressive is the notion of the nation-state. So when we think of China today, we should not think of the nation-state running from the Yellow Sea in the east to the depths of central Asia in the west, but rather an amalgam of prosperous, burgeoning regions, such as Dalian, set alongside others that might be light-years behind in economic development and prosperity. All these regions vary in size. They are theoretically under the same sovereign state, the People's Republic of China, but part of China's prosperity lies in its ability to forget about this in practice and to allow its region-states to plough their own furrows. In reality, all these regions are engaged in almost manic competition with each other for investment and resources, not as in the old days from the center, but for investment from the outside world.
Meanwhile in Ireland
We started this chapter describing Riverdance. Let us now look at the country that inspired it: Ireland.
For many people, Ireland summons up visions of green, mist-covered fields and valleys. But outside the tourism industry, pleasant scenery does not produce wealth. Anyway, these visions belong only in the glossy pages of holiday brochures.
When Ireland became independent as a nation in 1922, it was overwhelmingly rural. Its rulers and citizens eyed covetously the northeastern quadrant of the island of Ireland, which had been kept by Great Britain. It was richer; it was the one area of Ireland that had seen extensive industrialization. So, the rest of the island seemed destined to remain perpetually green&8212;and poor&8212;with its major export people. This strengthened a lack of self-confidence. There was a sense of the country being a victim of forces beyond its control.
From the 1960s onward, attempts were made to attract manufacturing industry from abroad. The Industrial Development Authority (IDA), a government agency, constructed industrial infrastructure and facilities, while the government offered generous tax breaks such as a 10-year moratorium on corporation tax payments for foreign direct investments (FDI). These moves were only partly successful. Irish competitiveness was low. Infra-structure (despite the best efforts of the IDA) in many sectors was abysmal. A former director of the IDA told of how they had brought a prospective investor to view a site for a facility by helicopter so that he would not experience the dreadful state of the roads.
In the 1970s and early 1980s, physical geography still played a big role in the international economy, and Ireland's location on the far western periphery of Europe meant that it was just too far away from potential markets. Most of those located there were attracted by Ireland's position as a European Community member. The reliance of the country on external commercial operations made its industrial sector vulnerable to trends in the global business cycle.
Emigration from Ireland increased again in the 1980s, but unlike many of the earlier emigrants, these were often highly educated. Again unlike earlier emigrants, they often returned to Ireland after gaining experience and contacts outside the country. A new self-confidence began to take hold, and with it a new attitude toward the rest of the world. It was no longer a place of exile, but one of opportunity and a source of prosperity.
The fact that the country had missed out on industrialization was increasingly seen as a blessing. It meant that there was no rusting industrial plants and no unemployed workforce born and bred to heavy industry. It also meant that the country's economy could take advantage of new trends beyond its borders in the global economy. Ireland could begin from scratch. In the late 1980s, developments in cybertechnology made it clear that jobs and prosperity could come at the end of a telephone line. The potential of Ireland to play a major role in the information technology sector was realized. Greater computer literacy in all sectors of the population was encouraged, and telecommunications infrastructure was enhanced. In 1992, the vision of Ireland as the "e-hub of Europe" emerged. Europe was headed in the direction of a single market, so why could Ireland not find a very profitable niche as the base for telecommunications entry into that market? Ireland already had a large base of young, educated workers who could fulfill investors' labor demands.
The visionary and almost prophetic nature of the e-hub concept is apparent when it is remembered that it was developed in 1992; that is, before the Internet became embedded in the commercial world. In the following chapter, I explain how the global economy began in 1985, and how I date developments according to my own calendar as being either BG (before Gates) or AG (after Gates). So the development of the e-hub occurred relatively early in this chronology, in the year 8 AG!
In Dublin, an extensive section of redundant docklands had been redeveloped since 1987 as a financial services center. This attracted many financial service providers to establish back-room operations. Ireland also became an attractive location for American companies' call centers in Europe. This was accompanied by a significant growth in indigenous software companies.
As we will see, Ireland is lucky; it is a nation-state that is the same size as a region-state. It is, therefore, capable of tapping into the dynamism of such a region state. We will see that one of the keys to the success of a region-state is being able to brand itself successfully (such as an "e-hub") and to offer something different that sets it apart from the competition. Ireland has been able to do this very effectively in the customer response management and "back office" sectors. It has also been able to capitalize on its image as a fun place to work, with a vibrant social life and abundant cultural and recreational facilities. Phenomena such as Riverdance and the international success of Irish rock groups such as U2 and The Corrs have also played a significant part in the nation's reinvention.
For decades, successive Irish governments expended resources on attempting to resuscitate the native Gaelic language. Although English remained the vernacular of the vast majority, it was felt that the country's right to nationhood was stillborn and defective without a language of its own. But in the new global economy, where English is the linguistic platform of communications, the possession of English as a first language is a major advantage for Irish citizens.
Ireland's call centers are able to employ many of Ireland's foreign language graduates, but there are not enough fluent speakers of German, Italian, or Swedish, for example, within Ireland. The country's openness means that native speakers of foreign languages are attracted to it and are welcomed. Greater prosperity has also attracted immigrants from all over the European Union, within which barriers to relocation have been all but cancelled. They have added their skills to Ireland's economy and helped to make Irish society more varied, colorful, and sensitive to the wider world. Given Ireland's readiness for and commitment to the global economy, it came as little surprise that the country was ranked first in both 2002 and 2003 in the A.T. Kearney/Foreign Policy Globalization Index.
Ireland has many strengths. It has a relatively small but highly educated population. It is situated on the periphery of Europe, yet it is the closest part of Europe to North America. In the economic past, dominated by manufacturing industry and physical constraints on movement, its location was a liability. But in the age of the global economy, physical location is much less important. Without doubt, the greatest advantage it possesses has been its vision of how it can fit into the new and ever-changing economic realities of the twenty-first century. This has enabled Ireland to create more than 300,000 new jobs in the areas of cross-border BPO, CRM, and R&D in just over a decade. Along the way, its time-honored social malaise of unemployment has been eliminated.
A comparison between Ireland and another island nation, New Zealand (actually two separate islands), will be helpful. Both have economies that were traditionally based on farming and processing of agricultural products. Ireland, though, has transformed itself from a country with a largely agricultural basis into a country with a strong ICT base. New Zealand is still very much playing the old game. It believes that deregulation is enough. It isn't anymore. As a result, New Zealand has not been able to come up with new types of industries. Sitting on a base of agriculture and agriculture-related industries, and applying Ronald Reagan–style deregulation, especially under the banner of "Rogernomics," is not good enough. You have to do what the Irish, the Finns, and the Chinese are doing.
Now let us leave the Emerald Isle and fly northward to Scandinavia and to its northeastern extremity, Finland.
Finland: In from the Cold
Finland has long been on the periphery of Europe, but the opposite periphery to Ireland. Where the latter looks out westward upon vast areas of ocean, the people of Finland have been able to look out upon a slightly drier landscape, but one equally hostile: mile after mile of impenetrable forest and frozen tundra broken only by icy lakes and endless, fast-flowing rivers. In fact, Finland was as far from the beaten track of commerce and trade as it was possible to be.
Finland sits on the northeastern shoulder of the Baltic, a sea by name, though almost one big lake. In the distant past, the Baltic was an avenue for primary products such as furs, timber, and amber, but Finland was really too far north to benefit from this. Its harbors have been kept open year-round only by icebreakers. Freezing temperatures bring one blessing. In the winter, some lakes and rivers freeze so hard that it is possible to drive trucks across them, thereby adding seasonally and nearly costless transport to the infrastructure.
Finnish industry has traditionally been based on processing natural resources, especially the abundant woodlands. There is also some high-quality mechanical engineering. But Finnish industry has never been static. Throughout the twentieth century, considerable amounts were spent on R&D, and production was accompanied by constant innovation.
In the last half of the century, the country was sandwiched between the spheres of influence of the rival superpowers: the United States and NATO to the north and west, the Soviet Union and the Warsaw Pact to the east and south. Although its society and government were free and pluralist, everyone in the country (and outside world) recognized that this had to be paid for by a commitment to "neutrality." Finlandization entered the political vocabulary as a term of contempt. No one wanted to be like Finland.
It also developed a Scandinavian-style welfare state, paid for by heavy borrowing and by some of the highest levels of direct and indirect taxation in the world. This also paid for some very high-quality education.
In the midst of this, companies such as Nokia and Sonera (now called TeliaSonera after a merger with the Swedish operator Telia in 2002) developed global trail-blazers in telecommunications. Important developments in software engineering, such as data security specialist, SSH, and the Linux computer operating system (invented by the Finn Linus Torvalds) also emerged.
As a result, Finland has achieved levels of productivity and competitiveness that are the envy of more established economic players. The Geneva-based World Economic Forum declared Finland the most competitive country in the world in 2003, for the second year running. It came in ahead of the United States and Singapore. It also scored top marks for network connectivity and compatibility, and was deemed the most responsive to IT and e-business opportunities.
How has an isolated high-tax country turned the economic tide? First, the country has always recognized that its prosperity lies in looking outward toward the rest of the world. This has been something of a curse in the manufacturing-dominated past. With few mineral resources, the country was vulnerable to oscillations in energy prices. Finland was also one of the few regions outside the old Soviet bloc to shed a tear, albeit perhaps a crocodile one, for the demise of the Soviet Union. The USSR was one of Finland's most important trading partners. Cross-border visits contributed to the Finnish tourism sector. The breakup of the communist giant meant that Finnish balance of payment figures suffered a considerable drop. Finland faced an international environment shorn of old certainties and a domestic economy that showed all the signs of being in terminal decline. The Finns are a resourceful nation, and with resolution they realized that salvation could come only through openness to the rest of the world.
In addition to being outward looking, the level of Finnish education is very high. As in other parts of Scandinavia, proficiency in English is extensive, but with the Finns such linguistic skill is a necessity. The Finns are proud of their vernacular Finnish, but they are wise enough to know that only Finns (and Estonians) can learn it. It is a very complex language, unrelated to Indo-European languages such as Swedish and Russian. Few foreigners are brave enough to acquire even a basic competence. The Finns have long been compelled to communicate with the rest of the world by means of the linguistic platform of English. Knowledge of English is necessary for advancing in education; after all, not many English and American high school and college textbooks are translated into Finnish. English is the language of top-level management meetings in companies such as Nokia (Finland's largest company). English is viewed not as a threat, but as an opportunity. English instruction starts early in Finnish schools, and, increasingly, many subjects are taught through English. This is one of the reasons Finnish universities have exceptionally large contingents of foreign students.
Outward looking and English speaking, Finnish leaders and managers acquire an international and global outlook almost by default. Top management in Finland's corporate sector is also broad-minded and seeks to acquire and use the best talents wherever they come from. For example, two of Nokia's top directors are Norwegian and American. The Finnish stock exchange is operated by a Swedish company, OM.
The final ingredient in the Finnish success story is an appetite for technology. The Internet was adopted with gusto in the mid-1990s. Every local government department and tourism office acquired a Web presence at an early stage. Most Web pages are in Finnish, but they nearly all have English translations on another part of the site. Browser terminals have been provided in all schools, public libraries, and many other public places. In 2002, Finland had one of the highest Internet connection rates in the world: 230 connections per 1,000 people. More people were online in percentage terms than in any other country&8212;1.5 million people out of a 5 million population used the Web on at least five days in the week.
Finland has a propensity for being at the top of league tables (see Exhibit 1.1). It holds the number one spot for cell phone usage. At the end of 2002, more than 87 percent of Finns had a mobile phone. This far exceeded land lines, but this was not surprising in the home of Nokia, which currently holds a third of global market share. Although the company is proud of its Finnish roots and Finnish headquarters, it also knows that its domestic market accounts for less than 1 percent of its global sales.
Exhibit 1.1 Competitiveness rankings.
Nokia did not attain its global position by accident. Nokia traces its origins back to a lumber firm set up in southwest Finland in the mid-nineteenth century. In the 1970s, it provided communications systems for the state railways and Finnish armed forces. In the next decade, it switched to consumer electronics and suffered a severe beating from Japanese competition. Indeed, the company almost went bankrupt in the early 1990s. But through innovation and the pursuit of aggressive R&D strategies, it has come back from the brink. It does not rest on its laurels. In 1994, Nokia's CEO, Jorma Ollila, made a truly historical decision: Nokia's future was to be in mobile telecommunications. From that year, the company has unsentimentally pursued success in this market. It has divested itself of involvement in the many other areas in which it was involved.
Finland has realized the benefits of a knowledge-based economy. Much of this grew out of an existing commitment to innovation. When problems arise, they have to be solved. Solutions can then be marketed abroad.
Finns have always been realists. They know that they cannot hide in their forested country at the top of Europe: They have to be participants. They have shown that full-blooded participation in the global economy can change a nation's place in the world and prove that the rest of the world is not a place to be feared. This openness to the global economy has encouraged investors, such as American pension funds, to buy Finnish corporate stocks. Today, more than 60 percent of Finnish equity is held by foreigners. As Finnish companies aggressively master the global stage, students and tourists flock to the land of Suomi.
Finland is not alone in Scandinavia in embracing the global economy, especially through the conduit of technology. Neighboring Sweden is the home of Ericsson, also a leader in the provision of mobile technology and the development of many technical platforms.