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Lessons from multinationals

Posted 29/06/2010 by roses

The US is generally considered to be the home of the multinational, but it was something of a surprise to learn that less than 1% of all US companies are in fact multinationals. So says a new report from the consultant McKinsey, Growth and competitiveness in the United States: The role of its multinational companies, which also points out that US multinationals make a major contribution to US exports, supplying 48% of total US exports, and, not unexpectedly, account for 37% of all US imports. But in addition to producing a favourable balance of trade, these giants also support their own, with 90% of intermediate inputs being purchased by US multinationals from other US firms.

But it is in terms of growth that US multinationals have made their impact, being responsible for 31% of the growth in real private sector GDP, and 41% of the labour productivity gains, since 1990. The productivity gain jumps to 53% when only periods of economic expansion are considered. The other significant area is, of course, R&D, with US multinationals accounting for 74% of all private sector spending.

These companies are, more than any other US concerns, exposed to the global market and, according to McKinsey, they therefore act like a ‘canary in the coal mine’ for the US economy byproviding an indication as to how other US companies and the economy as a whole may respond to increasingly intense global competition.

To produce its report, McKinsey talked to senior executives at 26 of the largest and best-known US multinationals. Taken together these companies have a market capitalisation of almost $2 trillion, with sales of $1.5tr/year and employing 2m US workers, all of which are likely to be affected by this increasing globalisation.

McKinsey says increasing global competition is creating ‘new battlegrounds for investment and jobs’ and suggests some of the factors that multinationals will need to consider, not just in the US but elsewhere in the developed and developing worlds.

One key comment is that there is no need to replicate all company functions in every location in which a corporation operates – and it is more effective to locate different activities in different locations. The key functions identified by the executives include sales and marketing, manufacturing, business support or back office, R&D and management, for which there are an increasing number of locations can be considered.

For the US, and other developed countries, manufacturing, business support services and, most recently, R&D have seen a growing movement into the developing world. And all of the executives McKinsey interviewed said they have no choice but to expand their operations in fast growing overseas markets, with the BRIC nations: Brazil, Russia, India and China, being the most attractive; however, Central and South America, Eastern Europe and Asia are also seen as offering huge potential.

In terms of R&D, almost all those questioned said that they are expanding their R&D activities overseas and hiring an increasing number of researchers and technicians in these emerging markets. ‘When we are looking for the next breakthrough innovation, we are looking for the most talented people. No matter where they are. If we have to, we will bring the R&D to the talent,’ commented one executive.

The message is clear. R&D, like other business functions before it, is going global and gone are the days when ‘not invented here’ was an option for not doing anything, if, in fact, it ever was.

Neil Eisberg - Editor

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