Local development strategies and global competitiveness
This piece is adapted from a chapter, in Spanish, in the upcoming book Globalización y desarrollo de los territorios, edited by Antonio Vázquez-Barquero and Juan Carlos Rodríguez Cohard.
For three decades, until about 2010, the trajectory of the world economy was one of increasing integration and interdependence.
This process of globalisation opened the door for local development strategies to take advantage of new opportunities. Not all territories managed to improve their competitiveness, and even those that did, now face the challenge of a new environment where past performance is no guarantee of future success.
The two global crises that we have already faced in this still-young 21st century had very different roots, but they have both accelerated disruptions to the globalisation dynamics that had been brewing for a while.
Geopolitical tensions exacerbated by Trump’s erratic policy making added fuel to the uncertainty. Hence, more than ever before, the recent past cannot be counted on as a reliable guide to the future, and extrapolating from trends that we are familiar with is a dangerously fragile premise for strategies of any kind.
Successful local development strategies cannot rely on premises based on a linear or monolithic view of the future
In this context, and thinking beyond any crisis situation of the moment, successful local development strategies cannot rely on premises based on a linear or monolithic view of the future. Such strategies need to be in tune with the unpredictable dynamic of change and, hence, incorporate the kind of flexibility that will make them resilient and adaptable. Multiple views of possible futures, through scenarios, offer a way of improving alertness to change and identifying options for versatility.
The competitiveness of a territory or locality has been made more challenging by the fact that all kinds of markets have become global – whether they appear to be or not. The process of globalisation has also created opportunities as the fragmentation of supply chains has increased the value of narrow specialisation.
Multiple views of possible futures, through scenarios, offer a way of improving alertness to change and identifying options for versatility
The potential that scenarios have for improving local development strategies is illustrated below through four examples. These scenarios revolve around key geopolitical and technological uncertainties and sketch out the range of situations to which it might be necessary to adapt.
But before looking at the scenario examples and some of their implications for local development strategies, it is worth considering the context in terms of globalisation dynamics.
Globalisation dynamics as context for local development strategies
Globalisation refers to a process of economic and social integration across countries. While social – and political – dynamics underpin the whole process, it is the economic aspects of integration that are most readily used to characterise it. While arguably there were earlier periods in history that represented partial but still important globalisation, the most directly relevant periods are the ones that took place over the last century and a half.
The first phase starts with the industrial revolution and culminates in a massive expansion of international capital flows; it ended abruptly with the First World War (it took a major conflict to stop globalisation) and the capital controls that started then and lasted well into the 20th century.
Capital mobility index
The second phase was built on a period of relative global stability following the Second World War (it took a major conflict to set the stage for a resumption of globalisation), as well as on the emergence of computers, with the subsequent explosion of information and communication technologies, and the often-unsung logistical revolution that the containerisation of ships and ports represented. This second phase saw an expansion again of capital flows, but it is worth noting that from this perspective the level of globalisation achieved in 1914 was only again reached shortly before the year 2000 – an arduous road back after a precipitous fall.
But the more recent phase of globalisation is even better characterised by the fact that the rate of increase of international trade in goods outpaced economic growth – remarkably because it took place in a period of solid economic growth. This outpacing is largely explained by a fragmentation of supply chains and levels of specialisation that would seem to vindicate classical economists. It has generated enormous consumer surpluses as, in a context of healthy competition, it allowed the resulting reduction in production costs to be passed on to consumers all over the world.
As we approach the third decade of the 21st century, globalisation seems to be at a crossroad
Right now, as we approach the third decade of the 21st century, globalisation – at least as described through the conventional measures of trade volumes and the trade/GDP ratios – seems to be at a crossroad. After the 2007-2011 roller-coaster, trade has not increased any faster than GDP over the last few years, and the direction of the trade/GDP ratio appeared unstable even before the current pandemic.
Trade dynamics and patterns were, thus, already uncertain by the end of the 2010s and we must also contend with the socioeconomic earthquake caused by the pandemic. The only thing that it is clear is that the health crisis, and the policy responses and economic stimulus will have many difficult-to-predict consequences.
Global trade/GDP
Some analyses of the effects of the 2020 pandemic crisis, and of the massive interventions by governments and central banks, attempt to characterise a 'new normality' and it is tempting to believe that local development strategies just need to understand this – and adjust accordingly. This way of thinking would be tantamount to 'wasting the crisis' and lowering the guard against what is nothing if not a wave of turbulent uncertainty.
How globalisation develops will have strategic implications for enterprises of all kinds, consumers, and policy makers – including notably those focusing on local development. There are a few clear indications of the direction in which globalisation is evolving, but also plenty of uncertainties about the timing and scope of change, as well as about the evolution of other factors and the impact of the intersection of economic, societal, and geopolitical drivers of change in the shape of globalisation.
Nothing much beyond a few basic demographic facts is certain (we pretty much know how many people will be of working age by 2030 – they have all been born and survived infanthood already – but we certainly do not know how many of them will be working, on what, and where). But there are a few other things that we count on – at least directionally.
- Firstly, the inexorable growth of the 'intangible economy' will be shaping the future of globalisation. Digital platforms are a key ingredient and digital services built on these platforms are only in their early stages and will grow in breadth and depth – making trade much less vulnerable to border controls. And these platforms will also make it possible for intangible footloose links in value chains to capture increasing shares of the total value of their output. Current statistical practices are not geared to capture the intangible component of trade, but policy makers, international organisations, and corporations of all kinds will need to find a way of assessing their evolution.
- Secondly, the off-shoring and wage-driven dynamic that has characterised the evolution of global supply chains in recent decades will be disrupted by the increasing cost-effectiveness of robotics, and by additive (3-D) manufacturing. The optimal location of production will be disrupted, as well as the role played by scale and opportunities for ‘just in time’ customisation through smaller batches.
- Thirdly, increasingly connected populations (and the 'internet of things') will generate exponential amounts of data that will change the basis of decision making for product/service design and customer outreach and targeting. This will be fuelled by advances in machine learning and other applications of artificial intelligence and create a powerful new source of competitive advantage.
These three premises can serve to anchor our view of the future of globalisation, but they also leave massive areas of uncertainty and, hence, plenty of room for exploring alternative paths and shapes for globalisation. Scenarios offer a compelling way of carrying out such an exploration.
Scenarios and strategy under uncertainty
A key to the success of any organisation's strategy is its ability to evolve and adapt to its environment – both statically and dynamically. The latter is complicated by the inertia that tends to infiltrate the strategic mindsets of organisations and managers. And the more uncertainty and turbulence there is around us, the more important it is to counteract inertia with methods designed to enhance alertness to change, and to facilitate adaptation to an unpredictably changing environment.
The experience of recent years shows that it is easier to underestimate, rather than overestimate, uncertainty. For strategic choices to lead to sustained success, the key is not to attempt to predict the outcome of events in the near future, but to understand the dynamics of change that surround us and the range of possible outcomes.
The uncertainty around us has expanded as the speed of change increases, thanks largely to technology, and unexpected ricochet effects become more pervasive due to social, political, and economic interdependence. It is essential to be aware of the uncertainty that surrounds us, but there is also a danger that awareness of uncertainty will cause procrastination or even decision paralysis.
Some companies failed to survive because they clinged to their single view of the future
Scenarios of the future provide a useful antidote to both the perils of ignoring or being overwhelmed by uncertainty. They do not attempt to predict outcomes but explore the future in the plural, rather than in the singular, providing a basis for exploring the ‘what if’ of alternative outcome paths.
Scenarios have better prepared many companies for unpredictable change dynamics. Some companies failed to survive because they clinged to their single view of the future, and took too long to discern the unexpected changes that disrupted their market.
Scenarios have also been used to inform public policy making; often focusing on national security or specific sectors. But a good example of a more systematic approach is that of Singapore, where the government conducts far-sighted scenario exercises on a regular basis. This city-state is an impressive case of success for a territory where the key has been good strategic management of opportunities – rather than natural resources or some other ‘manna’ – and it has managed to maintain, and even upgrade its competitiveness, while the global market it sells to changed.
Scenarios have better prepared many companies for unpredictable change dynamics
Starting from a desperate situation in not-so-distant 1965, Singapore's economy has grown strongly and per capita income (at constant prices) has increased 14-fold (compared to just a doubling of per capita income globally). As a fundamentally urban territory that is also a sovereign state, Singapore has had at its disposal more strategic levers than a subnational territory. But having them is not the same as using them well, and for decades it has used scenarios to enrich strategic decision making and facilitate adaptability. The Singaporean Center for Strategic Futures develops scenarios and helps different parts of government apply them to strategic challenges.
A key component of the environment for any territory is the outcome of the process of globalisation – and its possible reconfiguration or even backtracking. Key to the success of any local development strategy is its ability to adapt to the evolution of globalisation. Scenarios are a particularly useful tool for exploring uncertain futures. By using them as a ‘wind tunnel’ when choosing strategic options, or reviewing strategic directions, scenarios can serve to improve strategic decision-making and increase a territory’s adaptability and competitiveness.
The combination of globally interconnected markets, the threat of sharper geopolitical segmentation, acceleration of technology-driven changes on both the supply and demand sides, and the shock of the 2020 pandemic and its aftermath (including social tensions) are adding up to a major boost in uncertainty. Local development strategies cannot be based – as implicitly tends to be the case – on premises of stability. They need to be imbued with the scepticism required to be alert to the dynamics of change.
Key to the success of any local development strategy is its ability to adapt to the evolution of globalisation
Two axes of uncertainty
Two major axes of uncertainty stand out for their influence on the globalisation dynamics that are the context for local development strategies. One is the geopolitical evolution, and its impact on market shapes and boundaries. The other is the adoption of technology with its many effects, including on a territory’s accessibility. These uncertainties can be concisely characterised through two opposing outcomes, as extreme as possible while still seeming plausible within a decade.
The role of geopolitics has now become a heightened source of uncertainty. Protectionism that had been creeping into many countries since 2012 has been reinforced by the latent trade war between the two major global powers in recent years. Moreover, second-order reactions to the 2020 health crisis could result in additional trade restrictions argued on the basis of lessons learned during the crisis concerning national security, vulnerabilities, and dependence. It is not difficult to imagine two vastly different situations by 2030.
At one end of the spectrum would be a conflicted outcome – due to pervasive lack of trust and poor dialogue among governments. In this situation, international organisations would be marginalised (almost mothballed in some cases), cross-border barriers on trade, capital flows, and other movements would increase alongside other restrictions to economic activity – often designed to discriminate on the basis of geography or, more significantly, political affinity.
The opposing situation would be that of a cooperative dynamic. The aftermath of the 2020 pandemic made many countries more aware of the value of international collaboration – and the cost and pain derived from a lack of cooperation. In that context, international organisations are revamped, enhanced mechanisms for global dialogue and coordination are put in place, and agreements, such as on climate action, given new impetus.
The extensive deployment of digital technologies over the last two decades has led to what could be considered a plateau of adoption, but the potential is there for many further applications in more domains – building on existing technology rather than depending only on new breakthroughs. Considerable uncertainty, however, derives from regulatory initiatives and the resources, appetite, or wariness of users.
One end of the continuum of outcomes to this uncertainty is a transformative role for technology resulting from the acceleration of connectedness – ranging from the pervasive ‘internet of everything’ to the extensive deployment of 5G networks – with the experience of confinement during the 2020 pandemic providing added impetus. A part of this outcome is also the expansive use of robotics and data-based artificial intelligence and machine learning.
At the other end of the spectrum, there is a disappointing outcome in terms of technology adoption which results from video and virtual fatigue in much of the population, delays in the deployment of 5G, and low investment in relatively more expensive robotics. Parts of this outcome are also concerns about cybersecurity, privacy, and data regulations to protect national interests and security.
Four scenario sketches – as examples
The main value of scenarios is that they make it possible – even require – us to explore the intersection and compounding effect of key uncertainties. The two axes of geopolitical and technological uncertainty (which, in turn, synthesise many areas of uncertainty) lead naturally to four scenarios that serve to illustrate how they can be used to pressure-test local development strategy options (or national development options if our focus is at that level).
Each scenario sketches out a vision of what the world could be like around 2030. As a set, the four scenarios allow us to envisage how successful local development may vary depending on the scenarios we might face – with the simple titles already providing a clue as to the differences.
1. Bustling world
In a Bustling world, technology has opened many doors by 2030, but with geopolitics dominated by tensions and tightened borders, the result has been to segment international markets along political affinity lines – creating many hurdles for fully global operations, especially for large corporations that had relied on unimpeded digital platforms. Trade volume has grown only modestly but its pattern has changed to reflect the geopolitical segmentation – almost like a new kind of cold-war. Supply chains have compressed as they become more regional and as manufacturing automation led to a reversal of the dynamics of fragmentation and off-shoring from the early 21st century.
In a Bustling world, technology has opened many doors by 2030
A salient manifestation of the rapidly entrenching commercial/digital cold war is the forking and disaggregation of the internet and the establishment of new regulatory boundaries that limit market access across geopolitical blocks. Digital mega-corporations from the US are kept out of China and its allied countries, while reciprocal restrictions apply to Chinese companies in the US and Europe.
To succeed in this world, local development strategies (and many corporations) must play within the affinity space of their national choice, and accordingly choose alliances, specialisations, and positioning in the re-shaped supply chains. Providing appropriate finance for transformation and market re-orientation will be an important factor determining how local enterprises fare – and whether territories manage to take advantage of the reconstituted opportunities of this world in 2030.
2. Bumpy world
In a Bumpy world, technology without borders has been generating steady improvements in productivity by 2030 and added impetus to the globalised supply chains. Trade has again been increasing even faster than robustly growing GDPs. The growth in service trade, and in the intangible components of value chains, is particularly significant and reflects the unrestrained flow of data that underpins machine learning and other artificial intelligence applications.
Production flexibility and automation are important characteristics of this world. There has been a proliferation of manufacturing centres that are not dedicated to a specific product, but to technologies such as additive manufacturing (aka 3-D printing) that take advantage of common application standards and take the shape of a productive diaspora arising from central (or even distributed) design locations.
In a Bumpy world, technology without borders has been generating steady improvements in productivity by 2030
Venture capital is an important player in this world in which the intangible economy has grown very rapidly, and talent is a critical source of competitiveness – at national and local levels as well as in enterprises. For people with demanded and advanced skills in scientific, technological, managerial, and innovative areas – there are great opportunities and incentives. But at the same time, the labour market has grown increasing polarised and pay differences across skill levels have widened and added to economic inequality in most countries.
Territories able to provide an environment (natural and institutional) offering the quality of life valued by talented individuals are at a great advantage, as capital in this world follows talent in a dynamic that is almost the inverse of the traditional logic that focused on attracting capital to create job opportunities. Connectivity and reliable infrastructure are part of this desired environment, and any market failures in this regard will need prompt attention, and their solution will have a high pay-off in competitiveness and prosperity.
3. Balmy world
Safety and privacy are valued over productivity and purely economic growth in a Balmy world. Cybersecurity attacks (both criminal and warlike) are of grave concern, and growing fatigue with virtual connections and transactions have resulted in a slow-down (near halt) in the adoption of technology – even when readily available (such as 5G, AI, VR, and IoT). In addition, this weakened demand has reduced incentives for further development of many technologies, and a lack of investment in the infrastructure that they would require. A side effect has been to prove wrong the dire forecasts made before 2020 about the share of jobs that technology would render obsolete.
Safety and privacy are valued over productivity and purely economic growth in a Balmy world
Supply chains remain largely global and are still efficiently fragmented but, in this world, resilience is a prime concern, and by 2030 this has resulted in the development of redundant supply chains to protect against vulnerabilities and diversify logistical risks. A greater emphasis on the quality of growth and on environmental risks has led to progress in the implementation of climate action programmes, and to surprisingly swift changes in consumer habits (such as in diet, travel, and acceptable packaging).
Local development strategies could find new competitiveness opportunities in the transformation of supply chains to emphasise reliability through parallel chains. Opportunities may also relate to the emphasis on natural, unadulterated products – ranging from food to cosmetics – driven by consumer preferences, and on the renewed appeal of ‘back to basics’ services.
Bound world
In a Bound world what started as a series of trade war skirmishes by 2030 has spread through barriers, quotas, foreign content, and ownership restrictions, but also through the 'weaponisation' of control over strategic, rare, and scarce materials. Suspicion over most things foreign also places strong value on proximity – both in terms of production and consumption – and familiarity.
Weak economic growth has resulted in a lack of resources for technology deployment (including on cybersecurity) and driven consumer preferences for low-priced goods and services. This has increased the vulnerabilities of many systems, resulting in widespread cyber-attacks with commercial, criminal, and political interference motivations, and led to heightened reticence about many aspects of online activity and permanent connectivity.
In a Bound world what started as a series of trade war skirmishes by 2030 has spread through barriers, quotas, foreign content, and ownership restrictions
Low levels of investment, high employment, and under-employment rates, narrow-minded nationalism, and lack of innovation are features of this world in which the international flow of goods, services, and people has slowed and even retreated. Supply chains have compressed – reducing both the number of links and the geographical spread – and the emphasis on control, short-term, and proximity has resulted in declining productivity levels in most countries and sectors.
Geographical location and the surroundings of a territory play more of a role in this world, and this greatly affects the strategic development options. Recognising that a major shift early on will be critical for local development strategies to adapt to the new context and respond to its challenges. Versatility and the agility to respond to short-term opportunities are more likely to pay off than seeking competitiveness through further specialisation efforts.
The purpose of these scenario sketches (and light-hearted titles) is to illustrate how this method can help ensure that local development strategies are well attuned and ready to adapt to a context in flux that evolves in ways that are not necessarily linear and have little predictability. An alertness to change that can result from using scenarios periodically will help businesses to bolster innovation dynamics and grasp unexpected opportunities.
Each scenario seems to require a different approach for local development success, but by looking across the scenarios we can also identify some common elements – and these will provide a robust foundation for evolving local development strategies. While a view of the future that is unwittingly premised on certainty would point to a definite specialisation strategy, awareness of the uncertainties that characterise the future reality point to much more flexibility in approaches to competitiveness.
The value of scenarios is that they force the exploration of future possibilities beyond conventional wisdom and generate alertness and sensitivity to change dynamics
It is generally accepted (and attributed to Darwin's works) that the species that survive are not the strongest or smartest, but those that best adapt to change. But even with that in mind, it is easy to fall into the trap of assuming that change is easily recognisable, whereas it often seems unassuming and gradual ... until its radical consequences arise.
Rather than as a source of predictions – which they are not intended to be – the value of scenarios is that they force the exploration of future possibilities beyond conventional wisdom and, hence generate alertness and sensitivity to change dynamics.
Scenarios provide a way to amplify the signals of change, increasing our alertness and providing information on possibly important (and not necessarily likely) shifts in the world around us. Such sensitivity to change is crucial for recognising the winds of change when they are still soft, and being prepared to react quickly and decisively before the winds are thunderous and effective reactions become much more difficult.
Scenarios can be seen as an opportunity to 'visit' the future that help us prepare and improve our reaction to the unexpected. Changing the metaphor, you can also see scenarios as an anticipatory tasting of different menus that will equip us to better appreciate the different possibilities that are ahead, and to rehearse in our minds the combinations, corrections, and improvements that will lead us to integrate any new ingredient in our environment into a good recipe of competitiveness.
The starting point of each territory (including in terms of demographics, natural resources, productive tradition, and skill base) is obviously a significant determinant of its options. But the strategic challenge, anywhere, is how to leverage existing assets and build new ones to achieve the best possible adaptation to the territory’s immediate and global contexts. When the context is unavoidably global and the world ahead is highly uncertain, the key to local development success involves alertness to change and flexibility in adaptation.