Thursday, February 2, 2017

Another headwind for EMs - end of age of multinationals?

From an article in The Economist which predicts that the age of the multinational corporations may be over and the "infatuation with global companies will come to be seen as a passing episode in business history", 
In 2016 multinationals’ cross-border investment probably fell by 10-15%. Impressive as the share of trade accounted for by cross-border supply chains is, it has stagnated since 2007 (see chart 2). The proportion of sales that Western firms make outside their home region has shrunk. Multinationals’ profits are falling and the flow of new multinational investment has been declining relative to GDP. The global firm is in retreat... In 2000 every billion dollars of the stock of worldwide foreign investment represented 7,000 jobs and $600m of annual exports. Today $1bn supports 3,000 jobs and $300m of exports.
As to why is this happening,
That is because a 30-year window of arbitrage is closing. Firms’ tax bills have been massaged down as low as they can go; in China factory workers’ wages are rising. Local firms have become more sophisticated. They can steal, copy or displace global firms’ innovations without building costly offices and factories abroad. From America’s shale industry to Brazilian banking, from Chinese e-commerce to Indian telecoms, the companies at the cutting edge are local, not global. The changing political landscape is making things even harder for the giants.
This is yet more disturbing news for countries like India that are seeking to emulate China's growth path, which rode on manufacturing and foreign direct investment (FDI). Not only is manufacturing, the largest source of commoditized middle-skill jobs, on the decline, now FDI too seems on the wane.   

It may be time to move from courting foreign firms to "make in India" to encouraging local firms to "make in India". Improving the ease of doing business assumes critical significance. 

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