Globalization, once measured largely by trade in goods and cross-border finance, is now converging with digitization. Enormous streams of data and information are transmitted every minute—circulating ideas and innovations around the world via email, social media, e-commerce, video, and more. As these sprawling digital networks connect everything, everyplace, and everyone, companies must rethink what it means to be global. Our latest research quantifies the economic impact of this shift and suggests five critical areas of focus for executives and top teams.
The new trade in bits
To measure the economic impact of digital globalization, we built an econometric model based on the inflows and outflows of goods, services, finance, people, and data for 97 countries around the world.1We found that over a decade, such flows have increased current global GDP by roughly 10 percent over what it would have been in a world without them. This added value reached $7.8 trillion in 2014 alone. Data flows directly accounted for $2.2 trillion, or nearly one-third, of this effect—more than foreign direct investment. In their indirect role enabling other types of cross-border exchanges, they added $2.8 trillion to the world economy.2These combined effects of data flows on GDP exceeded the impact of global trade in goods. That’s a striking development: cross-border data flows were negligible just 15 years ago. Over the past decade, the used bandwidth that undergirds this swelling economic activity has grown 45-fold, and it is projected to increase by a factor of nine over the next five years (exhibit).
Beyond creating value in their own right, digital flows are transforming more traditional ones. Some 50 percent of the world’s traded services are already digitized and that share is growing. About 12 percent of the global trade in goods is conducted via international e-commerce.3Digitization is facilitating flows of people too, as AirBnB, TripAdvisor, and other websites provide information that enables travel.
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Meanwhile, the growth of trade in goods has flattened. That’s a stark reversal from previous decades, which saw it rise from 13.8 percent ($2 trillion) of world GDP in 1985 to 26.6 percent ($16 trillion) of world GDP on the eve of the Great Recession. Weak demand and plummeting commodity prices account for a large part of this recent deceleration, though trade in both finished and intermediate manufactured goods has also stalled since the crisis. In parallel, many companies are reconsidering the risks and complexity of managing long supply chains—and placing greater importance on speed to market and other costs of doing business and less on labor costs. As a result, more production is occurring in countries where goods are consumed. Looking forward, 3-D technology could further erode international trade as some goods are printed at their point of consumption. These shifts make it unlikely that global trade in goods will resume its previous brisk growth.