This piece first appeared in Open Africa, a custom digital publication by Ornico that features interviews, insights and business lessons from some of Africa’s leading CEOs, innovators and decision makers.
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Global organisations migrate much the same as people do, but the reasons behind this are as complex as the implications. GIBS’s Helena Barnard maps the intricacies of enterprises that cross borders.
Not a new phenomenon
The migration of multinationals is not a new phenomenon yet the reasons for this have become more complex as new structures challenge notions of nationality, ownership and control.
In the past, a company such as BMW or Siemens would expand operations to countries such as Australia and South Africa, but the head office would remain in Germany. As a result, the marketing directives, the parts and most of the management would be imported from the ‘home country’. But some multinationals have evolved from being anchored in their country of origin to a new breed of firm, one that Barnard refers to as ‘migrating multinationals’. A professor at the Gordon Institute of Business Science (GIBS) and the director of research, responsible for the GIBS doctoral programme, Barnard studies multinationals that leave their country of origin, and what this implies for both for businesses and states.
Barnard writes in Migrating EMNCs and the theory of the multinational:
“Migrating multinationals were fairly often seen in the early part of the twentieth century. Jones (2006) highlights the case of British American Tobacco: Although the firm was first registered in the UK in 1902, the headquarters, managers, and dominant shareholding were initially from the United States. By the 1920s the British managers and shareholders were dominant, and the company became (and remains) a British multinational with its headquarters and primary stock exchange in London.”
National boundaries being eroded
During most of the 20th century, a multinational was recognisably from a given country. We knew General Motors as an American firm, BP as British and Merck as German. The fluid nationalities of the original multinationals turned into clear national identities. But, over the past few decades, enabled by advances in telecommunications, we’ve once again seen those national boundaries being eroded.
“What we’re seeing across the world is the fragmentation of the global value chain,” says Barnard, who adds: “What that means is now is that it is becoming difficult to determine some products’ country of origin.
“Think of even a fairly simple product, let’s say a piece of clothing,” she explains. “The cotton came from one place; it was woven and dyed in another territory; it was cut and sewn into a T-shirt in another region. Maybe the design for that piece of clothing came from somewhere else. It becomes impossible to assert that piece of clothing is a German item, or a Chinese garment.”
Barnard says that the reasons for the fragmentation of the value chain are mainly economical, but also practical. It allows firms to draw on the different strengths of different countries. “Design, for instance, can be outsourced to countries that are established as centres of excellence for aesthetics, while raw materials are sourced from the lowest bidder,” she says.
Relocation of headquarters
Even though an increasing number of functions is being outsourced, the headquarters typically remain in the country of origin. However, a number of firms, mainly from developing countries, are increasingly deciding to also relocate their headquarters. In the case of SA, companies such as SABMiller, Old Mutual and Anglo American, as well as smaller firms, have relocated to new capitals such as London and New York.
“A company starts up in SA and has access to a certain set of capabilities and a certain set of markets because its operation is located here.” But, as the SA company begins to expand into Africa, and enjoys success, this enterprise could start thinking about changing its configuration. Barnard explains: “Very often, expansion requires higher levels of financial support so if, for example, you’re trying to raise capital, it could be more practical to have access to global markets.” Currently it is easier to find venture capital in London than it is in Johannesburg, she says.
Image and perception are other reasons for relocation. Barnard explains that country of origin may have a beneficial or deleterious impact when applying for permits or trade concessions. “Depending on the nature of the business, an entity registered in one territory might come across as more legitimate than if its country of origin was registered in another country. There’s a big difference in perception, for example, in financial businesses headquartered in London and those based in Angola or SA.”
Of course, perception is not always reality. Bayerische Motoren Werke, better known by its abbreviation, BMW, was always thought of a German luxury vehicle. But these days the automaker produces cars all over the world. Autoweek reports on a recent J.D. Power and Associates Initial Quality Study that reveals the BMW factory with the fewest defects per 100 vehicles is not based in Germany or Europe. It is, in fact, located in Rosslyn, South Africa and produces the BMW 3-series compact luxury sedan.
Perceptually on a different level
But, bluntly put, by headquartering in London or New York, a SA firm may perceptually put itself on a different level and also take advantage of the stock exchanges, investors, clients and management pool, as well as other services and perceptual benefits that these capitals provide.
Multinational migration may be for more pragmatic reasons. “Executives may need to travel a lot to develop businesses in other territories — for example to Latin America. Let’s face it; it’s a lot easier to fly between London and Latin America than from SA to Latin America. What happens incrementally— and in some cases quite dramatically—in cases like this is that head offices emigrate.”
Migration is a double-edged sword, she says. “Of course, that creates a virtuous cycle for London, because everybody wants to be in London, so everybody goes to London — which means that London is more and more the place where everybody wants to be [prior to the Brexit referendum — ed-at-large].”
But the inverse is also true: a SA firm based in London, by showing preference for a London law firm over a SA law firm, for instance, undermines and calls into question the credibility of SA services — at least, in the international arena.
This means that a vicious cycle may also play out if the strongest firms in a middle-income country go to high-income countries for the more complex of managerial activities. SA firms are to some extent protected from that vicious cycle because of its perceived role as a gateway to Africa, and because of the extent of investment from SA firms into wider Africa. Why? Because many African countries suffer from what Barnard calls “institutional or infrastructural voids”, SA firms have a competitive advantage in those countries. “As South Africans, we don’t just expect the electricity to be on; we have processes in place for what to do when the electricity goes off. If you have a German or an American multinational coming into Rwanda or Kenya, they take serious strain, because they’re not used to that level of institutional underdevelopment,” she says.
This capability in managing across very different levels of development is not easily found in the major economic capitals of the world. “SA managers will tell you that they have to learn to almost translate between an Asian or European parent and small sales offices across the continent.” And SA multinationals relocating to London or New York often find they still need really skilled managers on the ground to manage the complexities of the wider African market.
Barnard consults with government and trade organisations regarding policy. “On the policy side, there’s one very, very simple message: companies will go to an area because of whatever it is that makes that area attractive.” In other words, a company can select a location because of the quality of the local workforce, or low wages, or tax incentives, to name but a few.
But here’s the rub: “If a company comes to you for something, they’re going to work very hard to maintain and grow that something. If they’ve come to you because of your excellent design skills or your R&D capabilities, they will fund chairs at universities and post-doctoral students to make sure you do not lose that capability.
Maintain the status quo
On the other hand, if you were chosen because you’re a low-cost manufacturing hub, they’re going to want to keep you a low-cost hub, which means that, as soon as people start organising, as soon as you start seeing a push to more value-added stuff, you’re actually going to get pushback from multinationals.” It’s in the interest of the company to maintain the status quo that provides the advantage, be it low wages, R&D capability, incentives or whatever.
In terms of SA multinationals that consider moving to a major European or North American capital, “is it patriotic or not to leave the country? Should we be standing in their way or not?” Barnard asks, and answers: “In an era of globalisation, we cannot stop them. You can try and create some sort of incentive to stay but, ultimately, they will go to where they need to be.”
It is often said that Johannesburg is a “gateway to Africa” and as a regional centre of excellence. Incoming multinationals which want to expand into Africa often see Joburg as a launchpad, and set up regional headquarters there. At the same time, companies from elsewhere on the continent are coming to Joburg for the same reasons that SA companies move to London. Relative to their home countries, capital is easier raised in SA; there is a better-developed professional-services infrastructure; and a larger workforce with global experience.
Barnard says, “For a multinational with global aspirations, like SABMiller or Anglo American, Johannesburg is too small a town. But if you are BancABC [of Botswana] which operates across six African countries, or Econet Wireless [which started in Zimbabwe], you see that operating in SA gives you a lot of benefits that you won’t get in Harare — and it’s a lot cheaper than going to London.”
About Helena Barnard
Helena Barnard is a full professor at GIBS and the director of research, responsible for the GIBS doctoral programme. She was on the organising committee for the Academy of Management Africa conference at GIBS in 2013 and serves on the editorial board of the Global Strategy Journal.