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Archived - 3. Globalization and the Pace of Change

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Canada is competing with other nations in a global economy in which powerful secular trends are changing the competitive landscape at an ever-quickening pace. An appreciation of these trends is essential to an analysis of Canada's position and to the development of measures to improve Canadians' standard of living. The Panel's recommendations have been developed with these trends in mind.

Economic globalization is not a new phenomenon. However, over the past 50 years, global economic forces have accelerated significantly in pace and intensity. Canadians must adapt to a global market that is undergoing rapid transformation as individuals and firms take advantage of the opportunities created by new enabling information and communications technologies, a substantial decrease in transportation costs, the spread of market-based economic ideologies, and countries' increased openness to trade and investment.

The Increasing Pace of Technological Advance

"Capitalism is taking us toward a future of accelerating change. The first twenty years of the twentieth century saw as much technological progress as the entire nineteenth century. Currently, industrial societies appear to be doubling their rate of technological progress every ten years. If this continues, and there is every reason to suppose that it will, the twenty-first century will experience the equivalent of twenty thousand years of 'normal' human progress."

— Walter R. Mead, God and Gold: Britain, America and the Making of the Modern World (Knopf: New York, October 2007).

Technological developments, including containerization, improvements in information processing and the introduction of lower-cost, more reliable systems for communicating voice, data and video, have greatly facilitated the internationalization of businesses. Over four decades, transportation and warehousing costs have declined by about a third as a share of the cost of the inputs used to produce goods and services in Canada.1

These forces have changed the frame of reference for economic activity from local to regional to continental and now to global. The notion of whom we compete with has changed. Today, Canadian firms compete against others not only in their city or region, but also across Canada, the continent and the world.

Globalization has increased the incentive for firms to search out the lowest-cost suppliers of materials and services, no matter where they are located. For the most part, multinational enterprises need no longer establish separate production facilities within a country to overcome tariff barriers. They base activities in a country or purchase materials and services from independent suppliers in a country only where this contributes to the overall efficiency of their operations.

Canada's Wine Industry — The Importance of Openness

The Canadian wine industry had long been relying on hardy native species of grapes, producing low-quality wines that were protected from foreign competition. The Canada–US Free Trade Agreement (FTA) put an end to industry protection and required wine growers to innovate or perish. They uprooted the native grape varieties and planted high-quality European grapes. They introduced Vintners Quality Alliance (VQA) standards, which enhanced the reputation of Canadian wines. Canadian vineyards became tourist attractions and promoted new, unique products, further building the world-class reputations of Canadian wineries. Increased foreign competition can drive innovation and enhance competitiveness.2

The transition to a larger marketplace has been foreshadowed for a generation. For Canada, the 1965 Auto Pact with the US signalled the evolution of economic activity from a national to a continental scope. The 1989 Canada–US Free Trade Agreement (FTA) and the North American Free Trade Agreement (NAFTA) in 1994 advanced the integration of Canada into a North American economy anchored by the US. As a result, Canadians began to compete not only with other Canadians, but also with firms and workers from across North America.

The international community has implemented similar agreements governing world trade, beginning with the General Agreement on Tariffs and Trade (GATT) in 1948 and continuing to the World Trade Organization (WTO) in 1995. They opened up huge new market opportunities and increased global competition.

The Fundamentals of Global Competition

As firms and countries rethink their strategies for achieving success, they must recognize the following key trends arising from the current wave of globalization.

Greater Mobility of People and Capital

International migration has increased markedly as people seek the best jobs and opportunities. The US, Germany and Canada are expected to be the top three net recipients of international migrants over the next half-century.

Table 1 — Top Six Net Immigration and Net Emigration Countries, 2005–2050
Net Immigration Countries Net Emigration Countries
Rank Country Migration (thousands) Rank Country Migration (thousands)
1 United States 1107 1 China -327
2 Germany 202 2 Mexico -293
3 Canada 200 3 India -241
4 United Kingdom 130 4 Philippines -180
5 Italy 120 5 Indonesia -164
6 Australia 100 6 Pakistan -154
Source: United Nations Economic and Social Affairs, World Population Prospects: The 2006 Revision.

The availability of skilled talent is a key determinant of investment decisions and the location of economic activity. Many countries have increased their focus on immigration to acquire needed skills. The availability of skilled labour is a key to ensuring sustained growth in all regions and sectors.

Slowing population growth and the aging of the population in developed countries will become an important factor in labour mobility. In the future, new skilled labour will come increasingly from developing economies.3

Global foreign direct investment (FDI) flows have grown a hundredfold from 1970 to 2006.4 FDI expansion significantly outpaced growth in gross domestic product and trade over this period.5 This FDI growth has been largely driven by cross-border mergers and acquisitions, and has featured an increasing involvement of private equity funds and sovereign wealth funds.6

Going forward, being an attractive destination for skilled immigrants and foreign investment will be a critical success factor for developed countries.

Broader Competition for Raw Materials and Natural Resources

Accelerating global growth has increased world demand for raw materials ranging from food to base metals. Prices have increased rapidly over a broad range of commodity groups.7 The growing demand for resources and the rise in associated prices, notably for energy and food, has had wide-ranging impacts, driving up the relative value of commodity-weighted currencies, raising costs for individuals, and obliging businesses and industries to find new strategies to adapt.

"Scale" Can Now Be Defined in Global Terms

In industries that benefit from economies of scale, large multinational enterprises increasingly dominate because they are able to achieve scale on a global basis. This scale in turn permits global operations, attracts talent and increases each firm's capacity to make investments and take political risks.

For example, the mining sector has recently experienced major structural change, with consolidation at all levels and the emergence of very large privately owned diversified corporations. For them, acquisitions are critical for securing new projects and diversifying portfolios in terms of commodities and geography. Canadian giant Alcan was acquired in 2007 for US$43 billion by Rio Tinto.8

Companies that have built global efficiencies often establish global and regional product mandates within their enterprise. A company may have several divisional or regional offices. A nation's productivity and competitiveness are important factors in helping business units dispersed across the world win global product mandates.

The Growth of "Global Value Chains"

Changing business dynamics are putting additional competitive pressures on firms. Cost pressures have increased as production cycles shorten to more quickly respond to changes in consumer demand. As new competitors emerge from anywhere in the world, business lines can move from profitability to loss with unprecedented speed.

Firms have responded to these challenges by casting aside the traditional paradigm of firms offering finished goods produced in a country for sale domestically or across a border. More firms now seek to organize their activities or position themselves within "global value chains."

A global value chain is the process whereby the production of increasingly complex goods and services is organized across international borders.9 The term "value chain" captures the linkages in activity required to bring a product from conception through final production to market. This can include design, production, marketing, distribution and support activities. Whether a complex product like an aircraft or BlackBerry, or something as "simple" as a fashionable article of clothing, firms are competing for participation in successive stages of production.

Figure 1 — Bombardier's Global Express, Component Source by Country

Figure 1 - Bombardier's Global Express, Component Source by Country

Source: Industry Canada.

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Many of the same phenomena described above that have contributed to globalization (e.g., declining trade barriers, burgeoning investment flows, decreasing transportation costs) have also contributed to the growth in global value chains.10

Firms have become more flexible, horizontally organized enterprises, converting from geographically concentrated production networks to geographically dispersed networks.11

Siemens Medical Body Scanners

SIEMENS has been global since the 19th century. Today it operates in 190 countries, with 80 percent of its sales, 70 percent of its factories and 66 percent of its workers abroad. Siemens "goes further than mere off-shoring of low-value-added work; [it] also does much of its research and product development abroad. For instance, a lower-cost version of one of its expensive medical body scanners, tailor-made for the Chinese market, was initially developed jointly at its headquarters in Munich and in China, where it is also being manufactured; but the latest version was developed entirely in China. This Chinese Siemens product is now sold in developing countries round the world."12

New Competitors Are Emerging

Economic relations between developed and developing countries are being altered by globalization. Capital no longer flows primarily from developed countries to developing countries. Capital today also flows from developing countries into developed countries.

In the past, developed countries maintained their advantage by using their advanced technology and skilled labour to export manufactured goods to developing countries. Then, companies reoriented their operations, designing products in developed countries but assembling products in lower-cost developing countries. Now, competition can come from anywhere, and high-tech products can be designed and engineered in what was formerly referred to as the developing world and disseminated via global distribution networks.13

In 2007, emerging economies produced just over half of world output and accounted for more than half of the increase in global gross domestic product.14 These economies are rapidly becoming a major force in the world economy. As their prosperity increases, so will their demand for resources. Since the early 1990s, for example, China's shares in world consumption of oil, aluminum and steel have doubled.15

Figure 2 — Brazil, Russia, India, China (BRIC) Projected Share of Gross Domestic Product, 2006–2050

Figure 2 - Brazil, Russia, India, China (BRIC) Projected Share of Gross Domestic Product, 2006-2050

Source: Goldman Sachs Global Economics Paper No. 153, "The N-11: More Than an Acronym," March 28, 2008.

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The Internet as an Agent of Change

The Internet is the dominant technology platform for a growing number of information and communications products that are radically changing how people around the world live and work and how businesses operate and generate wealth.16 The Internet's pervasiveness is being felt across developing as well as developed countries. In 1997, nearly three quarters of the world's population living in developing countries accounted for just 5 percent of the world's Internet users. Now they account for over 30 percent.17 Global mobile connections passed the one billion mark in 2004 and reached the three billion mark in 2008, with much of this growth occurring within developing countries. Today, new connections are being added to global mobile networks at the rate of 15 per second, 1.3 million per day.18

The Internet is bringing new competition into Canadian and global markets. Both buyers and sellers have more easily accessible information on market conditions and prices. Transaction costs for buying and selling goods and services are reduced, often significantly. New online businesses are being created, and the borders of formerly isolated national markets are more permeable. The Internet is also a force for productivity growth because it promotes the more efficient use of business resources.

A country's competitiveness depends on governments welcoming, rather than seeking to control, the new freedom and choices brought by the Internet as an agent of change.

The Challenge of Globalization and Change

Globalization has become a critical challenge to Canadian competitiveness. Canadians cannot be shielded from global forces. To chart our future, we must confront these forces and deal with them. This will require us to challenge some long-held notions that harken back to a different era. Strategies that were successful in the past must be replaced with new strategies that respond to a larger global marketplace.

In the new world economy, Canada must be ready to keep pace with change and develop a global mindset that is open to two-way trade, investment and talent. Canada's economic success will be determined by how well we deal with the economic, social and political forces that are driving globalization. The future well-being of Canadian businesses, jobs and incomes depends on concerted and continuing actions by all Canadians.