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McKinsey Global Institute global flows in a digital age. how trade, finance, people and data connect...

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A new McKinsey Global Institute (MGI) report, Global flows in a digital age: How trade, finance, people, and data connect the world economy, examines the inflows and outflows of goods, services, finance, and people, as well as the data and communication flows that underlie them all, for 195 countries around the world.
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McKinsey Global Institute

Global flow

s in a digital age: How

trade, finance, p

eople, and data connect the w

orld economy

McK

insey Global Institute

Global flows in a digital age: How trade, finance, people, and data connect the world economy

April 2014

Copyright McKinsey & Company 2014

The McKinsey Global Institute

The McKinsey Global Institute (MGI), the business and economics research arm of McKinsey & Company, was established in 1990 to develop a deeper understanding of the evolving global economy. Our goal is to provide leaders in the commercial, public, and social sectors with the facts and insights on which to base management and policy decisions.

MGI research combines the disciplines of economics and management, employing the analytical tools of economics with the insights of business leaders. Our micro-to-macro methodology examines microeconomic industry trends to better understand the broad macroeconomic forces affecting business strategy and public policy. MGIs in-depth reports have covered more than 20 countries and 30 industries. Current research focuses on six themes: productivity and growth; natural resources; labor markets; the evolution of global financial markets; the economic impact of technology and innovation; and urbanization. Recent reports have assessed job creation, resource productivity, cities of the future, the economic impact of the Internet, and the future of manufacturing.

MGI is led by three McKinsey & Company directors: RichardDobbs, JamesManyika, and JonathanWoetzel. MichaelChui, SusanLund, and JaanaRemes serve as MGI partners. Project teams are led by the MGI partners and a group of senior fellows, and include consultants from McKinsey & Companys offices around the world. These teams draw on McKinsey & Companys global network of partners and industry and management experts. In addition, leading economists, including Nobel laureates, act as research advisers.

The partners of McKinsey & Company fund MGIs research; it is not commissioned by any business, government, or other institution. For further information about MGI and to download reports, please visit www.mckinsey.com/mgi.

McKinsey Global Institute

Global flows in a digital age: How trade, finance, people, and data connect the world economy

James ManyikaJacques BughinSusan LundOlivia NottebohmDavid PoulterSebastian JauchSree Ramaswamy

April 2014

The global web of economic interconnections between countries is growing ever larger and more complex. We know a great deal about individual flows such as goods trade and cross-border financial flows. Yet little research has been done thus far that seeks to paint a comprehensive picture of the web of cross-border interactions of the different types of global flows that increasingly characterizes our world. This report seeks to begin to address that gap.

In this research, the McKinsey Global Institute and the McKinsey High Tech Practice examine the evolution of flows of goods, services, finance, and people. We have also added a new, fifth flowdata and communicationthat increasingly underlies the other four. Our goal is to assess how major forces are reshaping global flows: the shift in the weight of the global economy that has been occurring over the past couple of decades, most notably toward emerging economies, coupled with the spread of digital technologies and Internet connectivity, and the opportunities for innovation that accompany them.

Further, as the global economy continues to recover from the 2008 financial crisis and worldwide recession, we wanted to take stock of how global flows are developing and their trajectory into the future, as a way to inform business strategies as well as policy making as countries seek to drive economic growth and prosperity. We looked at how the network structures of these flows are broadening and how countries and cities are positioned in these networks. As part of this project, we built a new McKinsey Global Institute Connectedness Index that gauges how different countries and regions in the global economy are evolving in terms of their participation in global flows. The research also seeks to answer a fundamental question as to whether these global flows matter. Our conclusion is that they do in terms of their contribution to economic growth and their relevance for shaping the business strategies of companies large and small and for creating opportunities for participation in the global economy.

Any attempt to build a comprehensive view of all global flows of economic relevance is an ambitious project. We acknowledge that our analysis is far from complete. Data limitationsboth over time and also across all aspects of the flowshave constrained our ability to draw a fully comprehensive picture. We know a great deal in a data-driven sense about trade and financial flows, but less about services, people, and data and communication flows. Our approach has been to combine macro analysis using available data with microdata-driven analyses where possible, and to bring to bear industry and geographic expertise and examples to illustrate the trends we see in the data. However, we believe that businesses and policy makers should work together to improve the data that are available so that collectively we can more fully understand their impact and importance and business and policy makers can set strategy and policy accordingly. We regard this report as a first foray into an area to which we will return as we know more. We hope that others will join us in this effort.

This research was led for MGI by JamesManyika, a senior partner based in San Francisco, and SusanLund, a partner in Washington, DC, and for the McKinsey High Tech Practice by JacquesBughin, a senior partner in Brussels, andOlivia Nottebohm, a partner in Silicon Valley. DavidPoulter, a consultant based in Silicon Valley, and SebastianJauch, a consultant based in Munich, led the project team. The team comprised AlexKatz, PatrickMacKenzie, SoyokoUmeno, FredericWagner, and AmberYang. We thank MGI colleagues MichaelChui, SreeRamaswamy, JanMischke, and JonathanAblett for their advice and input. Research assistance was provided by the MGI economics research team, including EduardoDoryanJara, AlanFitzgerald, JanGrabowiecki, CarlosMolina, and MoiraPierce.

We thank the academic advisers who helped shape this research and provided challenges and insights and guidance: MartinN.Baily, Bernard L. Schwartz Chair in Economic Policy Development and senior fellow and director of the Business and Public Policy Initiative at the Brookings Institution; MatthewSlaughter, associate dean of the MBA program and the Signal Companies

Preface

Global f lows in a digital age: How trade, finance, people, and data connect the world economyMcKinsey Global Institute

Professor of Management at Tuck School of Business at Dartmouth University; MichaelSpence, Nobel laureate and William R. Berkley Professor in Economics and Business at NYU Stern School of Business; LauraTyson, S. K. and Angela Chan professor of Global Management at Haas School of Management, University of California at Berkeley; and HalR.Varian, chief economist at Google and emeritus professor in the School of Information, Haas School of Business and the Department of Economics at the University of California at Berkeley. In addition to these close academic advisers, we have benefited from insights and feedback provided by J.BradfordJensen, professor of International Business and Economics at the McDonough School of Business at Georgetown University, and AnnaLeeSaxenian, dean and professor in the School of Information and professor in the Department of City and Regional Planning at the University of California at Berkeley.

We are grateful for the input and industry expertise from many McKinsey colleagues in various geographies and sectors around the world, including HenrikArwidi, VicenteAssis, ChintaBhagat, JaapBouwer, SusanColby, ToosDaruvala, WouterDePloey, AlexDichter, DanEwing, DavidFine, KatyGeorge, TimoGlave, AndrewGrant, BrianGregg, WielandGurlit, MaryanneHancock, StaffanHertzell, EndreHolen, EricKutcher, EricLabaye, AlanLau, DanLeberman, NicolasLeung, Diaan-YiLin, VikMalhotra, JrgenMller, ThomasNetzer, GordonOrr, KausikRajgopal, LouisRassey, StefanRehbach, ChristianRiis-Hansen, PaulRoche, NickSanthanam, JimmySarakatsannis, HugoSarrazin, JrgenSchrder, ColinShaw, MarcSinger, OzgurTanrikulu, OliverTonby, FransjevanderMarel, ArendVanWamelen, and DilipWagle.

This independent MGI initiative drew from MGI research, the experience of our McKinsey colleagues more broadly, and McKinseys Technology, Media and Telecom Practice and its collaboration with Google, which included data and insights from EricSchmidt, BetsyMasiello, NikeshArora, PabloChavez, RossLaJeunesse, NicklasLundblad, PatrickPichette, PatrickRyan, JohannaShelton, AmitSinghal, KentWalker, SteveWalter, DavidWeller, and RachelWhetstone. In addition, this initiative benefited from published reports and data from many industry and academic researchers. In particular, we are grateful for data and insights we learned from researchers at Facebook, SarahWynn-Williams, MaritzaJohnson, RuddyWang, and ChrisWeasler; from AT&T, JakeJennings and RichardClarke; from eBay,

UsmanAhmed and DevinWenig; IanHathaway at Engine Advocacy; RayBingham at Flextronics; SteveStewart at IBM; GregSlater at Intel; MarcParich at MetLife; JohnHorton at oDesk; and LeilaJanah at Samasource. We would also like to thank AlanWheatley, former global economics editor of Reuters, for his input on early report drafts.

MGIs operations team provided crucial support for this research. This includes senior editors JanetBush and LisaRenaud; RebecaR

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