[Marxism] The Economist on Crisis of Globalization
aktiv at rkob.net
Sat Feb 25 06:20:01 MST 2017
Very interesting articles on the crisis of globalization from /The
Economist /- one of the mouth pieces of capitalism. They also contain
several graphs which I can send to those who are interested.
*The multinational company is in trouble*
*/Global firms are surprisingly vulnerable to attack/*
Jan 28th 2017,
AMONG the many things that Donald Trump dislikes are big global firms.
Faceless and rootless, they stand accused of unleashing “carnage” on
ordinary Americans by shipping jobs and factories abroad. His answer is
to domesticate these marauding multinationals. Lower taxes will draw
their cash home, border charges will hobble their cross-border supply
chains and the trade deals that help them do business will be rewritten.
To avoid punitive treatment, “all you have to do is stay,” he told
American bosses this week.
Mr Trump is unusual in his aggressively protectionist tone. But in many
ways he is behind the times. Multinational companies, the agents behind
global integration, were already in retreat well before the populist
revolts of 2016. Their financial performance has slipped so that they
are no longer outstripping local firms. Many seem to have exhausted
their ability to cut costs and taxes and to out-think their local
competitors. Mr Trump’s broadsides are aimed at companies that are
surprisingly vulnerable and, in many cases, are already heading home.
The impact on global commerce will be profound.
*The end of the arbitrage*
Multinational firms (those that do a large chunk of their business
outside their home region) employ only one in 50 of the world’s workers.
But they matter. A few thousand firms influence what billions of people
watch, wear and eat. The likes of IBM, McDonald’s, Ford, H&M, Infosys,
Lenovo and Honda have been the benchmark for managers. They co-ordinate
the supply chains that account for over 50% of all trade. They account
for a third of the value of the world’s stockmarkets and they own the
lion’s share of its intellectual property—from lingerie designs to
virtual-reality software and diabetes drugs.
They boomed in the early 1990s, as China and the former Soviet bloc
opened and Europe integrated. Investors liked global firms’ economies of
scale and efficiency. Rather than running themselves as national fiefs,
firms unbundled their functions. A Chinese factory might use tools from
Germany, have owners in the United States, pay taxes in Luxembourg and
sell to Japan. Governments in the rich world dreamed of their national
champions becoming world-beaters. Governments in the emerging world
welcomed the jobs, exports and technology that global firms brought. It
was a golden age.
Central to the rise of the global firm was its claim to be a superior
moneymaking machine. That claim lies in tatters (see Briefing
In the past five years the profits of multinationals have dropped by
25%. Returns on capital have slipped to their lowest in two decades. A
strong dollar and a low oil price explain part of the decline.
Technology superstars and consumer firms with strong brands are still
thriving. But the pain is too widespread and prolonged to be dismissed
as a blip. About 40% of all multinationals make a return on equity of
less than 10%, a yardstick for underperformance. In a majority of
industries they are growing more slowly and are less profitable than
local firms that stayed in their backyard. The share of global profits
accounted for by multinationals has fallen from 35% a decade ago to 30%
now. For many industrial, manufacturing, financial, natural-resources,
media and telecoms companies, global reach has become a burden, not an
That is because a 30-year window of arbitrage is closing. Firms’ tax
bills have been massaged down as low as they can go; in China factory
workers’ wages are rising. Local firms have become more sophisticated.
They can steal, copy or displace global firms’ innovations without
building costly offices and factories abroad. From America’s shale
industry to Brazilian banking, from Chinese e-commerce to Indian
telecoms, the companies at the cutting edge are local, not global.
The changing political landscape is making things even harder for the
giants. Mr Trump is the latest and most strident manifestation of a
worldwide shift to grab more of the value that multinationals capture.
China wants global firms to place not just their supply chains there,
but also their brainiest activities such as research and development.
Last year Europe and America battled over who gets the $13bn of tax that
Apple and Pfizer pay annually. From Germany to Indonesia rules on
takeovers, antitrust and data are tightening.
Mr Trump’s arrival will only accelerate a gory process of restructuring.
Many firms are simply too big: they will have to shrink their empires.
Others are putting down deeper roots in the markets where they operate.
General Electric and Siemens are “localising” supply chains, production,
jobs and tax into regional or national units. Another strategy is to
become “intangible”. Silicon Valley’s stars, from Uber to Google, are
still expanding abroad. Fast-food firms and hotel chains are shifting
from flipping burgers and making beds to selling branding rights. But
such virtual multinationals are also vulnerable to populism because they
create few direct jobs, pay little tax and are not protected by trade
rules designed for physical goods.
*Taking back control*
The retreat of global firms will give politicians a feeling of greater
control as companies promise to do their bidding. But not every country
can get a bigger share of the same firms’ production, jobs and tax. And
a rapid unwinding of the dominant form of business of the past 20 years
could be chaotic. Many countries with trade deficits (including “global
Britain”) rely on the flow of capital that multinationals bring. If
firms’ profits drop further, the value of stockmarkets will probably fall.
What of consumers and voters? They touch screens, wear clothes and are
kept healthy by the products of firms that they dislike as immoral,
exploitative and aloof. The golden age of global firms has also been a
golden age for consumer choice and efficiency. Its demise may make the
world seem fairer. But the retreat of the multinational cannot bring
back all the jobs that the likes of Mr Trump promise. And it will mean
rising prices, diminishing competition and slowing innovation. In time,
millions of small firms trading across borders could replace big firms
as transmitters of ideas and capital. But their weight is tiny. People
may yet look back on the era when global firms ruled the business world,
and regret its passing.
*MultinationalsThe retreat of the global company*
The biggest business idea of the past three decades is in deep trouble
From the print edition | Briefing, Jan 28th 2017,
IT WAS as though the world had a new appetite. A Kentucky Fried Chicken
(KFC) outlet opened near Tiananmen Square in 1987. In 1990 a McDonald’s
sprang up in Pushkin Square, flipping burgers for 30,000 Muscovites on
its first day. Later that year Ronald McDonald rolled into Shenzhen,
China, too. Between 1990 and 2005 the two companies’ combined foreign
sales soared by 400%.
McDonald’s and KFC embodied an idea that would become incredibly
powerful: global firms, run by global managers and owned by global
shareholders, should sell global products to global customers. For a
long time their planet-straddling model was as hot, crisp and moreish as
Today both companies have gone soggy. Their shares have lagged behind
America’s stockmarket over the past half-decade. Yum, which owns KFC,
saw its foreign profits peak in 2012; they have fallen by 20% since.
Those of McDonald’s are down by 29% since 2013 (see article
Last year Yum threw in the towel in China and spun off its business
there. On January 8th McDonald’s sold a majority stake in its Chinese
operation to a state-owned firm. There are specific reasons for some of
this; but there is also a broader trend. The world is losing its taste
for global businesses.
Their detractors and their champions both think of multinational
firms—for the purposes of this article, firms that make over 30% of
their sales outside their home region (unless otherwise specified)—as
the apex predators of the global economy. They shape the ecosystems in
which others seek their living. They direct the flows of goods, services
and capital that brought globalisation to life. Though multinationals
account for only 2% of the world’s jobs, they own or orchestrate the
supply chains that account for over 50% of world trade; they make up 40%
of the value of the West’s stockmarkets; and they own most of the
world’s intellectual property.
Although the idea of being at the top of the food chain makes these
companies sound ruthless and all-conquering, rickety and overextended
are often more fitting adjectives. And like jackals circling an elderly
pride, politicians want to grab more of the spoils that multinational
firms have come to control, including 80m jobs on their payrolls and
their profits of about $1trn. As multinational firms come to make ever
more of their money from technology services they become yet more
vulnerable to a backlash. The predators are increasingly coming to look
It all looked very different 25 years ago. With the Soviet Union
collapsing and China opening up, a sense of destiny gripped Western
firms; the “end of history” announced by Francis Fukuyama, a scholar, in
which all countries would converge towards democracy and capitalism
seemed both a historical turning-point and a huge opportunity. There
were already many multinationals, some long established. Shell,
Coca-Cola and Unilever had histories spanning the 20th century. But they
had been run, for the most part, as loose federations of national
businesses. The new multinationals sought to be truly global.
Companies became obsessed with internationalising their customers,
production, capital and management. Academics draw distinctions between
going global “vertically”—relocating production and the sourcing of raw
materials—and “horizontally”—selling into new markets. But in practice
many firms went global every which way at once, enthusiastically buying
rivals, courting customers and opening factories wherever the
opportunity arose. Though the trend started in the rich world, it soon
caught on among large companies in developing economies, too. And it was
huge: 85% of the global stock of multinational investment was created
after 1990, after adjusting for inflation (see chart 1).
By 2006 Sam Palmisano, the boss of IBM, was arguing that the “globally
integrated enterprise” run as a unitary organisation, rather than as a
federation, would transcend all borders as it sought “the integration of
production and value delivery worldwide”. From the Seattle
demonstrations of 1999 onwards, anti-globalisation activists had been
saying much the same, while drawing less solace from the prospect. The
only business star to resist the orthodoxy was Warren Buffett; he sought
out monopolies at home instead.
Such a spree could not last forever; an increasing body of evidence
suggests that it has now ended. In 2016 multinationals’ cross-border
investment probably fell by 10-15%. Impressive as the share of trade
accounted for by cross-border supply chains is, it has stagnated since
2007 (see chart 2). The proportion of sales that Western firms make
outside their home region has shrunk. Multinationals’ profits are
falling and the flow of new multinational investment has been declining
relative to GDP. The global firm is in retreat.
*The other end of the end of history*
To understand why this is, consider the three parties that made the boom
possible: investors; the “headquarters countries” in which global firms
are domiciled; and the “host countries” that received multinational
investment. For their different reasons each thought that multinational
firms would provide superior financial or economic performance.
Investors saw a huge potential for economies of scale. As China, India
and the Soviet Union opened up, and as Europe liberalised itself into a
single market, firms could sell the same product to more people. And as
the federation model was replaced by global integration, firms would be
able to fine-tune the mix of inputs they got from around the world—a
geographic arbitrage that would improve efficiency, as Martin Reeves of
BCG, a consultancy, puts it. From the rich world they could get
management, capital, brands and technology. From the emerging world they
could get cheap workers and raw materials as well as lighter rules on
These advantages led investors to think global firms would grow faster
and make higher profits. That was true for a while. It is not true
today. The profits of the top 700-odd multinational firms based in the
rich world have dropped by 25% over the past five years, according to
FTSE, an index firm. The weakness of many currencies against the dollar
is part of the story, but explains only a third of the fall. The profits
of domestic firms rose by 2%.
A complementary measure comes from the foreign profits of all firms as
recorded in balance-of-payments statistics. Though the data refer to
firms of all sizes, big ones dominate the mix. For companies with
headquarters in the OECD, a club of mostly rich countries, foreign
profits are down by 17% over five years. American firms suffered less,
with a 12% drop, partly because of their skew towards the fast-growing
technology sector. For non-American firms the drop was 20%.
Profits should be compared with the capital sunk. The return on equity
(ROE) of the top 700 multinationals has dropped from a peak of 18% a
decade ago to 11%. The returns on the foreign operations of all firms
have fallen, too, based on balance-of-payments statistics. For the three
countries which have, historically, hosted the most and biggest
multinationals, America, Britain and the Netherlands, ROE on foreign
investment has shrunk to 4-8%. The trend is similar across the OECD (see
Multinationals based in emerging economies, which account for about a
seventh of global firms’ overall activity, have fared no better: their
worldwide ROE is 8%. Several supposed champions—such as Lenovo, the
Chinese company which bought IBM’s PC business and parts of
Motorola—have been financial flops. China’s biggest completed
cross-border acquisition was of Nexen, a Canadian oil firm, in 2012.
Last year the buyer, CNOOC, a state-owned energy firm, wrote a chunk of
About half of the deterioration in multinationals’ ROE over the past
5-10 years is explained by the slump in commodity prices, and thus the
profits of oil firms, mining firms and the like. Another 10% of the
deterioration is due to banks. Firms that provide the specialist
services behind globalisation have also been hammered. Profits have
dropped by over 50% from their peak at Maersk, a Danish shipping line,
Mitsui, a Japanese trading house, and Li & Fung, a supply-chain agent
The pain extends beyond these core industries, however. Half of all big
multinationals have seen their ROE fall in the past three years; 40%
fail to make an ROE of over 10%, widely seen as a benchmark of whether a
firm is creating any value worth speaking of. Even at powerhouses such
as Unilever, General Electric (GE), PepsiCo and Procter & Gamble,
foreign profits are down by a quarter or more from their peak. The only
bright spot is the technology giants. Their foreign profits comprise 46%
of the total foreign earnings of the top 50 American multinationals, up
from 17% a decade ago. Apple made $46bn abroad last year, more than any
other firm and five times more than GE, often seen as America’s bellwether.
These figures mean multinationals are no longer achieving superior
performance. /The Economist/ has examined the record of the 500 largest
firms worldwide. In eight out of ten sectors, multinational firms have
expanded their aggregate sales more slowly than their domestic peers. In
six out of the ten sectors they have lower ROEs (see chart 4). For
American firms, returns are now 30% higher in their home market, where
cosy oligopoly has become more enticing than the hurly-burly of an
Individual bosses will often blame one-off factors: currency moves, the
collapse of Venezuela, a depression in Europe, a crackdown on graft in
China, and so on. But the deeper explanation is that both the advantages
of scale and those of arbitrage have worn away. Global firms have big
overheads; complex supply chains tie up inventory; sprawling
organisations are hard to run. Some arbitrage opportunities have been
exhausted; wages have risen in China; and most firms have massaged their
tax bills as low as they can go. The free flow of information means that
competitors can catch up with leads in technology and know-how more
easily than they used to.
As a result firms with a domestic focus are winning market share. In
Brazil two local banks, Itaú and Bradesco, have trounced global lenders.
In India Vodafone, a Western mobile-phone operator and Bharti Airtel, an
Indian multinational active in 20 countries, are losing customers to
Reliance, a domestic firm. In America shale firms stole a march on the
global oil majors. In China local dumpling brands are eating into KFC’s
sales. A blend of measures for listed firms shows that multinationals’
share of global profits, 35% a decade ago, is now only 30%.
So much for the investors. What about the second constituency for
multinationals, the “headquarters countries”? In the 1990s and 2000s
they wanted their national champions to go global in order to become
bigger and brainier. A study by McKinsey, a consultancy, based on 2007
data, outlined the sort of benefits they were after. Multinationals
operating in America, which accounted for 19% of private-sector jobs,
were responsible for 25% of private wages, 25% of profits, 48% of
exports and 74% of research and development. Go them.
*Citizens of nowhere*
The mood changed after the financial crisis. Multinational firms started
to be seen as agents of inequality. They created jobs abroad, but not at
home. Between 2009 and 2013, only 5%, or 400,000, of the net jobs
created in America were created by multinational firms domiciled there
(although preliminary figures suggest that job creation picked up
sharply in 2014). The profits from their hoards of intellectual property
were pocketed by a wealthy shareholder elite. Political willingness to
help multinationals duly lapsed.
As a result, the tapestry of rules designed to help businesses globally
is fraying. Global accounting, antitrust, money-laundering and
bank-capital rules have splintered into American and European camps.
Takeovers of Western firms now often come with strings attached by
governments to safeguard local jobs and plants. Two American-led trade
deals, known as TPP and TTIP, that gave protection to intellectual
property, have flopped. The global tribunals that multinationals use to
bypass national courts have come under attack.
The deep roots of globalisation mean that trying to favour domestic
companies by erecting tariffs no longer works as once it did. Over half
of all exports, measured by value, cross a border at least twice before
reaching the end-customer, so such tariffs hurt all alike. This does not
mean that the inept or ignorant will not try them. But it does encourage
the use of other avenues to try and right perceived wrongs, such as the
tax system and good old political muscle.
A typical multinational has over 500 legal entities, some based in tax
havens. Using American figures, it pays a tax rate of about 10% on its
foreign profits. The European Union (EU) is trying to raise that figure.
It has cracked down on Luxembourg, which offered generous deals to
multinationals that parked profits there; it also hit Apple with a $15bn
penalty for breaching state-aid rules by booking profits in Ireland,
with which it had a bespoke tax deal. America, for its part, has barred
big firms from using legal “inversions” to shift their tax base abroad,
most notably in the case of Pfizer, a pharmaceutical company that is
America’s third-largest foreign earner.
Republicans in Congress are debating changes to the tax code which would
see exporters and firms bringing profits home pay less than before,
while firms shifting production abroad would face levies. Meanwhile,
some firms have apparently been browbeaten into outsourcing decisions
about where to base factories by Donald Trump, the new American
president. On January 3rd Ford, a carmaker, agreed to cancel a new plant
in Mexico and invest more at home. Mr Trump also wants Apple to shift
more of its supply chain home.
If these trends continue global firms’ tax and wage bills will rise,
squeezing profits further. If American multinationals shifted a quarter
of their foreign jobs home, at American wage rates, and paid the same
tax rate abroad as they did at home, their profits would fall by another
12%. This excludes the cost of building the new plants in America.
Of all those involved in the spread of global businesses, the “host
countries” that receive investment by multinationals remain the most
enthusiastic. The example of China, where by 2010 30% of industrial
output and 50% of exports were produced by the subsidiaries or
joint-ventures of multinational firms, is still attractive.
Argentina’s government wants to draw in foreign firms. Mexico has just
sold stakes in its oilfields to foreign firms, including ExxonMobil and
Total. India has a campaign called “make in India” to attract
multinational supply chains. An index through which the OECD seeks to
gauge the openness of host countries shows no overall deterioration
since the financial crisis.
But there are gathering clouds. China has been turning the screws on
foreign firms in a push for “indigenous innovation”. Bosses say that
more products have to be sourced locally and intellectual property often
ends up handed over to local partners. Strategic industries, including
the internet, are out of bounds to foreign investment. Many fear that
China’s approach will be mimicked around the developing world, forcing
multinational firms to invest more locally and create more jobs—a mirror
image of the pressures placed on them at home.
*The price of hospitality*
Host countries may also become less welcoming as activity shifts towards
intangible services. For the top 50 American multinationals, 65% of
foreign profits now come from industries reliant on intellectual
property, such as technology, drug patents and finance. A decade ago it
was 35%, and the share is still rising. (It is much lower in Europe and
Japan, which do not have big technology firms.) There is no serious
appetite among multinationals to recreate in Africa or India the
manufacturing centres they spurred on in China, which removes a reason
for those host countries to welcome them. The jobs and exports that can
be attributed to multinationals are already a diminishing part of the
story. In 2000 every billion dollars of the stock of worldwide foreign
investment represented 7,000 jobs and $600m of annual exports. Today
$1bn supports 3,000 jobs and $300m of exports.
Silicon Valley’s latest stars are already controversial abroad. In 2016
Uber sold its Chinese operations to a local rival after a brutal battle.
In December India’s two digital champions, Ola, a ride-hailing firm, and
Flipkart, an e-commerce site, said the government should protect them
against Uber and Amazon. They argued that their rivals would build
monopolies, create few good jobs and ship the profits to America.
The last time the multinational company was in trouble was in the
aftermath of the Depression. Between 1930 and 1970 their stock of
investment abroad fell by about a third relative to global GDP; it did
not recover until 1991. Some firms “hopped” across tariffs by building
new factories within protectionist countries. Many restructured, ceding
autonomy to their foreign subsidiaries to try to give them a local
character. Others decided to break themselves up.
Today multinationals need to rethink their competitive advantage again.
Some of the old arguments for going global are obsolete—in part because
of the more general successes of globalisation. Most multinationals do
not act as internal markets for trade. Only a third of their output is
now bought by affiliates in the same group. External supply chains do
the rest. Multinational firms no longer have a lock on the most
promising ideas about management or innovation. Where they have
enforceable patents over valuable brands they are still at an advantage,
as they are in products, such as jet engines, where economies of scale
are best created by spreading costs over the entire world. But those
benefits are less than they were.
The lack of advantage is revealed in the amount of activity that yields
little value. Roughly 50% of the stock of foreign direct investment
makes an ROE of less than 10% (40% of the stock if you exclude
natural-resources firms). Ford and General Motors make 80% or more of
their profits in North America, suggesting their foreign returns are
Many industries that tried to globalise seem to work best when national
or regional. For some, the penny has dropped. Retailers such as
Britain’s Tesco and France’s Casino have abandoned many of their foreign
adventures. America’s telecoms giants, AT&T and Verizon, have put away
their passports. Financial firms are focusing on their “core” markets.
LafargeHolcim, a cement maker, plans to sell, or has sold, businesses in
India, South Korea, Saudi Arabia and Vietnam. Even successful global
firms have gone on diets. P&G’s foreign sales have dropped by almost a
third since 2012 as it has closed or sold weak businesses.
It looks as if, in the future, the global business scene will have three
elements. A smaller top tier of multinational firms will burrow deeper
into the economies of their hosts, helping to assuage nationalistic
concerns. General Electric is localising its production, supply chains
and management. Emerson, a conglomerate that has over 100 factories
outside America, sources about 80% of its production in the region where
it is sold. Some foreign firms will invest more deeply in American-based
production in order to avoid tariffs, if Mr Trump imposes them, much as
Japanese car firms did in the 1980s. This is doable if you are large.
Siemens, a German industrial giant, employs 50,000 in America and has 60
factories there. But midsized industrial firms will struggle to muster
the resources to invest more deeply in all their markets.
Politicians will increasingly insist that companies buying foreign firms
promise to preserve their national character, including jobs, R&D
activity and tax payments. SoftBank, a Japanese firm that bought ARM, a
British chip company, in 2016, agreed to such commitments. So has
Sinochem, a Chinese chemicals firm that is buying Syngenta, a Swiss
rival. The boom in foreign takeovers by Chinese firms, meanwhile, may
fizzle out or explode. Many such deals, reliant on subsidised loans from
state banks, probably make little financial sense.
The second element will be a brittle layer of global digital and
intellectual-property multinationals: technology firms, such as Google
and Netflix; drugs companies; and companies that use franchising deals
with local firms as a cheap way to maintain a global footprint and the
market advantage that brings. The hotel industry, with its large
branding firms such as Hilton and Intercontinental, is a prime example
of the tactic. McDonald’s is shifting to a franchising model in Asia.
These intangible multinationals will grow fast. But because they create
few direct jobs, often involve oligopolies and do not benefit from the
protection of global trade rules, which for the most part only look
after physical goods, they will be vulnerable to nationalist backlashes.
*The seeds of something more*
The final element will be perhaps the most interesting: a rising cohort
of small firms using e-commerce to buy and sell on a global scale. Up to
10% of America’s 30m or so small firms already do this to some extent.
PayPal, a digital payments firm, says its cross border transactions,
which include activity from such multinationalettes, are running at
$80bn a year, and growing fast. Jack Ma, the boss of Alibaba, a Chinese
e-commerce firm, predicts that a wave of small Western firms exporting
goods to Chinese consumers will go some way to reversing the past two
decades of massive American firms importing goods from China.
The new, prudent age of the multinational will have costs. Countries
that have grown used to global firms throwing cash around may find that
competition abates and prices rise. Investors, who all told have a third
or more of their equity portfolios tied up in multinational firms, could
face some unpleasant turbulence. Economies that rely on income from
foreign investments, or capital inflows from new ones, will suffer. The
collapse in profits from British multinationals is the reason why
Britain’s balance of payments looks bad. Of the 15 countries with
current-account deficits of over 2.5% of GDP in 2015, 11 relied on fresh
multinational investment to finance at least a third of the gap.
The result will be a more fragmented and parochial kind of capitalism,
and quite possibly a less efficient one—but also, perhaps, one with
wider public support. And the infatuation with global companies will
come to be seen as a passing episode in business history, rather than
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