DHL Global Connectedness Index 2014

DHL Global Connectedness Index 2014
13
Defining Globalization
Globalization is a widely-used term but different
people mean different things by it. Probably the
most widely-cited definition is due to David Held et
al., who conceive of globalization as a “transformation
in the spatial organization of social relations
and transactions—assessed in terms of their extensity,
intensity, velocity and impact—generating transcontinental
or interregional flows…” 11 —and insist
that a satisfactory definition must capture each of
these four elements. The definition of globalization
in the DHL Global Connectedness Index (GCI) follows
this theoretical definition in some respects but
departs from it in others.
The GCI’s focus on depth coincides with what Held
et al. refer to as intensity. And its focus on breadth,
or more broadly distribution, resembles what they
refer to as extensity, but with a difference. Our
analysis reveals that, on average, more than half
of international flows and stocks measured in the
GCI take place within rather than between regions.
While Held et al. suggest excluding such flows, doing
so within, say, Europe (where the intra-regional
average is 69%), 12 would yield a severely incomplete
picture of countries’ international interactions.
Velocity, as defined by Held et al., is largely a result
of developments in transportation and communication
technologies. We exclude it from the GCI
because it does not exhibit sufficient variation over
the time frame we analyze—since 2005—or, given
limitations in data availability, across countries. In
terms of communications technologies, time lags
seem to have asymptoted towards zero a long time
ago. Thus, the transatlantic telegraph cable reduced
the time that it took for information to travel from
New York to London from three weeks to a few
hours in the 1860s, and to one minute by 1914. 13
The fourth element highlighted by Held et al., the
impact of globalization, is crucially important, but—
in our view—should not be mixed up with measures
of globalization itself. In order to analyze the links
between globalization and other phenomena of
interest, we must have separate measures of them.
That is why GCI scores and ranks focus exclusively
on measures of actual international interactions that
take place between countries. They exclude—unlike
some other globalization indexes—the effects of
globalization as well as its enablers.
Finally, the perspective on globalization underlying
the GCI also calls attention to directionality, which is
missing from Held et al.’s definition even though it
seems both theoretically and empirically important.
Inbound versus outbound flows may be qualitatively
different in their significance. Think, for example,
about many countries’ focus on mercantilist trade
policies that favor exports over imports. And empirically,
the other flows and stocks measured in the
GCI are (even) more unbalanced than merchandise
trade—and in most instances, imbalances have increased
rather than decreased since 2005.
In summary, the definition of globalization underlying
the GCI builds on but also adapts and, in some
respects, goes beyond previous definitions of globalization.
brought back into the discussion in the final section. Let’s
start with the collection of global depth measures presented
in Figure 1.1. It turns out that the international
proportion of these activities—which can take place either
domestically or internationally—represents a small fraction
of the total, typically less than 20% and often less than 10%.
For only two of the variables—trade and portfolio equity
stocks—do internationalization levels exceed 30%—and
one of them (trade) is inflated by double-counting when
products cross borders multiple times during their production
processes. Removing such double counting brings the
share of value added around the world that gets exported
down from 32% to about 23%. And while the value of international
portfolio equity stocks has reached 39% of stock
market capitalization, research still indicates a very high
level of home bias in investors’ portfolios.
These levels of globalization are much lower than the levels
one would expect to see if borders and distance had ceased
to matter (which would typically imply values of 85% or
more). They are also significantly lower than most people’s
intuitions. In an online survey conducted by the Harvard
Business Review, respondents pegged international phone
calls at 29% of the total, immigrants at 22% of the world’s
population, and foreign direct investment (FDI) at 32% of
total fixed capital formation—an average estimate of 27%,
or more than five times the actual average. 14 (CEOs, interestingly
enough, overestimated by a factor of nearly seven!)