EUROPEAN MULTINATIONAL CORPORATIONS AND GLOBALISATION



1. Multinational corporations: configuration and strategy

In the economic lexicon a multinational corporation is a business that owns product or service facilities outside the country in which it is based: that is, it does no limit itself to selling abroad (exporting) but has reached a more mature, advanced phase in its process of internationalisation. Another important characteristic of such a corporation is that it can shift production inputs, production factors and markets among the different countries in which it operates. Schematically, we could represent the sphere of activity of an MNC as in figure A.


An MNC has one headquarter – rarely, two – where all the important decision concerning the planning in the use of resources, the allocation of finance to the different activities and the targets of the technological strategy are taken. The headquarter is usually located in an advanced country but the number of MNCs based in newly industrialised countries is rapidly growing. The manufacturing activities are placed where the cost of the production factors is lower, which contributes to explain, among other things, the rapid growth in the relocation of industrial plants to the countries both of the Far East and of Eastern Europe. But in this respect a MNC has several other degrees of liberty connected to the revolution in information technology and telecommunications. The increasing digital codification of knowledge allows any activity which can be conducted through a screen to be carried out anywhere in the world. So Swissair announced a few years ago that its back-office for flights booking had been moved to Bombay while banks are currently imitating what MNC manufacturing companies have been doing for quite some time by moving their own back-offices staff to cheaper places connected to the headquarter by satellite and computer.

The third component in the basic configuration of an MNC are markets: they are wherever there is an actual or potential purchasing power adequate enough to justify the building up of a sale network, nowadays perhaps the single highest cost of merchandising.

The basic configuration of an MNC does not say much, however, about the different strategies it may pursue. In this connection an interesting taxonomy has been recently proposed by Hill based on two dimensions: the pressures a MNC receives for local responsiveness, i.e. to adapt its goods or services to the specific needs of the local clients, and the cost pressures, i.e. to lower the costs of value creation by means of either economies of scale or economies of learning or economies of scope or even vertical and / or horizontal integration.

An international strategy is based on low pressure for local responsiveness and low cost pressure: it creates value by transferring differentiated product offering developed at home to new markets overseas, usually establishing manufacturing and marketing functions in each major country where they do business, with a limited local customisation of products and of marketing strategy. This strategy is adopted by companies such as Microsoft, Procter & Gamble, IBM, Kellogg, etc.

A multidomestic strategy is based on low cost pressures accompanied by high pressures for local responsiveness: it is adopted by company such as General Motors, with its extensive European operations which are largely autonomous companies. A strategy of this kind can however meet with setbacks if the autonomy of the affiliates grows too much, as is exemplified by the case of a European MNC, Philips NV. In the late Seventies they wanted to introduce for their VCR the V2000 format, but this was refused by their US subsidiary, which adopted the VHS format introduced by Matsushita putting its own label on the VCRs manufactured by the latter.

A global strategy is based on high cost pressures and low pressures for local responsiveness. It is usually adopted by corporations which do not aim at customising their products and prefer instead to standardise their products world-wide. Firms operating in the semiconductors industry such as Intel, Texas Instruments and Motorola tend to adopt this strategy.

Finally, a transnational strategy is based on both high cost pressures and high pressures for local responsiveness. These companies experiment at a maximum the need to let all their affiliates and operations share the skills worked out anywhere in its structure. The industry of the earth moving equipment is typical of this situation: corporations such as Caterpillar and Komatsu and the (relatively) new comer New Holland (born from an agreement between Fiat and Ford in 1994) usually adopt it. A giant European MNC adopting a transnational strategy is Unilever: they recognise that they must remain locally responsive, even if it is imperative to steadily reduce costs in manufacturing and in marketing by means of optimisation programs.


2. European MNCs: the recent evolution

How does Europe fare in the development of MNCs, which are with banks and other financial institutions the main actors in the process of globalisation of the world economy? An exhaustive study recently published by Mediobanca / R & S3 allows us to cast a glance on some important recent developments. The study analyses the performances of 241 manufacturing and energy groups comprising a total of some 34.000 companies throughout the world with sales of 4.200 billion euro and over 17 million employees. These groups are analysed over the years between 1989 and 1997 and occasionally 1998.

In this period the average stock value of these groups grew by 67% in Europe and in the United States and by 60% in Japan. The industries with the fastest growth were paper (+121%), chemicals (+88%) and cars (+ 82%), which to speed up their internationalisation were compelled to costly reorganisations and innovations in the production processes. After some slowdown in the late Eighties, sales picked up again in the Nineties, though in 1998 a marginal deceleration was caused by the fall in the price of oil (in particular for the British oil groups) and by the reduced growth of the international economy (in particular for the Japanese and Italian groups). The analysis by industry confirms the decline of the world steel industry and the dramatic growth of electronics. The energy and mechanical industries lost weight in the United States and in Japan, whilst they gained ground in Europe, as it is stressed among other things by the two most important mergers of 1998 where European corporation acquired the control of American automotive (Daimler - Chrysler) and energy industries.

3 International Financial Aggregates, R & S, Milan, 2000 (the study is an updating of previous issues on the same topic). Mediobanca is a leading Milan – based merchant bank; R & S is one of its affiliates dealing with economic and business studies.

Up to 1997 MNCs increased their equities and reduced their debts: in 1998 this trend was overturned and debts began to grow faster than equities (+8.9% for European and + 11.2 for US groups). This trend reflects a positive development as it was engineered by the drop in interest rates: the only for European and +11.2 for US groups). This trend reflects a positive development as it was engineered by the drop in interest rates: the only exceptions were again the oil companies, which had to face a reduction in their gross operating margins due to the fall in the price of the raw material (+8.9%, but their situation has certainly improved considerably in 1999 and even more in 2000).

But the most interesting aspects of the study are perhaps those dealing with the internationalisation processes. In table 1 we see the percentage distribution of the clients of the 241 groups of the Mediobanca sample split according both to home country of each group and to home country of the clients (for European groups, Europe is considered the “home country”, as North America is for North American groups). European MNCs have still the majority of their clients in Europe, with and average of 61%. From this point of view the most internationalised among the European countries is Switzerland, which has only 45% of the clients of its MNCs in Europe and the balance outside the Old World (31% of their clients are in North America). British MNCs are also quite well placed with 49% of their clients in Europe and the balance outside of it (30% in North America). The British have also the highest proportion of clients outside both Europe and North America (21%). By contrast, Italy and Germany seem retarded in this process, as their multinational groups have still respectively 72% and 69% of their clients in Europe; besides among their European competitors they have the maximum concentration of clients in their own national markets (40% and 38%). But in truth also the MNCs from the other European countries or groups of countries do not fare particularly well: France has still 66% of European clients versus 34% of clients from outside Europe, Scandinavia has 65% versus 35% and Benelux 61% versus 39%. These countries however exhibit a much lower concentration of clientele from their own national markets than Italy or Germany.

Other studies confirm that in Germany in particular there is a limited degree of multi - culturalism. The Germans themselves recognise that there is an insufficient proportion of foreign managers, of foreign people in their companies (apart from the lowest levels in the organisation as there are a lot of immigrants of course). It is in the higher echelons of companies that there is an insufficient number of foreigners. At the same time there is an insufficient number of German managers with a wide experience of working abroad at least in proportion to the size, ambitions and aspirations of the German industry which is now the core of the European industry, i.e the core of the third largest population in the world and second largest economy just after the United States.

Table 1 - Percentage distribution of the clients of the 241 multinational companies of the Mediobanca sample

Home country of MNCs	Clients in national market	Clients in Europe*	Clients in the Americas	Clients in other countries
Benelux	9	61	27	12
Britain	26	49	30	21
Germany	38	69	20	11
France	29	66	18	16
Italy	40	72	20	6
Scandinavia	17	65	22	13
Switzerland	6	n.a.	31	24
Europe	29	61	24	15
USA	-	24	55	21

* For European MNCs, inclusive of % of clients in domestic market
Source: R & S, Mediobanca, Milan


The American groups instead have a much more differentiated distribution than the European ones, as only 55% of their clients are in North and South America, while 24% are in Europe and 21% elsewhere (which for them means mostly the Asian markets). In the terms of the taxonomy described in the previous paragraph, American MNCs seem well ahead in the internationalisation process, having in many cases reached the level of the transnational strategy with adequate responses both to local pressures and to cost pressures, or at least the level of the global strategy, responding to cost pressures. There are indeed cases, as the above quoted of the Microsoft group, where the condition of virtual monopoly (pending of course the final solution of the case for infringement of the antitrust legislation) enables the company to reap substantial profits even with a mere international strategy. However, the notable recovery of the American manufacturing industries in the Nineties must certainly be attributed, at least in part, to their ability to adjust to the rapidly evolving international competitive arena by means of timely strategic change.

This difference in the performances of the European and American MNCs is broadly confirmed bringing into the picture the analysis of the changes in productivity. In Table 2 we can see the data on the added value and the labour cost per employee of the 241 world MNCs in 1997 together with the percentage change over 1989. In 1997 the AV per employee was of 67.300 euro in Europe and of 93.900 euro in the USA (+28,3%): even more significantly, the US groups grew marginally faster (+ 48,3) than Europe (+ 47,2%) in the 9 years considered. The British MNCs boasted the highest European AV per employee in 1997 (80.200 euro), whilst those from the Benelux countries exhibit the lowest (+ 28,9). Among the European countries, the fastest growth from 1989 to 1997 was obtained by the Scandinavian countries (+ 81,8%), with Britain (+69,4 %) and Italy (+68,3%) in the wake. Much more modest increases were instead obtained by Switzerland, Germany, France and Benelux.

Home country of MNCs	AV per employee in 1997*	% change on 1989**	LC per employee in 1997*	% change on 1989**
Benelux	55.9	+28.9	34.3	+25.2
Britain	80.2	+69.4	35.9	56.5
France	64.4	+25.0	40.7	30.2
Germany	66.0	+35.6	47.9	+37.6
Italy	64.4	+68.3	35.0	+50.3
Scandinavia	66.8	+81.8	36.9	+70.5
Switzerland	68.2	+40.5	41.4	+25.5
Europe	67.3	+47.2	40.8	+43.2
USA	93.9	+48.3	50.7	+38.6

* In '000 of euro
** In local currency
Source: R & S, Mediobanca, Milan


The performances in the growth in the cost of labour are mirrored in those in the growth of productivity. In 1997 the cost of labour per employee in the US multinational groups was 50.700 euro against 40.800 for the European ones: but in the 9 years between 1989 and 1997 the former has grown 38,6% against 43,2% in the latter. Germany has the highest labour cost per employee (47.900 euro), while Italy and Benelux have the lowest (35.000 and 34.300). But while the labour costs did not on the whole differ too much from the European average, marked differences emerged about the rate of growth between 1989 and 1997. Here Scandinavia exhibited a worrying + 70,5%, followed by a + 56.5% for Britain and 50.3% for Italy, while France and Germany remained under +40% and Switzerland and Benelux around 25%.

Interesting considerations can anyway be made by calculating for each country or group of countries the differences between the percentage increases in productivity and the percentage increases in the cost of labour per employee exhibited in table 2. These differences reflect the real gains in productivity obtained in the 9 years period we are examining. Here they are:

• Benelux, +3.7
• Britain, +12.9
• France, - 5.2
• Germany, - 2
• Italy, +18
• Scandinavia, 11,3
• Switzerland, +15
• Europe, +4
• United States, +9.7

The US MNCs thus gained 5.7 points over Europe in real productivity between 1989 and 1997. But the European situation is far from being homogeneous: Italy, Britain, Switzerland and Scandinavia made substantial progress, whilst Benelux and particularly the two major continental economies, Germany and France, lagged behind.


3. Conclusion

It must be remembered that the productivity of these multinational groups is not the productivity of the entire economy and that the Mediobanca sample does not include services, nowadays the largest part of the GDP of each country. Besides, many small and medium sized European companies have made in recent years considerable progress in becoming more competitive on the international markets. Still, one inference can certainly be drawn from this analysis: the widening gap in productivity between the European and the US multinationals, as well as the greater degree of internationalisation of the respective clients, allows the latter to gain better margins and to exploit a larger operational flexibility.

Part of the story is certainly explained by the different attitudes toward mergers and acquisitions as well as toward risk taking. In the United States big companies now come and go at lightning speed: one – third of the companies listed in 1980 among the Fortune top 500 had lost their independence by 1990 and another 40% were gone five years later. But the top 500 listed now are certainly healthier and stronger than those of 20 years ago, with a great net advantage for the economy. The more static picture of the European MNCs also mirrors the more defensive efforts by their corporate establishments.

Substantial changes must therefore be introduced in Europe to allow its companies and particularly its MNCs to regain ground in the competitive race with their competitors from the United States, as well as from Japan and from a growing number of companies in the newly industrialised countries in Asia and Latin America. These changes entail a much greater flexibility in the labour market, the dismantling of many useless formal administrative procedures and above all the improvement of infrastructures in IT networking and TLC. But European companies must also do their homework in learning to earn greater returns from their distinctive skills, in realising location economies by dispersing value creation activities to those locations where they can be performed more efficiently and above all in becoming less bound to their home markets and in gaining clients in a growing number of foreign markets.