United Kingdom : A report released today by Ernst & Young in cooperation with the Economist Intelligence Unit (EIU) shows that, after a brief pause in 2009 and a modest rebound in 2010, the world’s 60 largest 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.

Winning in a polycentric world 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.

The report draws on two sources of original research: Ernst & Young’s Globalization Index, which measures the world’s 60 largest economies according to their degree of globalization relative to their GDP, and a survey of more than a thousand senior business executives worldwide, conducted in late 2010, canvassing their thoughts on globalization.

Globalization and economic growth

The speed with which different parts of the world are recovering from the economic downturn, and the subsequent policy responses they are making, is undoubtedly placing some stress on globalization but, as our index and survey suggest, those are temporary concerns and the long-term trend continues to be for closer integration.

James S. Turley, Chairman and CEO of Ernst & Young, comments, “The enormous opportunities in emerging markets, the ever increasing power of technology and a gradual international economic recovery will ensure that globalization continues to deepen over the coming years. That said, it is incumbent on business and governments to continue to make the case for globalization as a positive force for economic and social good and avoid any descent into protectionism.”

What does it mean for business?

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.

John Ferraro, Chief Operating Officer of Ernst & Young, explains, “Business opportunities are now distributed more evenly around the world than at any time in history. 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.”

Companies must now operate in a “polycentric world” in which there are multiple but divergent spheres of influence in both developed and developing markets. It is not just opportunities that are located in these multiple centers. Competition, capabilities and resources can all now reside anywhere in the world and travel in new, sometimes unexpected directions.

Long-term winners?

Turley explains that 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 a polycentric world requires companies to focus on four priorities as Turley concludes:” 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 we 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.