Remaking of the corporate world By Shahid Javed Burki

BY now the suggestion that the global economy is being reshaped by the process economists call “catching up” is generally accepted. There is no doubt that Asia is rising and within Asia, China has replaced Japan as the dominant economy.

The Japanese, when they dominated Asia, were really oriented towards the West; they had few contacts with the Asians, including those in their immediate neighbourhood. Initially China followed the same model, growing by exporting large amounts of cheap manufactured products to the West. But that approach has changed in the last few years. There are three reasons for this. Two of these are already in place; the third has only very recently begun to acquire salience.

The first reason is the remaking of the global production system that has reduced the emphasis on producing one product entirely by one process within firms. Instead, products are now being made by importing parts and components from many different places. The production process has been scattered to the four corners of the world; it has become globalised. The process will continue for many reasons, among them demographic changes in the developed world. Today’s industrial countries are simply running out of people to staff and manage businesses.

The second reason is the way some of the large emerging economies have dealt with the Recession of 2008-09, spending large amounts of “stimulus money” in reshaping their economies rather than simply creating jobs by pumping money into what President Barack Obama called “shovel ready” projects.

The Chinese, for instance, used the money to build infrastructure that will aid their economic transformation. A good part of this money went into improving China’s links with the countries in the neighbourhood. Among the countries China is developing links with are Vietnam, Laos, Thailand, Myanmar and Pakistan. This means that China is paying much greater attention to Asia than was done by Japan which was the second largest economy in the world before being replaced by China.

The third contributing factor to global change is the growth and geographic expansion of firms in the emerging world. Let us begin with some data before going on to discuss the impact of this development on the global economy. The “emerging firms”, to coin a phrase, have become more important in the corporate world over the last ten years.

In 2000, only 26 companies from the emerging world made it to the list of the Financial Times 500 companies. Their total capitalisation was estimated at $700 billion out of $21.3 trillion. In other words, only 5.2 per cent of the firms from the emerging world then could be classified as big and they had 3.2 per cent of the capital worth of the world’s 500 largest companies. The average size of the large emerging firm was about $27 billion as against $43 billion for the firms in the old industrial countries.

The picture since then has changed quite remarkably. There are now 199, or 23.8 per cent of the total, emerging firms listed by the Financial Times among the world’s largest. Their size has increased to $45 billion compared to $48 billion for the firms in the industrial world. In 2000, the average size of the large firms in the emerging world was 63 per cent of those in the industrial countries. Now, ten years later, they are practically of the same size.

The firms in the emerging world increased their presence in the global corporate world – and their size as well – through acquisitions and not organic growth. Again some numbers will help us to understand the trends. Three years ago, before the Great Recession pulled down the global economy, $211 billion of money spent on mergers and acquisitions flowed from the developed to the developing world. But the developing countries’ firms were also buying assets in the developed world. For every dollar that developed countries’ firms spent in M&A activity in the developing world, developing countries spent 87 cents.

In just two years, the ratios changed dramatically. In 2009, the cash-strapped corporations in the industrial world spent only $74 billion acquiring businesses in the developing world while the developing countries put in $105 billion for the same purpose.

This time for every dollar spent by the developed world corporations in the developing world, the developing world companies spent $1.42. As these numbers suggest, developed country firms have not given up expanding into the developing world. In fact some of the newer firms in the West have been aggressive in creating a presence in emerging markets. Microsoft has developed a large development and research centre close to Beijing while Cisco has set up its “eastern headquarter” in Bangalore.

Size begets size. It was only the very large developing countries’ firms that were engaged in acquisitions in developed countries. Some of these transactions hit newspaper headlines and rocked the developed world. When India’s Tata acquired Corus for over $110 billion, it was recalled by British newspapers that in the 19th century the grand father of the current head of the company was turned back contemptuously by the British when he sought to bid for the supply of railway track for the Indian railways. Indians, he was told, should concentrate on tilling the soil rather than venture into the complicated business of making steel products.

Those kinds of prejudices and biases are gone but other types of obstacles remain. On several occasions security concerns have been cited – in particular by the Americans – to prevent developing country firms from picking up assets. One example of this is the attempt by World Port, a Dubai-based company, to buy P&O, a firm that owned and managed a number of ports in the United States. The reason for this may have been that the acquiring firm was based in an Arab state and ports are considered to be sensitive assets. However, the Americans have been equally reluctant to let in the Chinese firms into some of the areas they consider sensitive. Washington objected to a bid by the Chinese telecom giant Huawei to buy 3Com, a US network technology company.

There is a belief that the Chinese and Indian firms that are expanding abroad are doing so to ensure a steady supply of raw material and sources of energy for their countries. That is only part of the reason. These companies are also interested in acquisitions for a number of other reasons: to get closer to the markets for some of their products and services, acquire new technologies and skills, diversify geographically. While the bulk of the acquisition activity has involved firms in large Asian countries, the Latin Americans have also begun to look outside their borders. The Brazilians in particular have become active.

For obvious reasons Pakistan has been almost totally absent from this area. It has not developed firms of the size that they can think of going abroad to look for expanding markets. Financial sector firms, in particular commercial banks, are the only corporate entities that have the wherewithal to venture outside the country’s borders. But they have decided to concentrate on developing the domestic market. The only example of some acquisition activity is Netsol, an IT company based in Lahore, that has acquired small companies in the UK and the United States to develop new markets for its products. Other IT firms may follow but firms from the older parts of the economy will stay domesticated unless they develop the size.

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/remaking-of-the-corporate-world-150