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From red flags to green (Part 2): how to see into the invisible economy

/ November 12, 2012 /

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From red flags to green (Part 2): how to see into the invisible economy

Last month, I had the chance to speak at the annual conference of the International Economic Development Council (IEDC) in Houston, Texas, with a focus on the question of how and why Business Retention and Expansion (BR+E) is evolving to be more effective in the new economy.

I’ve had a lot of requests for transcripts and copies of the speech but I generally don’t speak from notes, so I promised I’d provide an overview of my thoughts on this blog. Here’s the second of three blog posts that will cover off the main ideas and themes of that presentation…

In part one of this series of blog posts, we looked at the emergence of the “invisible economy,” and the need to find the “green flags” pointing to the innovative firms that are driving it. If we hope to support the next generation of successful entrepreneurs and companies within our communities, these firms are our best opportunity, rather than the struggling “red flag” firms that BR+E has traditionally focused its efforts on.
In recent years, a lot of leading thinkers at business schools around the world have been trying to describe the models and processes that define success in the new economy.

One of the most compelling analyses comes from Victor Fung (of Harvard), William Fung (of Princeton) and Yoram Wind (of Wharton) in their 2007 book, Competing in a Flat World. In this book, they suggest that the new economy is driven by “network orchestration” or the close coordination of partners in joint ventures and interlinked supply chains.

“Companies used to see competition as firm against firm,” they suggest. “But a networked world is like a team sport – the final score depends not on one player, but on the strength of the entire team. The best network will win.” This insight suggests that – in beginning to search for “green flags” – we should seek out firms that are either embedded in such global networks, or have the potential to add value to these networks.

The idea that globalization is somehow accompanied by a closer interlinking of multiple entrepreneurial ventures is not new. For many years, those in the field of international relations talked about the “Golden Arches Theory of Peace” which argued that no two countries with a McDonald’s restaurant have ever gone to war with each other.

While this assertion rests on shaky ground, it was reformulated a number of years ago by the journalist Thomas Friedman, who posited the Dell Computers theory of Peace, pointing out that no two countries in the Dell Computers supply chain had ever gone to war against each other. Though perhaps overly simplistic, the key idea behind each of these theories is that when the world is changing, and that economic and business connections between people can come to overwhelm and sideline political and military structures and conflicts.

Friedman ground this idea in the changing nature of globalization, and suggests that what we describe as “globalization” today is the latest in a series of ideas falling under that label. Globalization 1.0 began in 1492, and ended about 1800. This era of globalization was marked by countries going global, in a quest for new territories and raw materials.

Sparked by Columbus in 1492, we can tell that this era of globalization is over by the early 19th century, as empire begin dissolving and selling off land – like Napoleon’s sale of land to the United States in the “Louisiana Purchase” of 1803. The end of this era signals the beginning of Globalization 2.0 in which companies drive the globalization process. From the activities of the British East India Company to the rise of multinational corporations in the 20th Century, this phase of globalization is driven by companies seeking new markets and new labour around the world.

Friedman suggests, however, that a third era of globalization – Globalization 3.0 – began around the year 2000. It’s an era characterized not by countries going global, and not by companies going global, but by individuals going global.

In this new era, highly-educated, highly mobile and highly entrepreneurial individuals are growing global networks of economic connectedness, with each building to compete in a global arena. The net impact of this process is that economic and business success today relies on very different forms and structures than in the past. Put simply, companies acting as if we’re still in the era of Globalization 2.0 simply won’t cut it anymore. They are doomed to fail, in a growing spiral of red flags and falling profits.

Instead, the economic development community must focus its efforts on what journalist Michael Malone, in his book The Future Arrived Yesterday, calls “protean corporation.” These emerging economic structures are entrepreneurial ventures that “use the latest information processing, communications and social networking technologies to become shape-shifters, constantly restructuring themselves to adapt to changing circumstances and new opportunities.”

To create these firms, he argues, company leaders must become “competence aggregators” – constantly and continuously assembling aver-shifting teams of talent and skill from around the world.
And here, we start to come full circle – competence aggregation becomes a tool for assembling the networks and teams that Fung, Fung and Wind argue is so essential to succeed in the new economy. As a result, our search for green flags leads us to consider how best to identify and understand these protean corporations.

NEXT: The Three Things Every Economic Developer Can do to Succeed in the New Economy

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