Neemrana January 2009 -...
Transcript of Neemrana January 2009 -...
The Decentering of the Global Firmg
NNeemranaJanuary 2009
Mihir A. DesaiHarvard and NBER
MotivationEven as the global activities of firms have increased, headquarters remained immutable – and national identities were meaningful concepts
Now, it appears that the center cannot hold – firms are unbundling critical headquarters functions and unbundling critical headquarters functions and reallocating them worldwide
The intuition of firms with fixed national identities or as national actors is increasingly obsolete …policymakers need to rethink various policies that are predicated on a need to rethink various policies that are predicated on a firm’s national identity
Motivating Example – “Repotting” CelaneseIn 2004, Celanese was a large German chemicals corporation
ith ld id ti iti lik f it l b l tit with worldwide activities, like many of its global competitors
PE players note that it is undervalued relative to global tit d t k it i tcompetitors and take it private
By 2005, Celanese is “re-potted” to U.S. – U.S. Holding NYSE li ti D ll HQ A i B Dcompany, NYSE listing, Dallas HQ, American BoD
Large valuation gap closed
Warner-Chilcott similarly repotted from an Irish pharma co, listed in the UK to a NYSE-listed, Bermuda-based holding co, and U S h d t U.S. headquarters.
Motivating Example – Nestle/AlconIn 2001, Nestle decides to float shares in Alcon, an In 2001, Nestle decides to float shares in Alcon, an opthamological sub. Wants to keep Swiss identity for tax purposes but also attract American investors and purposes but also attract American investors and employees
• Alcon AG became Alcon Inc. but retains Swiss identity• Listed directly on NYSE – no ADR/dual-listings ed d ec y o S o /dua s g• American BOD and corporate bylaws
American HQs• American HQs
Motivating Example – PixamoPhoto sharing website startup based in Cambridge MA -g p gsecond effort by serial entrepreneur
Prior to first round/financing founder contemplates Prior to first round/financing, founder contemplates Delaware, Switzerland and Ukraine as corporate domicile
Global, private agribusiness giant HQed in Sao PaoloMotivating Example – Bunge
, p g g QPrior to going public, family decides that they don’t want an emerging market discount relocate to White Plains an emerging market discount – relocate to White Plains prior to IPO
Motivating Examples – Numerous othersShire and WPP leave England this summer; Stanley Works tries t l th U Sto leave the U.S.
Forty percent of Chinese red-chip companies have parents y p p p pincorporated in Caribbean
U S companies that had left for the Caribbean have now moved U.S. companies that had left for the Caribbean have now moved to Switzerland
Israeli tech companies routinely undertake “reverse-sleeve” transactions to become subs of newly-created U.S. companies
James Hardie – An Australian corporation redomiciled to the Netherlands, kept Australian listing and moved HQ to USA
What is going on?These transactions are of a piece…they represent an These transactions are of a piece…they represent an extension of trends apparent over the last fifty years
Much as firms have reallocated production and distribution worldwide, firms are beginning to unbundle HQ functions and reallocate them worldwide
How should policy-makers respond?
The Changing Shape of the Global Firm These changes can be best understood as a continuation to changes in the shape of the global firm The last forty years have featured very different organizational responses to falling tariffs
1960s-1980s – Self Replication to Avoid Tariffs and High
Transport Costs
1990s-2000s – Specialization and Fragmentation through Offshoring
firm. The last forty years have featured very different organizational responses to falling tariffs, transport costs, and contracting costs…
2000s – Ownership based outsourcing decisions
Transport Costs through Offshoring
MNC HQ
Final Goods& Services (G&S)
U.S. customers
MNC HQ
Intellectual Property
MNC HQ
Intellectual Property
Capital
Austrian Sub
Intermediate
Property
UnrelatedAustrian Company
Intermediate
Property
Brazilian Sub
CanadianSub
AustrianSub
Final G&SFinal G&S
IntermediateG&S
BrazilianSub
IntermediateG&S
BrazilianSub
Braziliancustomers
Canadiancustomers
Austrian customers
Final G&SFinal G&S
Worldwide customers Worldwide customers
Reconceptualizing the Corporate Home A traditional home can be unbundled into three critical functions that can then be relocated in response to global opportunities
2000s and on – The Decentering of the Global Firm
then be relocated in response to global opportunities
MNC HQ
A Financial Home A Legal HomeHome (s) for
Managerial Talent
Consider Genpact – First BDA now Lux, NYSE listing, India talent with senior managers in Europe and Singapore
Reconceptualizing the Corporate Home 2000s and on – The Decentering of the Global Firm
MNC HQ
A Financial Home A Legal HomeHome (s) for
Managerial Talent
First, what is giving rise to these changes? 1) Enhanced communication technologies, 2) Rising competition amongst countries, 3) Power of Talent, g ) g p g )and 4) Emergence of global shareholder and lender base
Reconceptualizing the Corporate Home –Home (s) for Managerial Talent
MNC HQ
The most traditional and obvious function of HQHome (s) for
Managerial Talent Yet, this need no longer be unitary…CFOs, CIOs and COOs can be usefully located closest to key suppliers, labor pools or travel hubs eg Genpactlabor pools, or travel hubs – eg. Genpact
This home can change culture of company - Celanese
Consider Rio Tinto/Lend Lease - senior management spread across UK and Australia
Reconceptualizing the Corporate Home – A Financial Home
MNC HQ
What functions does a financial home provide?Allows for recontracting around poor rules ADRs
A Financial HomeAllows for recontracting around poor rules - ADRsDictates incentive compensation arrangements -AlconCapital raising and capital allocation – J. HardieCan determine owners - NestleDictates firm value – News Corp and Boart Longyear
Reconceptualizing the Corporate Home – A Legal Home
MNC HQ
What functions does a legal home provide?1 Legal homes create opportunities and
A Legal Home1. Legal homes create opportunities and
obligations – eg. corporate taxation and of investors
Stanley, BHP-Billiton, havens….
2. Rights of investors, workers and other 2. Rights of investors, workers and other stakeholders that can influence firm value
Celanese
Reconceptualizing the Corporate HomeMNC HQ
A Financial Home A Legal Home Home (s) for Managerial Talent
Incentive compensation
Managerial Talent
Tax obligations Proximity to suppliers, pAnalyst coveragePrice discoveryDisclosure regulations
gWorker rightsLegal liabilityCorporate law
y ppcustomers, labor pools
Cultural compatibilityDisclosure regulationsInvestor protections
Corporate law p yLabor poolsInfrastructure/Hubs
Maximizing Firm Value
Policy Responses to These Developments 2000s and on – The Decentering of the Global Firm
MNC HQ
A Financial Home A Legal HomeHome (s) for
Managerial Talent
If firms can unbundle these functions and mutate national identities easily, how should policymakers respond?
Policy Responses to These Developments If firms can unbundle these functions and mutate national identities easily, h h ld li k d?how should policymakers respond?
“Barring the door” is likely to be ineffectiveeg. U.S. tax policy after expatriations
Policies based on national identity are increasingly tenuousy g yOwnership restrictions – Virgin America/Virgin AtlanticTax Policies – Worldwide taxation vs Residence taxationProtectionism predicated on national identities of corporationsWeak investor protections can lead to firm flight
ConclusionThe idea of firms as national actors with immutable identities is i i l tincreasingly tenuous
Whil “th t t h ld ” thi d t th t “thi While “the center cannot hold,” this does not mean that “things fall apart”
A Bermuda-incorporated, Paris-HQed, NYSE-listed firm with a CIO in Bangalore a COO in Shanghai and a CFO in Brussels CIO in Bangalore, a COO in Shanghai and a CFO in Brussels may well become the norm rather than the exception
P li i di t d t bli hi ti l id titi Policies predicated on establishing national identities are fraught with difficulties