Tontwelve months Previously, Russia was added to the disgraceful list of countries — along with North Korea and Cuba — where consumers couldn’t enjoy Coca-Cola. The US beverage giant ceased operations in Ukraine following Russia’s invasion there. Thirty years ago, when Coca-Cola expanded in Russia after the collapse of the Soviet Union, barriers to global commerce were being torn down. Today, they are being erected again — and not just around Russia.
The U.S. Treasury Department is reportedly developing plans to block foreign investment in cutting-edge technology from hostile countries. It has banned the sale of advanced microprocessors and chip-making equipment to China. If China emulates Russia’s bellicose approach in its relationship with its coveted neighbor Taiwan, Sino-US trade could shut down entirely. Meanwhile, the US has pending subsidies worth $500 billion aimed at bringing home supply chains for semiconductors, electric vehicles and clean energy. The EU is expected to roll out a large package of similar sweeteners any time now.
Operating as a global company is always going to be difficult, from coordinating across time zones to navigating the intricacies of regulatory regimes. The latest pressure on globalized business from geopolitical tensions and rising protectionism is raising thorny questions for Western corporate giants that have been the biggest beneficiaries of globalization. Their initial responses sketched out the contours of the 21st century Western multinational corporation. It relies less on China and more on intangible assets such as software and patents. But overall, it’s no less global.
Western corporations began to expand around the world in the 1600s, when European colonial trading companies ventured (often violently) beyond the Old Continent in search of business opportunities. By the early 20th century, the global FDI stock (Foreign Direct Investment), roughly representing the prevalence of multinational corporations, hovering around 10% of the world gross domestic product.
Then, around the time Russians started drinking locally produced Coca-Cola, Western corporate globetrotters experienced their own fizzy high. Freer trade, lower shipping costs, and better communication technologies made them more truly global. Whenever they can find cheaper labor, lower taxes or new customers, they will open shop.In the early 2010s, the global stock Foreign Direct Investment Reaching the equivalent of 30% of global production. Western companies accounted for 78% of the total. The average US multinational has more than a dozen foreign affiliates.
Over the past decade or so, things have started to change. American and European companies are starting to lose some of their foreign dynamism. Banks hit by the 2007-09 global financial crisis and ensuing euro zone debt disputes have scaled back their overseas operations. New competitors, especially from China, are starting to challenge Western companies. For example, four of the five largest smartphone brands in India are now Chinese brands. China overtook Germany last year to become the world’s second-largest car exporter, after Japan.
Since 2010, overseas sales of US and European listed companies have grown only 2% per year, down from 8% in the 2000s and 10% in the 1990s (see Figure 1).Multinationals have been reducing the number of foreign factories Foreign Direct Investment in stock. According to the United Nations Conference on Trade and Development, annual foreign investment flows (excluding reinvested earnings) in the US and Europe have plummeted from a peak of US$659 billion in 2015 to US$216 billion in 2021—a drop from US$156 billion in 2019. The dollar rose, before covid-19 almost wiped them out in 2020. Western’s global share between 2010 and 2021 Foreign Direct Investment Shares fell from 78% to 71%. The typical U.S. multinational now has only nine foreign subsidiaries.
Politicians on both sides of the Atlantic have applauded the trend. They are talking about a renaissance in domestic manufacturing and increasingly trying to neutralize China, the factory enemy of the West. Monthly US spending on factory construction hit $10.9 billion in January, up 55% year-on-year.this European Union It hopes its new subsidies will have a similar effect.
US companies and Europe SA Attitudes toward China, both a manufacturer and a market for their products, are also cooling.according to Bank of East Asia The value of U.S. multinationals’ factories and equipment in China peaked in 2018, the data showed. Western politicians may attribute this change to Western politicians, but the bigger reason may be higher labor prices in China. Since 2010, Chinese manufacturing wages have quadrupled, from $2 an hour to more than $8 an hour in nominal terms.
As for the Chinese market, it remains important to certain industries. For example, about 30% of the sales of Western semiconductor companies come from China. But chip manufacturing accounts for only $400 billion of the $12 trillion overseas sales of Western listed companies (see Figure 2). Across all industries, China accounts for less than one-eighth of Western companies’ overseas revenues, according to investment bank Morgan Stanley — a fraction of sales across the Atlantic to the U.S. and Europe or other emerging-market countries Many worlds (see Exhibit 3). Only 8% of European companies’ total revenue comes from China. For their American counterparts, the figure is 4%.according to Bank of East Asia Data show that US multinationals’ sales in China were flat between 2017 and 2020. In India, they have grown at an annual rate of 6% over the same period.
Therefore, the degree of Sinicization of Western multinational corporations has been reduced. However, it would be wrong to conclude that they are becoming nerds.In terms of the ongoing “reshoring” of Chinese production, Arend Kapteyn observes Swiss bank, a bank that is largely confined to a small number of favored sectors. Overall U.S. manufacturing output remains below pre-financial crisis levels when adjusted for inflation, while it remains largely unchanged in Europe.
In fact, Western corporations look the opposite of misanthropic. On average, U.S. companies may have a quarter fewer foreign affiliates than they did a decade ago, but that decline is offset by the number of affiliates doing business abroad. This has ballooned from 2,300 in 2010 to more than 4,600 in 2020, Bank of East Asia Data Display. According to reports, on March 13, Chick-fil-AThe US fast-food chain is planning a $1 billion expansion in Asia and Europe.
The largest companies maintain substantial foreign business. General Motors, the Detroit automaker, still has more than 100 foreign subsidiaries. Most Chick-fil-ANew foreign diners will be able to eat chicken sandwiches with Coca-Cola, a beverage that continues to quench thirst in more than 200 countries and territories.
Western companies have not given up on foreign production either. Apple and Adidas are increasingly sourcing their iPhones and sneakers, respectively, from geopolitically friendly places like India and Vietnam, where wages are about a third of those in China. This month, Elon Musk announced that Tesla will build a new factory in Monterrey, Mexico, another low-wage location with the added bonus of being adjacent to the auto company’s headquarters on the Texas border.
The world is still your coke can
These globetrotters are increasingly looking for more than just cheap manual labor. Technological advances mean that many companies’ most productive assets are now not their physical plant and equipment, but intangible assets such as computer programs and patents. This increases the return on investment in talent, especially where wages for an educated workforce are lower than in the West. Technologies such as faster broadband, video calling and cloud computing have made this talent pool easier than ever to tap. Richard Baldwin of the Graduate School in Geneva predicts that the offshoring of white-collar jobs will form the basis of a new wave of globalization, similar to the decentralization of manufacturing in previous decades.
Jimit Arora of the Everest Group, a consultancy, notes that multinationals have begun to think more broadly about what tasks can be done overseas. R&D spending by U.S. multinational corporations (R&Man) roughly doubled between 2010 and 2020 (see Figure 4).In November, plane maker Boeing announced it would spend $200 million to build a R&Man The facility in Bangalore, India, is its largest outside of the United States. U.S. tech giants including Alphabet, Amazon and Microsoft have also opened R&Man In the center of the city. The same goes for Wal-Mart, the largest U.S. supermarket chain, and Rolls-Royce, the U.K. aircraft engine maker.
The importance of intangible assets will only grow as businesses across the economy reinvent themselves for the digital age. German industrial giant Siemens already calls itself a “technology company” specializing in digital simulation, data analysis, and more. Walmart now employs about 25,000 technologists, as many tech darlings as Pinterest, Snap, Spotify and Zoom combined.
Because software tends to be expensive to make but cheap to replicate, large companies that can spread the fixed costs of development enjoy a greater competitive advantage. Multinational corporations can share these costs broadest.
From 1990 to 2021, the average return on equity of U.S. and European public companies with less than $1 billion in sales fell from 8% to 4%. For companies with revenues of $10 billion or more, the percentage rose from 12 percent to 18 percent (see Figure 5). It’s much easier to go big if you’re international. U.S. and European public companies with revenues of more than $10 billion will generate an average of 43% of their sales overseas in 2021, compared with 32% for companies with sales of less than $1 billion. In other words, global reach is more important than ever. With ambitious emerging-market rivals on their heels, Western corporate champions have no option but to retreat. ■
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