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