Wednesday, 28 September 2011

Can countries benefit from having their domestic firms acquired by foreign companies?

When a foreign company acquires a domestic firm, it often leads to outcries of indignation, nostalgia (“another of our once great companies in foreign hands”), and calls for legislation to prevent any more foreign poaching. Politicians and union leaders proclaim that the foreign owners may not be dedicated to keep up investment in the subsidiary, and that the take-over threatens national jobs and other economic interests. “Most governments are reluctant to see their corporate treasures fall into foreign hands”, the BBC wrote in an article devoted to the topic.

But is all this (slightly xenophobic) fear justified? Well, maybe not; at least not on all dimensions. Because we have increasing evidence that foreign ownership of a firm may actually also benefit firms, specifically in terms of their innovativeness. And this increased innovativeness may clearly benefit the host country.

Professor Annique Un, from Northeastern University in Boston, for example, did a pointy study. She collected data on 761 manufacturing firms operating in Spain, examined which ones were foreign hands and what their innovation output was in terms of new products introduced in the market. And the answer was pretty clear: foreign owned firms were more innovative than purely domestic firms.

Interestingly, Annique also corrected her models for the amount of R&D investments spent in the companies, and it turned out that this was not what was driving it; foreign owned companies were not just more innovative because they were investing more. Instead, they were more innovative irrespective of R&D. As a matter of fact, they were able to generate more product innovations for the same level of investment; meaning that they were simply better at it.

The study’s results suggested that they were better at it for two reasons. First, foreign parents seemed to use their domestic subsidiary to channel innovation into the country. Put differently, it seemed a foreign-owned company could tap into its parent’s superior repository of innovative stuff, and most of them gratefully made ample use of that option. Secondly, the foreign-owned companies were simply also better at coming up with new stuff on their own, in comparison to their domestic counterparts. Apparently, something about them being foreign-owned stimulated them to be more agile and creative, which resulted in more product introductions.

Whatever the reason behind this foreign-driven surge in innovation, the host country was better off for it; the evidence clearly showed that the foreign mercenaries stimulated diversity in the markets, giving customers more choice, while raising the bar for everyone. And this is not a benefit we hear many politicians, newspapers, and union leaders proclaim and acknowledge, when yet another foreign corporation is eyeing up their country’s corporate treasures.

Saturday, 17 September 2011

Don’t be mistaken, bankers kill (but they give life too)

"In terms of power and influence, you can forget the church, forget politics. There is no more powerful institution in society than business” the equally famous as illustrious CEO and founder of the BodyShop – the late Dame Anita Roddick – said. And of course she was right. The most comprehensive and dominant institution in today’s society is business.

Business is more influential than people often realize, simply because it creates – or destroys – wealth. And wealth impacts pretty much anything we care about. Whether you analyze crime rates in a particular country, malnutrition, happiness, or infant mortality; a huge influence is how wealthy the particular society is. And wealth is created by business.

As a consequence, for example, the 2008 banking crisis undoubtedly killed people. Infant mortality is closely related to wealth and consequently an economic crisis will among others lead to a surge in infant mortality, somewhere, in some country down the road. It also means that the strategic business choices made by CEOs such as Lehman’s Richard Fuld or RBS’s Fred Goodwin indirectly but significantly influence the survival chances of some baby boy or girl born on the outskirts of London, Cairo, or Detroit. And therefore, whether you like it or not, bankers kill.

But let’s not forget that they give life too. The inverse of “bankers kill” is true too. If banks make wise choices, given their pivotal role in our economies, they can trigger a huge boost to the prosperity of many industries. And the profits, employment, and general wealth created through this boost will really improve the health and survival chances of the baby cradled by her mother somewhere on the outskirts of London, Cairo, or Detroit.

Given the research we have on the link between economic prosperity and infant mortality it would not even be too onerous to come up with some estimate of the direct relationship between Royal Bank of Scotland’s balance sheet and the probability of a baby surviving. We could relatively easily calculate the link between profit and the number of lives saved. I could even imagine that the computer terminals that give live updates of a company’s fluctuating share price – which many corporations have dotted across their entrance halls and offices for everyone to see – would be reprogrammed to display the number of children’s lives saved. Traders walking over to their lunch break could have an immediate update of how many baby lives the deal they just closed saved – or destroyed.

A ridiculous thought? Why? Don’t you care (even) more about the life or death of a baby than your company’s fluctuating share price? I am guessing you do. And you know these bankers aren’t so different from (other) human beings. Your company’s performance also creates wealth, and wealth saves lives. Why then only monitor its financial performance? I tell you, the sandwich you’re having for lunch will taste a whole lot better, knowing that this morning you just saved some unknown baby’s life, somewhere on the outskirts of London, Cairo, or Detroit.