The Corporate Stampede to Developing Nations
Why are so many U.S. corporations rushing to increase their presence in developing markets?
November 12, 2009
The headlines have become commonplace. The New York Times recently ran with "Ford Unveils Small Car to Compete in India."
A day earlier, The Wall Street Journal posted stories on "IBM Markets Wares in Africa" and "PC Makers Cultivate Buyers in Rural China."
Procter & Gamble's bid to increase its market presence in Poland was a recent topic in the Financial Times.
Clearly, a new race has begun among U.S. firms — along with their European and Japanese counterparts — to strategically position themselves in the developing nations.
The stakes in this race are huge, since many large companies domiciled in the slow-growth and saturated developed markets are increasingly dependent on the younger, faster-growing developing markets for future earnings growth.
This reality is understood by investors. Less recognized, however, is the simple yet glaring fact that many U.S. and European multinationals are behind the curve when it comes to having an in-country presence in many key emerging markets. Rather than too much investment in the developing nations, there is too little.
To this point, the bulk of America's global infrastructure — foreign capital stock, overseas workforce, research and development (R&D) expenditures and foreign affiliates — is sunk in Europe, Canada and Japan.
Of the $1.1 trillion U.S. firms have invested overseas this decade, nearly 70% has been directed to the developed markets. U.S. investment in Ireland since the start of this decade is nearly 50% greater than combined U.S. investment in Brazil, Russia, India and China — the fabled BRIC nations.
Other key metrics tell a similar tale. According to figures from the Bureau of Economic Analysis (BEA), more than 80% of the R&D conducted by U.S. foreign affiliates takes place in the developed nations.
This is despite all the chatter about the millions of science and engineering graduates being pumped out by Chinese and Indian universities each year.
Even on the employment front, the bias remains toward wealthy, high-wage nations. In 2007, the last year of available data, U.S. affiliates employed just over ten million foreign workers worldwide, with 55% of this workforce toiling in the developed nations.
Many in America blame China for declining U.S. manufacturing employment, although the combined number of workers employed by U.S. affiliates in Germany, France and the United Kingdom is more than double those employed in China.
On the whole, America's global manufacturing workforce is slowly shifting toward the developing world, although just over half of this cohort is still on the dole in Europe, Australia, Canada and Japan.
And where it matters the most — corporate earnings — is where the developed nations still yield the greatest windfall to U.S. multinationals. This decade, rich nations accounted for 70% of U.S. foreign affiliate income, a proxy for global earnings.
All of the above suggests that Corporate America's global infrastructure is presently configured for a bygone era whereby the developed nations, notably Europe, drove the global economy.
Since the late 1950s, the principal focus of U.S. multinationals has been on the developed nations, a strategy that has served them well given the wealthy consumer markets and availability of skilled labor in these locations. Many other developed nations face the same dilemma.
It's not just the United States that is underweight when it comes to investment in the developing nations — so too is France, Germany, Japan and the United Kingdom.
In the decades ahead, however, it is the developing nations that will drive global growth and come to possess the key endowments — expanding consumer markets, a skilled labor force and critical resources — desired by U.S. multinationals.
That said, it is ironic that at precisely the moment when Corporate America needs to build out its presence in the developing nations, the latter have become pickier and somewhat less welcoming to foreign investment.
U.S. oil companies, for instance, increasingly confront resource nationalism in a number of petro-states. U.S. companies and private equity firms have found it slow-going in China, India and other markets.
In general, a whiff of investment protectionism permeates many key developing nations at a time when U.S. firms are seeking to increase their local presence.
If the developing nations — with their burgeoning middle classes and massive infrastructure needs — represent the future of global economic activity, then many U.S. and European companies are not ready for the future.
On a relative basis, food and beverage multinationals are better entrenched in the emerging markets, as are many mining and energy companies. Yet, for many other firms, the race is on.
More than 80% of the R&D conducted by U.S. foreign affiliates takes place in developed nations. This is despite all the chatter about science and engineering graduates in China and India.
A whiff of investment protectionism permeates many key developing nations at a time when U.S. firms are seeking to increase their local presence.
Many large companies domiciled in the saturated developed markets are increasingly dependent on the younger, faster-growing developing markets for future earnings growth.
Urbi et Gorbi
November 11, 2009