Sunday, July 30, 2023

American business firms global champions for now

The genesis of multinational enterprises (MNEs) dates from the early 160Os when the state trading companies, the English East India Company, and Vereenigde Oost-Indische Compagnie (VOC: 1602-1799) — United East India Company in English, but commonly known as the Dutch East India Company, adopted the shareholder model. China in particular preferred silver rather than European-produced goods in exchange for spices and tea, and the trading companies became leading Asian traders in opium — in effect drug cartels. Finfacts: First Modern Economy: Myths on tulips & most valuable firm in history.

Today, multinational enterprises control facilities — other than those exclusively devoted to sales — in two or more countries.

Most of the output of US foreign affiliates is not sold to US parent companies.

In 2021 the Congressional Research Service noted "In 2018 US multinationals 12% of the sales of US foreign affiliates went to US parent companies, while 58% of sales went to the local market of the host country and 30% went to other foreign countries (see Figure 3 above). However, the Bureau of Economic Analysis (BEA) says some firms may also establish operations abroad to replace exports or production, or to gain access to raw materials or less expensive labor abroad. Foreign firms may invest in the United States to access the US consumer market, high-skilled labour, and other resources.

In a September 2022 paper 'Multinational Firms in the U.S. Economy: Insights from Newly Integrated Microdata,' economists using data from 1997 to 2017 on average noted, although "MNEs represent less than 1% of all firms in the US economy, they account for disproportionate shares of US economic activity: employment (22%), payroll (30%), sales (40%), goods exports (65%), and goods imports (60%). Within manufacturing, MNEs account for over 40% of total employment and payroll and over 60% of sales. MNEs’ shares of employment, payroll, and sales are quite similar across the 50 states."

"We find that among multinational firms, US-owned MNEs are significantly larger than foreign-owned MNEs with respect to domestic US operations: on average, they employ 8 times as many workers and have 5 times more sales. US-owned MNEs own more establishments; operate in more broad sectors and detailed industries; have activities in more states and counties; and export and import higher number of products to a larger number of countries. Average pay per worker and sales per worker tend to be similar among both types of MNEs within broadly defined sectors and regions; however, there is a robust MNE premia compared to non-MNEs."

Majority-owned US affiliates (MOUSAs) of foreign multinational enterprises (MNEs) employed 7.86mn workers in the United States in 2020 according to the BEA. MOUSAs accounted for 6.4% of total private-industry employment. US parents accounted for 67.0% of worldwide employment by US MNEs. Employment abroad by majority-owned foreign affiliates (MOFAs) of US MNEs was 14.0mn workers and accounted for 33.0% of employment by US MNEs worldwide.

Business R&D spending was at $420.2bn in 2020 and 86% was carried out in the United States.

Some Facts about Dominant Firms (2020): "We measure the evolution of dominant firms in the U.S. economy since 1960, and globally since 1990. Contrary to common wisdom, dominant firms have not become larger, have not become more productive, and their contribution to aggregate productivity growth has fallen by more than one third since 2000."

Biggest global companies by revenue

Number of Fortune 500 companies in selected countries worldwide from 2000 to 2022

Chinese companies that are mainly unlisted state enterprises (some subsidiaries are listed) have topped the Fortune Global 500 companies since 2020. The ranking is based on revenue and in 2022 China had 145 firms compared with 124 for the US.

The Center for Strategic and International Studies in Washington DC says that in 2020, Chinese companies’ average profit margin and return on assets were 4.5% and 1.9% respectively. In 2022, Chinese firms performed similarly; what has changed is that most firms from other countries have improved significantly.

So now China has the lowest average profit margin and return on assets among all countries that have more than 10 companies on the 2022 list.

Fortune Global 500 companies in 2022 generated revenues totalling $37.8trn — more than one-third of the world's GDP — for an increase of 19% over the 2021 year, marking the highest annual growth rate in the list's 33-year history. Cumulative profits were up 88% over the previous year, for a record $3.1trn. Companies on the 2022 list employ 69.6mn people worldwide and are based in 229 cities and 33 countries and regions around the world. The number of women CEOs of Fortune Global 500 companies rose to 24 in 2012 from 23 the previous year.

In 2021, the Fortune 500 tracker of domestic companies earned $1.84trn in profits on $16.1trn revenue. But in 2022 while revenues rose to $18.1trn, profits dropped roughly 15% to $1.56 trn.

Apple was the most profitable company in America in 2022, just below $100bn in profits. Its net profit margin stood at almost 25%.

The Forbes 2000 published in June 2023 tracks profits, assets and market value. Total revenue has surpassed $50trn and there are 58 countries represented by the publicly traded companies on the list.

The US leads the way with 611 companies on the ranking, and China comes in second with 346 Global 2000 companies. Japan is third at 192 firms; the UK has a fourth ranking and 67* companies (. South Korea has 59 companies and Germany has a sixth ranking with 53 companies while France is seventh with 52 companies.

*Just as Ireland has 21 mainly US firms (re-domiciled for tax purposes) from 24 firms in its R&D listing, the UK government is enticing foreign firms to become British. In recent years, Unilever, the consumer goods firm, which was a merger in 1929 between the Dutch Margarine Unie and British Lever Brothers, has become fully British. The Shell oil company has ditched "Royal Dutch," which had been part of its identity since 1907. However, the Astra AB pharmaceutical company which was founded in 1913 in Södertälje, Sweden, merged with the British Zeneca Group in 1999 to form AstraZeneca. It is still called British-Swedish.


The 2022 edition of the European Commission's Scoreboard of 2,500 business companies that invested the largest sums in R&D (research and development) worldwide in 2021.

The firms have headquarters in 41 countries, and more than 900k subsidiaries all over the world, each invested over €48.5mn in R&D in 2021.

The total investment across all 2,500 companies was €1093.9bn — €1.1trn — an amount equivalent to 86% of the world’s business-funded R&D and passing the trillion Euro mark for the first time.

The Commission said that the top 2,500 includes 361 companies based in the EU, accounting for 17.6% of total R&D investment; 822 US companies (40.2%), 678 Chinese companies (17.9%), 233 Japanese companies (10.4%) and 406 from the rest of the world (RoW, 13.9% of R&D). The RoW group comprises companies from South Korea (53), Switzerland (55), the UK (95), Taiwan (84) and companies based in a further 18 countries.

With the addition of Amazon and mainly American companies that have headquarters in Europe, the US ratio would rise close to the 50% level.

Ireland has 24 companies on the global listing led by Medtronic of the US having a spend of €2.4bn. However, the only Irish companies are Kerry Group and both Bank of Ireland and Allied Irish Banks.

The coming long-run fall in profits and stock returns.

In 2017 a team from France's University Sciences Po produced a publication called 'The World Atlas of Global Issues.' "On the map of the stock market capitalization of the 2,000 major multinational companies in 2017, the size of the circles is proportional to their weight in terms of stock market capitalization. The weight of United States firms can be seen (44%, compared with 22% for all European firms). The range of colours indicates the progress made over the last decade: in addition to the growth of United States companies, an increase in those of emerging Asian countries is visible, at a time when some European, Japanese, and Latin-American firms are stagnating."

Last month (June 2023) the Federal Reserve in Washington DC published a paper, 'End of an era: The coming long-run slowdown in corporate profit growth and stock returns' by Michael Smolyansky, one of its economists.

Smolyansky says that the decline in interest rates and corporate tax rates over the past three decades accounts for the majority of the period’s exceptional stock market performance. "Lower interest expenses and corporate tax rates mechanically explain over 40% of the real growth in corporate profits from 1989 to 2019. In addition, the decline in risk-free rates alone accounts for all of the expansion in price-to-earnings multiples. I argue, however, that the boost to profits and valuations from ever-declining interest and corporate tax rates is unlikely to continue, indicating significantly lower profit growth and stock returns in the future."

This figure shows the total annual R&D spending by countries

The two superpowers have their home challenges

Jim O'Neill, the then British chief economist of US bank Goldman Sachs, in 2001 coined the acronym "BRIC” for Brazil, Russia, India and China. He predicted that the four could eclipse the world’s biggest economies in a decade.

South Africa joined the group in 2011 and BRIC became BRICS. Next month (August 2023) the country will host a meeting in Johannesburg. Putin, the Russian dictator, will be missing as he would risk being arrested for his war crimes in Ukraine.

The BRICS as an Alternative Anchor for Global Economic Governance: A Comment from Dan Ciuriak

China is the only BRICS country to have had a spectacular economic leap forward since 2001.

It typically takes many years or not at all, to move from the developing status of a developed or advanced country.

The United Nations agency UNCTAD (United Nations Conference on Trade and Development) says a country with more than 60% of its total merchandise exports comprising commodities, is dependent. Two-thirds of developing countries — over 100 — are dependent.

In South America, all 12 independent countries have a level of commodity dependence greater than 60% and for three-quarters of them, the share of commodity exports out of merchandise exports exceeded 80%.

Commodity dependence is also synonymous with kleptocracy and Russia is one of the worst.

China's rate is 7%; India 37%; South Africa 57%; Brazil 67%; Russia 68%.

Convergence of developing countries to developed countries can take a long period or convergence does not happen.

Dominik Paprotny of the Potsdam Institute for Climate Impact Research in Germany in 2020 divided countries of the world into 21 developed “benchmark” countries and 156 developing countries.

These benchmark countries in the period 1920-2020 were Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg (except indicator “GDP per capita”), the Netherlands, New Zealand, Norway, Spain, Sweden, Switzerland, the United Kingdom and the United States.

In Convergence Between Developed and Developing Countries: A Centennial Perspective he says "The study finds that a majority of developing countries, and the population-weighted developing world as a whole, has reduced its lag in most indicators between 1920 and 2020. Progress was unevenly distributed, with East Asian and European countries converging the most with the benchmark, while most African countries have diverged along with some American ones."

The IMF (International Monetary Fund) has a list of 41 advanced economies - excluding Andorra; Puerto Rico; San Marino; Hong Kong and Macao, leaving 36, in Asia: Japan; Australia; South Korea; New Zealand; Singapore and Taiwan.

The Euro Area has 20 members as a sub-bloc. Members such as the 3 Baltic republics; Slovak Republic; Slovenia and Croatia could be classified as emerging.

This would mean that since 1920 only 9 countries ascended to "advanced" status.

The IMF has suggested that BRICS countries will constitute more of the world economy in 2023 ($56trn) than the G7 (US; Japan; Germany; UK; France; Italy and Canada ($52trn) using PPP-adjusted GDPs.

However, this flatters! GDP per person or income per inhabitant may not be absolutely correct but it is a useful tool.

The typical Global South country has two economies: a first-world economy for business and political elites with international schools followed by enrollments in foreign universities, good health services, and pricey restaurants. The rest of a population can comprise a local developing population (second world), and both internal migrants or foreign workers in a sub-category that is less-developed (third world).

Indian officials spray a chemical on unemployed migrant workers in 2020 to kill the Covid virus?

China is the only country in the Global South that will have significant gains in the years ahead.

India's annual GDP (gross domestic product) per inhabitant is $2,601 in 2023 according to the IMF; Brazil is at 9,673; South Africa 6,485; Russia is at 14,409 and Credit Suisse, the Swiss bank, in 2022 had the top 1% of the Russian population owning 58.6% of the wealth.

China is at $13,721 compared with Argentina at 13,709 and Malaysia 13,382.

The Economist wrote in 2003 "SOME comparisons are stark enough to generate a national inferiority complex. In 1980, India had about 687m people, 300m fewer than China. Living standards, as measured by purchasing power (PPP) per head, were roughly the same. Then, as China embraced modernity with a sometimes ugly but burning passion, it left India behind. In the next 21 years, India outperformed its neighbour in almost nothing but population growth.

By 2001, India had 1,033mn people against China's 1,272mn. But China's national income per head, according to the World Bank, was $890, nearly double India's $450. Adjusted for purchasing power, the Chinese were still 70% wealthier than the Indians were. In the ten years from 1992, India's GDP per head grew at 4.3% a year, China's twice as fast. Some 5% of Chinese now live below the national poverty line, compared with 29% of Indians."

China will continue to lead the Global South and while great strides have been made in eliminating extreme poverty, claims that poverty has been vanquished have been disputed.

The former Chinese premier Li Keqiang at the end of the National People’s Congress in May 2020 released data on household incomes. It showed that the bottom 40% of households ranked by annual income and accounting for about 600mn people from a population of 1.4bn, had an average annual per capita disposable income of CN¥ 11,485 yuan (US$1,621) — an average of CN¥ 957 yuan (US$135) per month — according to an annual household survey produced by the National Bureau of Statistics (NBS).

United States

The US fiscal outlook is on an unsustainable path. Debt held by the public is on track to exceed GDP in 2024 and climb to 119% in 2033.

At the end of January 2023 (the most recent data available), domestic creditors held 70% of the outstanding debt held by the public. Foreign creditors held the remaining 30%.

Gross federal debt is 119% of GDP.

The foreign holders at $7.4trn are headed by Japan at $1.1trn followed by China at $859bn and the UK at $668bn. Data for Luxembourg and Ireland likely are US company holdings.

The Gini index in the US in 2021 was 0.494. In 2021, social transfers reduced income inequality as measured by Gini coefficient among the EU population from 0.52 to 0.30.1

The US and UK, in particular, have poor Current Account records which record a nation's transactions with the rest of the world — specifically its net trade in goods and services, its net earnings on cross-border investments, and its net transfer payments — over a defined period, such as a year or a quarter.

For example (see the chart on top) the large overseas activity of US MNEs results in funds being returned to the US but still since 1975 the red ink remains!

Clayton Christensen (1952-2020) was an American academic based at Harvard Business School and a business consultant, who developed the theory of "disruptive innovation," which has been called the most influential business idea of the early 21st century. It was first announced in 1995.

What Is Disruptive Innovation?: Disruptive innovation, describes a process by which a product or service takes root initially in simple applications at the bottom of a market and then relentlessly moves up the market, eventually displacing established competitors.

The biggest companies generally post fatter margins and pay less in taxes than they did in decades past, the Bloomberg Economics study showed in 2021. "Their median effective tax rate of 35% in 1990 had dwindled to only 17% last year — while profit margins headed in the opposite direction, soaring from 7% to 18% over the same period. They also devote a smaller portion of their earnings to job-creating investments: In 1990, IBM — one of the world's biggest publicly listed companies — devoted 9% of its revenue to capital expenditures. Fast-forward to 2020, when Apple — its replacement in the top spot—spent just 3%."

The Biden administration succeeded in introducing a 15% corporate minimum tax for big US corporations, effective for taxable years beginning after 31 December 2022.

Ruchir Sharma in The Financial Times writes "What’s wrong with tech giants riding the AI wave; It is dysfunctional for the same companies to dominate another innovation surge."

"He says that the average age of the tech top five is edging back up towards 40, with no newcomers. And their size is unprecedented.

"Earlier waves of the digital age brought new names to the top of the tech stock charts. But following the crash of 2000, a few huge companies began to entrench themselves, staying on top through the rise of the mobile internet in the 2010s, and flourishing anew in this year’s AI mania. Disruption is fading in the industry where it should be most powerful.

Sharma writes that the bigger a firm becomes, the harder it is to grow rapidly. However, since late last year, Apple and Microsoft are both up about 50% to a combined value of nearly $5.7trn — more than the entire listed tech sector in 2000, when it had 1,850 companies."

General Motors had over 618,000 employed in the US in 1979 in union jobs. IBM underestimated the changes in the world of computers in the 1980s. Nicknamed Big Blue, the company's dominance rested on mainframe computers and by 1990 US employment was down to 216,000. The number of US IBM employees in 2023 is about 105,000.

Apple has about 80,000 employees in the United States — 65,000 in retail and customer support.

The Washington Post said last year that "Employees say Apple’s hourly rates are usually in line with what other retail jobs pay in the regions where they’re employed. But most other retailers do not earn so much in revenue, nor are they valued at near $3trn.

Apple Store employees interviewed by The Post believe their knowledge and passion for the products help drive sales and that they should share more fully in the company’s success."

The US has the lowest life expectancy among large, wealthy countries while it far outspends its peers on healthcare.

In 2021 the life expectancy in the United States was 76.1 years compared with the average of comparable countries at 82.4 years.