The Corporate Stampede to Developing Nations

U.S. corporations are finally waking up to the fact that developing markets are their best hope for future earnings growth. Yet, the bulk ofAmerica’s global infrastructure is still sunk in Europe, Canada and Japan. Joseph Quinlan of Bank of America explains the contours of this pressing issue.


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 recognised, 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 per cent has been directed to the developed markets. U.S. investment in Ireland since the start of this decade is nearly 50 per cent greater than combined U.S. investment in Brazil, Russia, Indiaand 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 per cent 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 per cent 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.

In the decades ahead, 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.

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 per cent 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, Japanand 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.


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