Industrial Insight

Not flat…. | October 25, 2011

’Flat’ World Will Take Time to Smooth Out: Pankaj Ghemawat

By Pankaj Ghemawat Oct 19, 2011 7:00 PM CT

In fact, data indicate that most people consistently overestimate current levels of cross-border integration and similarly underestimate the impact that distances and differences still have in keeping countries apart. Immigration, for example, is a contentious issue on multiple continents. Yet only 3 percent of the world’s people actually live outside the country in which they were born, and only 2 percent of university students study outside their homelands.

What about the much-vaunted flow of information throughout our hyperconnected world? Only 2 percent of telephone calls are international, and less than 18 percent of Internet traffic crosses national borders. Based on a popularity survey of online news sites in 30 countries, most users get all but a tiny portion — roughly 5 percent — of their news from domestic sources. According to the Pew Research Center, only 20 percent of U.S. news coverage across all types of media focuses on international issues, and almost half of that concerns the U.S.’s own foreign affairs.

Exports provide the most visible face of globalization, yet even they comprise a smaller proportion of the economy than many believe, accounting — without double counting products that cross a border multiple times — for about 20 percent of world gross domestic product.

Finally, consider capital, which is presumed to respect no boundaries. Foreign direct investment makes up only 9 percent of all fixed investment globally. Roughly 15 percent to 20 percent of venture capital is deployed outside the investing fund’s home country, and equity investors have only 20 percent of their stock holdings abroad.

No matter how you slice the numbers, the bulk of the flow of goods and services is domestic, not international, and will remain so for the foreseeable future. Even the international flows that do take place are constrained geographically. Not only are international migration, telephone calls, trade and direct investment small in comparison with domestic counterparts, but more than 50 percent of international flows in these categories are contained within distinct continental regions.

In fact, if you double the distance between countries, trade between them falls by half. Similarly, otherwise identical countries trade 42 percent more if they share a common language, 47 percent more if they are part of a common trading block, 114 percent more if they share a common currency and 188 percent more if one colonized the other at some point in history.


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About author

I'm the executive vice president for a steel casting trade association, the Steel Founders' Society of America. I've got a crazy wife, five crazy children, three crazy people that married into the family, and two crazy fun little grandsons.







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