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July 2007 - Fortune Magazine has published their annual
Global 500 list. Global revenues of the top 500 in 2007 added up
to $20.9 trillion versus $16.8 in 2005 - a gain of 24.4%. Total
profits are up nearly 65%, from $0.93 to $1.53 trillion. Total "Global
500" profits as a % of revenues have climbed from 5.5% to 7.3% since 2005.
US Treasury Secretary Hank Paulson was quoted as saying this
is the
"strongest
global economy" he has seen in his business lifetime. The
headline of a related
article declared it to be the "greatest economic boom ever",
quoting several global business leaders to reinforce the premise that this is
about "as
good as it gets" - but with no end yet in sight. The writer
adds the caveat that booms are like that - at the end. |
Their sidebar graphics point out that "cross-border trade,
commodity prices, and per capita GDP have all soared to historic levels -
and nowhere have things been growing faster than in the emerging world.
What's grown fastest of all are international flows of capital and direct
investment." There was the usual emphasis on the
"BRIC" countries - Brazil, Russia, India and China - but now Turkey and
Middle East locations such as Dubai are attracting attention among global
CEO's too as potential investment locations. |
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A comparison of the Fortune Global 500 list for 2007 against
the similar data still readily available for 2005 seemed to be one way to
get a sense of perspective on how the list has been changing recently - as
shown and reviewed below. Our recent analysis of the
investment sentiment shown by CEO's surveyed quarterly by the Business
Roundtable is also potentially interesting as context about what is
anticipated short-term (within the next 6 months) in terms of capital
investment and job creation as well as sales expectations in that sample
group of leaders. The survey suggests CEO's are similarly wary, but
still very optimistic. |
Analysis of Business Roundtable
CEO Survey 2002-2007 Results |
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Among our own observations from the above list is that the
total number of European companies in the list (not limited to the EU) has
grown slightly from 171 to 173 from the 2005 to 2007 lists.
In the Americas, the changes from the 2005 to 2007 lists are:
 | Canada - up 3 from 13 to 16 |
| Mexico - up 3 from 2 to 5 |
| United States - down from 176 to 162 |
It is worth noting that these rankings can be affected by
cross-border M&A deals which change the parent country attributed to the
same company. Such consolidation may change the mix, as can private
equity deals to take over large publicly traded companies.
It would be a mistake to extrapolate trends or conclusions
from two data points which may not be directly comparable, but it is still
interesting to observe the change and consider what is driving it.
Unlike some countries, there are very few restrictions on
foreign ownership of businesses which are largely concentrated in the United
States. Some of these may still be perceived as US firms even though
the ownership is now in other countries.
The new Open
Economies policy of the White House is relevant in this regard, as it
reinforces the obvious point that the United States remains one of the most
open markets in the world for both inward and outward foreign direct
investment flows.
Very few international investments into the USA are
subject to the national security review process known as CFIUS, although
there can be other factors such as anti-trust legislation. |
It also seems
worth noting, given all the public and C-level attention given to the
so-called "BRIC" countries (Brazil, Russia, India and China - as a very
different mix of big emerging markets) that their representation in the
Fortune Global 500 is still rather small even though there are significant
gains.
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Brazil - up 2
from 3 to 5 |
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Russia - up 1
from 3 to 4 |
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India - up 1
from 5 tot 6 |
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China - up 8
from 16 to 24 |
Others gaining in
the 2007 rankings relative to 2005 included:
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South Korea - up
3 from 11 to 14 |
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Taiwan - up 4
from 2 to 6 |
Japan had fewer
companies in the 2007 list than in 2005.
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Japan - down 14
from 81 to 67 |
It is worth noting
that the relative stability of the total in Europe (up 2 overall from 171 to
173) included many small gains and losses, and as in the United States, this
sometimes just reflects changes in ownership rather than where these
companies are growing today.
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Belgium - up 2
from 3 to 5 |
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Switzerland - up
2 from 11 to 13 |
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Britain - down 2
from 35 to 33 |
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Germany -
unchanged at 37 |
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France - down 1
from 39 to 38 |
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The Netherlands
- unchanged at 14 |
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Observation: Where investment decisions are made
In some regions, global corporations are largely free to
choose what they regard as their home country, whether through relocation of
the corporate headquarters, choices about where their stock will be traded
publicly, or as M&A deals or such things as private equity deals change the
country attributed to the business.
This does not mean that the list reflects where companies
are investing in growth. The list reflects the country attributed to a
business as home when - by the nature of this list - these are global rather
than national entities. They operate across borders - and in many
cases their internal management structures are truly global.
The nationality attributed to a company doesn't
necessarily reflect where top decisions are made about global growth and
investment. The leadership team may be very global, regardless of
location. |
State vs. public vs. private equity
Some countries have developed very large companies through
state-owned enterprises which may go public or become privately held.
There are also some very large private companies worldwide.
If these become publicly traded companies, that can skew
the data over the short term by simply changing the mix of companies in the
list. Similarly, if publicly traded companies are taken private again,
as has obviously been the case in some major deals in recent years, that
changes the mix.
A review of publicly traded companies, as is common in the
US context, can therefore change through new ownership structures.
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Whose strategy - business or national government?
Ultimately, as companies with nationalistic private leaders
go public, or as public companies go private, or as state-owned companies
privatize, the question is what drives future investment decisions.
Will investment strategy be driven by business issues
rather than politically driven by perceived "national interests" and
restrictive market practices which distort trade and investment flows?
In an era of efficient global communications,
transportation, and travel, globalization imposes external constraints on
nationalistic policies. In short, business goes where it is welcome.
Money goes where it can be applied to grow. Governments have
considerable power to drive business away through policy choices which are
not competitive with the choices being made elsewhere in the world.
Open economies attract trade and investment, and prosper
from it. Restrictive economies, regardless of "good" intentions behind
the restrictive policies, tend to drive trade and investment away through
higher costs and risks relative to alternatives elsewhere. Over time,
nationalistic economic isolationism leads to stagnation or decline relative
to more open and dynamic economies. There's ample evidence of this in
recent history.
There is absolutely no doubt that some countries still
cling to nationalistic economic policies despite the repeated evidence of
their failure, each believing firmly that this is the right thing to do.
Like a compulsive gambler, they lose by their own free choice with the firm
conviction that they will win big soon. |
Open economies vs. nationalistic industrial strategies
It is self-evident that some governments diligently attempt
to intervene in global markets to favor their perceived national interests
as though the terms and benefits of trade and investment could be
manipulated to their advantage.
There is no doubt that sovereign governments can try to
manipulate markets to their advantage, and some do not hesitate to attempt
this. This can certainly cause short-term market distortions, and can
potentially have a major impact within and beyond their borders.
It is less clear, however, that nationalistic policies
which attempt to manipulate markets to achieve a perceived benefit are
sustainable in the larger global context. Regardless of "good" or
"bad" intentions from any perspective, open markets are dynamic, and adapt
fairly quickly to such distortions and the changing mix of opportunities.
Governments, by their nature, are less agile.
"Black" markets in less open economies, including the most repressive ones,
have demonstrated this external constraint on public policy for centuries.
It's like betting against the house in a casino. Few
governments "get lucky" consistently over time. Open economies win -
but it is not a zero-sum game because business deals are driven by mutual
interests and flow faster when market distortions are removed. |
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