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Are Western companies becoming less global?

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tI popularize you Russia has already joined the infamous list of countries – along with North Korea and Cuba – where consumers are denied Coca-Cola. The US beverage giant ceased operations there after Russia’s invasion of Ukraine. Thirty years ago, when Coca-Cola expanded into post-Soviet Russia, barriers to global trade were fading away. It is being rebuilt today – and not just around Russia.

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The US Treasury Department is said to be working on plans to stop foreign investment in cutting-edge technologies in the feuding countries. It has already banned the sale of advanced microprocessors and chip-making equipment to China. Sino-American trade could shut down entirely if China emulates Russia’s aggressiveness in its relations with its desirable neighbor, Taiwan. At the same time, America is providing half a trillion dollars in subsidies aimed at bringing home supply chains for semiconductors, electric cars and clean energy. The European Union is expected to unveil a large package of similar sweeteners any day now.

Operating as a multinational corporation has always been challenging, from coordinating across time zones to navigating a patchwork of organizational systems. Recent pressures on globalized trade – brought about by geopolitical tensions and rising protectionism – raise difficult questions for the giant corporations in the West that have been among the biggest beneficiaries of globalization. Their initial responses define Western multinational corporations in the twenty-first century. It is less dependent on China and more on intangible assets such as software and patents. But in general, it is no less universal.

Western corporations began to spread into the world in the seventeenth century, when European colonialists (often violently) ventured out of the Old Continent in search of commercial opportunities. By the beginning of the twentieth century, the global stock of foreign direct investment (direct foreign investment), which is a rough proxy for the spread of MNCs, hovered at 10% or so of the world gross domestic product.

Then, while Russians were sipping on homemade Coca-Cola, Western travel pioneers suffered from a high carbon footprint. Free trade, lower shipping costs, and better communication technology allowed them to become truly more global. They set up shop anywhere they can find cheaper labor, lower taxes, or new clients. In early 2010, the global inventory of direct foreign investment It reached the equivalent of 30% of global output. Western companies accounted for 78% of the total. The average American multinational corporation had dozens of foreign subsidiaries.

In the past decade or so, things have started to change. American and European companies began to lose some of their foreign crises. Banks hit by the global financial crisis of 2007-2009 and the subsequent debt run-in in the eurozone reduced their foreign business. And new competitors, especially from China, are beginning to challenge Western companies. Four of the five largest smartphone brands in India, for example, are now Chinese. Last year, China overtook Germany as the world’s second largest exporter of automobiles, behind only Japan.

Since 2010, foreign sales to listed US and European companies have grown at a meager 2% annually, down from 8% in the 2000s and 10% in the 1990s (see Chart 1). Multinational corporations have added fewer foreign factories to direct foreign investment stock. Annual inflows of US and European foreign investment (excluding reinvested earnings) fell from a peak of $659 billion in 2015 to $216 billion in 2021, according to the United Nations Conference on Trade and Development — and that was up slightly from $156 billion in 2019, before that covid-19 could wipe them out almost completely in 2020. between 2010 and 2021, the west’s share of the world direct foreign investment Inventory decreased from 78% to 71%. The typical American multinational now has only nine foreign subsidiaries.

Politicians on both sides of the Atlantic are applauding this trend. They talk of the renaissance of domestic manufacturing and increasingly try to keep China, the Western manufacturer-turned-nemesis, down. In January, monthly spending on building factories in America was $10.9 billion, up 55 percent from the previous year. the European Union She hopes the new support will have a similar effect.

America and Europe company SA China calms down too – as the maker and market of their wares. according to BEA Data, the value of US multinational factories and equipment in China peaked in 2018. Western politicians may claim credit for the change, but the bigger reason may be more expensive Chinese labor. Since 2010, manufacturing wages in China have quadrupled, from $2 an hour to more than $8 in nominal terms.

As for the Chinese market, it is still important for some sectors. For example, Western semiconductor companies derive about 30% of their sales from China. But the chip industry accounts for only $400 billion of the $12 trillion in sales generated by overseas listed Western companies (see Chart 2). Look across all industries, and you’ll find that China accounts for less than one-eighth of Western companies’ foreign revenue, according to Morgan Stanley, an investment bank — a much smaller share of US and European sales across the Atlantic or of the rest of the startups. world (see chart 3). Only 8% of all European companies’ total revenue comes from China. For their American counterparts, the figure is 4%. according to BEA According to the numbers, sales of US multinationals in China were flat between 2017 and 2020. And in India they grew 6% annually in the same period.

So, Western multinationals have become somewhat less Chinese. However, it would be wrong to conclude that they are turning into homebodies. As far as “reproduction” of production from China takes place, Arend Kapteyn notes UPS, a bank, is mostly confined to a narrow set of preferred sectors. Gross manufacturing output remained lower than it was before the financial crisis in America and almost unchanged in Europe, after adjusting for inflation.

Indeed, Western business seems to be the opposite of what has made the world weary. American companies may have a quarter fewer foreign subsidiaries than they did a decade ago, on average, but that decline is offset by the number of companies with a presence abroad. This swelled from 2,300 in 2010 to more than 4,600 in 2020. BEA Display data. On March 13, it was reported that Chick-fil-aan American fast food chain, plans to spend $1 billion on expansion in Asia and Europe.

The largest companies maintain a large foreign presence. General Motors, a Detroit automaker, still has more than 100 foreign subsidiaries. Most Chick-fil-aNew foreign diners will be able to wash down chicken sandwiches with Coca-Cola, which still quench thirst in more than 200 countries and regions.

Western business also does not abandon foreign production. Apple and Adidas are increasingly sourcing iPhones and sneakers, respectively, from geopolitically friendly places like India and Vietnam, where wages are roughly a third of those in China. Elon Musk announced this month that Tesla will build a new factory in Monterrey, Mexico, another lower-wage location with the added bonus of being next door to the cross-border car company’s home in Texas.

The world is still your Coca-Cola can

These travelers are increasingly after more than cheap handicrafts. Advances in technology mean that the most productive assets for many businesses are now not their physical facilities and equipment but intangible assets such as computer software and patents. This increases returns on investment in talent, particularly in places where an educated workforce demands lower wages than in the West. Technologies like faster broadband, video calling, and cloud computing make this talent pool easier than ever. Richard Baldwin of the Geneva Graduate Institute predicts that offshoring will form the basis for a new wave of globalization similar to the dispersal of manufacturing in earlier decades.

Multinational corporations are already starting to think more comprehensively about what tasks can be done offshore, notes Jemit Arora of Everest Group, a consultancy. US multinational corporations’ spending on research and development (s&Dr) in low-cost countries approximately between 2010 and 2020 (see Chart 4). Last November, Boeing, the aircraft manufacturer, announced that it would build a $200 million airliner s&Dr The facility in the Indian city of Bangalore is the largest outside America. American tech giants such as Alphabet, Amazon, and Microsoft have also opened s&Dr centers in the city. So did Wal-Mart, America’s most powerful department store chain, and Rolls-Royce, a British maker of aircraft engines.

The importance of intangible assets will only grow as companies across the economy reinvent themselves for the digital age. Siemens, a German industrial giant, actually calls itself a “technology company” focused on digital simulation, data analytics, and so on. Walmart now employs about 25,000 tech professionals, about the combined workforce of Pinterest, Snap, Spotify, and Zoom, and four tech darlings.

Because software tends to be expensive to create but cheap to reproduce, large companies that can spread the fixed costs of development have a greater competitive advantage than ever before. Multinational corporations can spread these costs over the widest range.

Between 1990 and 2021, the average return on equity for listed US and European companies with sales less than $1 billion fell from 8% to 4%. For companies with revenues of $10 billion or more, it increased from 12% to 18% (see Chart 5). And being big is easier if you’re international. In 2021, US and European companies listed with more than $10 billion in revenue generated 43% of their sales abroad on average, compared to just 32% for companies with less than $1 billion in sales. In other words, global reach is more important than ever. With ambitious emerging-market competitors nipping at their heels, quitting is not an option for corporate champions in the West.

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