Tuesday, November 3, 2015

Next generation multinationals

Schumpeter in The Economist states, "The golden age of the Western corporation may be coming to an end."

"The golden age of the Western corporation, [McKinsey Global Institute] argue, was the product of two benign developments: the globalisation of markets and, as a result, the reduction of costs. The global labour force has expanded by some 1.2 billion since 1980, with the new workers largely coming from emerging economies. Corporate-tax rates across the OECD, a club of mostly rich countries, have fallen by as much as half in that period. And the price of most commodities is down in real terms."

The world is flattened a la Mr. Thomas Friedman. The results have been corporate growth of existing multinationals to new ones from emerging markets growing fast:

"Two things in particular are shaking up the comfortable world of the old imperial multinationals. The first is the rise of emerging-market competitors. The share of Fortune 500 companies based in emerging markets has increased from 5% in 1980-2000 to 26% today."

The power of technology, and its democratization has been the other significant change:

"The second factor is the rise of high-tech companies in both the West and the East. These firms have acquired large numbers of customers in the blink of an eye."

The article offers a solution for the current multinationals, based on the concept that all innovation is preceded by invention:

"How can Western companies navigate these threats to their rule? MGI advises them to focus on the one realm where they continue to have a comparative advantage—the realm of ideas. Many companies in labour- and capital-intensive industries have been slaughtered by foreign competitors, whereas idea-intensive firms—not just companies in obvious markets such as the media, finance and pharmaceuticals, but in areas such as logistics and luxury cars—continue to flourish. The “idea sector”, as MGI defines it, accounts for 31% of profits generated by Western companies, compared with 17% in 1999."

Unfortunately, the larger the corporation, the lesser it is capable of creating and nurturing "ideas".  Ideas require a desire "to be something" more in the future, and then nurturing them, allowing them to fail.  Rare is a corporate that is capable of such, handcuffed to quarterly earnings.  Tools of the corporations to capture innovations versus "creating" via M&A, divestures for streamlining and growing the balance sheet, etc.

Yet, does a new model emerge for the ones who will last?

"The cult of quarterly earnings may lose more of its following. A striking number of the new corporate champions have dominant owners in the form of powerful founders. They are willing to eschew short-term results in order to build a durable business, such as Mark Zuckerberg at Facebook, the Mahindras and other assiduous families in India, and private-equity firms. Gibbon’s great work was a tale of decline and fall, as classical civilisation gave way to barbarism and self-indulgence. With luck, the tale of the relative decline of the Western corporation will also be a tale of the reinvention of capitalism as new forms of companies arise to seize opportunities from the old."

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