7 features of the new world economy

International forces are reshaping the world of business, but also creating new opportunities and a more level playing field for small firms.

When the US athlete Phil Knight decided to set up a business selling high-quality running shoes in the late 1950s, he had a bright idea – that the company would be more competitive if the shoes were made in Japan.

It was a concept he explored in a paper written while studying for his MBA at Stanford University. However Knight’s letters to Japanese manufacturers went unanswered. He and his running coach Bill Bowerman, who became his business partner, had to start out selling shoes by an existing Japanese brand before they could arrange for the manufacture of their own designs.

Knight and Bowerman were ahead of their time. Manufacturing in Japan helped their company, Nike, to become one of the world’s largest suppliers of athletic shoes. It took 30 years before most other companies caught on and outsourcing became common business practice.

Today’s companies can outsource almost any aspect of their operation – from manufacturing and customer service through to management functions. It is estimated that global revenues from outsourcing exceeded $510 billion in 2010.

According to Professor Peter Liesch, an international business expert with UQ Business School, shifts in production patterns are changing the nature of business. “Companies can tap into the market to purchase productive capabilities from anywhere in world, which has consequences for the way firms are structured. You can have a world famous brand without manufacturing the product,” he says.

While outsourcing and offshoring is a feature of the new world economy, and there is now inshoring, Professor Liesch believes the concept of ‘globalisation’ does not tell the full story about what is going on. Other factors come into play. Centrally planned economies like the former Soviet Union have moved to market-based economies, as have many others, while barriers to trade and investment are being broken down.

There are more markets now than ever before, more are being created, with yet more to come and a worldwide market for market transactions is in place, as the outsourcing and offshoring trend shows. The markets we have are also more efficient.

Professor Liesch says: “New markets are being created all the time – in fact a lot of entrepreneurial activity is about creating markets that didn’t previously exist. For example, Amazon created a global market for book deliveries while Facebook and other sites created a market for social media that was not there before.

“At the same time, obstacles to business are being removed. Improved communications and transportation, the internet, new global payment systems and the dismantling of trade barriers all make it easier to engage in international business. The world is becoming more interconnected.”

Professor Liesch says firms need to understand the implications of the new world economy for their own operations:

1. More options for production

No matter what your production processes, the chances are that the same capabilities exist elsewhere. Be informed where such services are located. How accessible are they? Could you outsource production and reshape your business? Bear in mind there is often a trade-off between the desire to control production and the interests of efficiency. However outsourcing is not the only option – alternative forms of international economic involvement exist and more will be created.

2. The chance to create new markets

The new world economy holds plenty of opportunities for smart minds. Today it is not usually the lack of capital that prevents people realising ideas. Entrepreneurs have the power to create new markets and often doing so requires very little in the way of investment.

3. Small firms can think big

International success is no longer limited to big business. “Small firms can be just as international as big ones,” says Professor Liesch. “While we will still have multinational corporations, there will be more and more opportunities for small and medium-sized firms – which is good news for local economies as they employ more people.”

4. A more level playing field

The democratising effect of the new world economy means that opportunities are not limited to those in science and technology. “While there is potential to develop things, it’s also about making better use of things, doing things in a different way that can give firms a competitive advantage,” explains Professor Liesch. “Similarly, the developed economies are no longer the bastion of all things innovative – bright ideas can come from anywhere in the world.”

5. Networks are important

Networks help firms to get to know the market and to be known within the market. Businesses need to have a good understanding of their own networks, but also peripheral networks because of the interconnections beyond their immediate networks.

6. Culture is no constraint

“Firms don’t have to speak the same language and do business in the same way,” says Professor Liesch. “While cultural differences are more of a barrier for consumer businesses rather than those in the business to business sectors, it’s not beyond any firm to overcome them. Managers should not be culturally blind – but likewise, they should not be culturally bound.”

7. Regionalisation not globalisation

Talk of globalisation can be misleading as connections between businesses often occur at a regional, rather than global, level – for example firms from the EU doing business in the EU, or North American firms doing business in NAFTA. Research into the behaviour and trade patterns of Fortune 500 companies reveals regionalisation across most industry sectors. Such connections arise for commercial reasons – free trade agreements may be put in place later but only once the initial connections have been made by firms.

Professor Liesch adds:

“The internationalisation of production is redefining the modern world economy and presenting firms with new possibilities. In this new world, businesses will compete on a more equal footing. Smart firms will use their ideas to gain competitive advantage and traditional limitations such as size or sector will not hold them back. The worldwide market for market transactions is a defining feature of our modern world economy.”