Samuel J. Palmisano
IBM Chairman and Chief Executive Officer
Final Remarks, as prepared
Bruegel Annual Meeting
Brussels, Belgium
June 11, 2008
"Global Integration 2.0: Now Comes the Hard Part"
As we gather this evening, I believe we find ourselves at a major inflection point for our countries, companies and societies. The first phase of modern global integration is coming to a close.
It has done enormous good. It has brought hundreds of millions of the world's people out of poverty. It has unleashed a wave of creativity and growth that make the Industrial Revolution look like a warm-up. But now we're at a turning point. What we do, starting now, will determine whether and in what ways we move ahead.
To quote Winston Churchill, "This is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning."
First, where do we stand today?
Over the past two decades—thanks to the digital network revolution and the dismantling of trade barriers and of economic nationalism during the '80s and '90s—we have seen the emergence of a global commons. Some call it the "flat world"—though we would all agree that it contains plenty of spikes and rolling hills. But the key point is that it is truly global.
Who wins and loses on that playing field? In the early years of this shift, that was about low cost. But increasingly now, it comes down to one word: Innovation.
In fact, I believe that global integration and innovation are two sides of the same coin. Global integration is the new playing field—and innovation is the way you win the game. Easy to say, but a lot more difficult to actually achieve.
The Large Enterprise and Global Integration: Beyond the Multinational
Now, when most people think of this competition, they naturally focus initially on the large enterprise, also known as the multinational corporation. That's not surprising. Most economists tell us that the multinational was the primary agent of economic globalization over the past 150 years.
However, the large enterprise that we are looking at today is no longer the classic multinational. In the journal Foreign Affairs two years ago, I talked about the impact of global integration on the multinational corporation—namely, that it starts to move toward what I called a Globally Integrated Enterprise.
This is a new corporate architecture. The multinational created mini-versions of itself in markets around the world, in order to operate within a world of trade barriers. In contrast, the globally integrated enterprise locates work, skills and operations wherever it makes sense, based on expertise… economics… and openness.
At IBM, we've started down the path of what we expect to be at least a ten-year journey… and we are working with clients all across the world—in both developed and emerging markets—to help them globally integrate.
By the way, it's not just businesses. The same forces, opportunities, threats and decisions face national and regional governments, agencies and economies. They are all confronting what I call it the law of global integration: When everything is connected, work flows.
And if you accept this principle, then the central question for every company, community and nation—in the EU, and in every other region of the world—is:
How will we get work to flow to us?
How, for instance, will the EU navigate through near-term choppy waters? How will the EU generate a disproportionate share of the most desirable jobs? How will the EU optimize itself for a globally integrated economy?
Which brings us to today, and to some tough choices.
The Hard Part
All of us—in both the developed and the developing worlds—have by now seized the low-hanging fruit. India has played the low-cost labor card to move strongly into information technology services. China has played the low-cost manufacturing card. Companies like IBM have globally integrated the parts of our business that are, frankly, the easiest and most logical to globalize.
And countless businesses and nations are benefiting from growth in the developing world. Have there been controversies about the movement of work and jobs? Yes—and appropriately so. But by and large, we have been able to manage this issue pretty well… so far.
But now comes the hard part. There are no longer any shortcuts. Low cost is running its course. Simply setting up a subsidiary in a high-growth market? Running its course. Relying on the belief that "a rising tide lifts all boats"? Running its course, too—as we know very well in the U.S.
Today, more enlightened strategic thinkers are deciding how they're going to differentiate themselves, in order to get the world to invest in them… buy from them… hire them. Will they invest in infrastructure—physical and technical infrastructure? Will they create an open, progressive policy environment in everything from taxation to intellectual property? How about your skills base? Your education base?
I believe my own company stands as an example of hard choices that weren't popular when we made them entering this decade, but from which we're now seeing benefits. However, we realize that these are not laurels to rest on.
As leaders of countries, companies, regions—and as individuals—we now have to make real choices… we have to get to work… and we have to do that work together.
Think about this: IBM recently concluded our bi-annual survey of CEOs—more than 1100 of them, from every region and industry around the world, including many of the leading CEOs here in Europe. We have published the results in a report called "The Enterprise of the Future."
Eight in ten of these leaders told us that they expect significant changes to their industries, economics and basic business models in the near term. And they plan bold moves in response.
But they also said something else. They told us that their organizations simply aren't yet ready to carry out that change. In fact, in the two years since our last survey, that gap—between the need for and the ability to manage change—has tripled.
This is significant and troubling. Someone once said: "When the rate of change outside your company exceeds the pace of change inside your company, you're dead."
Now instead of a CEO, think: head of state. Instead of management teams and employees, think of government officials running key agencies serving a country's citizens. And then think about that change gap—between a country's need for change, and whether it is actually ready to carry it out.
Global Integration and Recapitalization
One of the reasons I was so eager to talk with you is that Bruegel has done extraordinary work to identify the issues, opportunities and imperatives of this new stage of global integration.
As some of your researchers have noted, the developed world must get its financial house in order—and not just because cyclical storm clouds are gathering on the horizon. I'm not an economist, so I am probably oversimplifying this, but I think of it as the need to recapitalize.
In the U.S., the EU and the rest of the developed world, we are still holding the strongest hand… but we are in a highly vulnerable position. Our economies have large deficits, with major dependences. And our demographics—namely, our aging populations—only exacerbate those tendencies.
Take two groupings of countries in the EU, and consider their average public debt as a percentage of GDP:
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The dollar is devalued. Everybody holds our debt. Frankly, we're not in charge of our fate.
So, how do you recapitalize? You use other people's money. That's what the developing markets have done. They've capitalized their countries to do what they need to do in order to grow and succeed. Regions whose economies used to be liabilities are now using money from the globally integrating economy to change their positions.
What the developing countries did, the developed countries can and must do. And the way to do this is by engaging the globally integrated economy, not by distancing ourselves from it.
Second, we need to recognize that a global economy is not just an opportunity for large enterprises. Today, small businesses can be global players, too.
The New Global Entrepreneur
In the past, if you were a small businessperson, you were a local businessperson. You served a local market… had local suppliers… drew from a local workforce.
Today, however, something new is emerging. Small businesses have realized that the potential buyers of their products and services are not just local, they're everywhere. Local entrepreneurs can reach the new middle classes that are arising around the world—hundreds of millions of people who are opening their first bank accounts, getting their first cell phones, using their first credit cards… tens of millions who are buying their first automobiles.
This is important, because, as we know, small businesses and entrepreneurs are the engines of job creation. And this issue of new job creation is at the heart of both the economic and political debate over global integration.
This is a new model—the small global business and global entrepreneur—and it brings with it a new set of needs… needs that today are largely unserved. Access to capital is part of it. But even more than financial capital, what they really need is intellectual capital… knowledge… the better idea… the how-tos… the information on other regulatory environments… the solutions to common problems… and the breakthrough business models.
There is no existing mechanism to support this new kind of small global business and entrepreneur. That is one reason I announced last month—at IBM's Forum on Global Leadership in London—an online service, which we're developing with a number of partners.
We call it The Global Entrepreneurs Exchange. It builds upon a program that IBM and the World Bank launched a couple of years ago, which already has 3.5 million subscribers in the developing world.
The goal of this exchange would be to fill a gap, to create something that does not now exist. It would include peer-to-peer advice and access to expert mentors… a support network for governmental and non-governmental agencies responsible for economic development, as well as small global entrepreneurs themselves… and the use of innovative social media for collaboration.
And, by the way, these kinds of tools, networks and opportunities are essential inside large companies, as well. It's about employees, as well as entrepreneurs.
We are hopeful about such initial forays, but we recognize that they are just that.
The third and most daunting challenge facing all of us is far broader and deeper than any one company or even its extended ecosystem can solve.
Making the Case for Global Integration
Most fundamentally, that challenge is about winning hearts and minds—which is why Bruegel's time has truly come. You are in a unique position to build on your excellent work in framing the case for the benefits of thoughtful global integration.
This is not primarily about convincing CEOs and heads of state. That's not the problem. It's the other management layers, the people who make decisions at the regional and agency levels—and especially the public at large… communities, individuals and populations that do not yet see themselves as the beneficiaries of global integration.
To do that, to make that case, we will need fact-based, reasonable, multi-lateral approaches. Your work to produce the arguments, the authoritative research, the rock-solid data, the persuasive case studies and the exemplary role models can make a significant impact on whether we succeed or fail.
As we do this, we must recognize that the opposition to global integration is a lot more sophisticated than it used to be.
For one thing, they are making use of the advanced communications and social networking capabilities that have become available to everyone. But more importantly, their analyses today are a lot more thoughtful. They really do have a point or two, when it comes to the environmental, economic and societal impacts of globalization... to job creation, education and skills… to access to connectivity and other resources… to the inherently global problems of crippling energy costs, unsafe drinking water and pandemic-scale disease.
We may disagree with the solutions they propose—but we can't simply keep arguing against a caricature of their position. We can't just keep saying, "Free trade! Free trade!" and think that will carry the day. We can't rely on arguments from 1990—or, for that matter, 1890.
If one needed any further demonstration of the importance—and difficulty—of building this new case, one need only look at the current state of the Doha negotiations. We have our work cut out for us.
Global Integration and Smart Power
Finally, I believe it is clear that tackling these exponentially tougher challenges—and seizing these exponentially greater opportunities—is something that we must do together. We cannot do justice to this historical moment if we hold onto the old model of the separate societal "estates"—with business in one corner, government in another, academia in a third, and so forth. The problems and the solutions of the global commons, the flattening world, by their very nature, cross those old boundaries. We must, too.
I would close by suggesting that this multi-disciplinary, cross-boundary dialogue and framework will also require new approaches to national and geopolitical action and decision-making.
That, too, is an appropriate area of inquiry and leadership for the thinkers at Bruegel.
Over the past decade, we have witnessed a great debate on how societies should deal with competition, conflict and opportunity on a planet that is rapidly integrating. Within policy circles, this is often framed as the debate between the so-called "realists"—those who look out and see a future of multiple competing nation-states, where the job at hand is to achieve a "balance of power"—and another view that foresees the rise of new superpowers, with one or another of them ultimately achieving dominance.
Neither of those perspectives seems particularly hopeful to me—nor does either of them seem truly global. Happily, over the past few years, a "third way" has emerged. It's often called "soft power" or, more recently, "smart power."
I can attest to the efficacy of this approach. My own company, IBM, was once the paradigm of a business "superpower." We dominated our industry. But such dominance is always fleeting, and ours fled. Yet, unlike most empires that fall, we didn't disappear. Instead, we asked very hard questions, and made very hard decisions, and reinvented ourselves—becoming far more open, far more collaborative and far less hierarchical.
To me, that's "smart power" within a particular company, and in the world of business. How would we take that approach across the global commons? What is "smart power for a flat world"?
I look forward to discussing with you how new kinds of balanced, innovative and collaborative approaches can help us turn this inflection point at which our societies stand today into the start of a new era of global growth and progress.
Separately, we've captured the low-hanging fruit. Now we must come together to reach farther up the tree, to seize the vast new opportunities before us.
