By Davide Taliente & Constanze Windorfer
Political sentiment has turned against globalization. Brexit, the election of Donald J. Trump and the rise of nationalist parties across Europe are signs of this new political mood.
And as this mood is translated into policy, the structural advantages of multinational corporations are coming under threat from five main sources.
- Trade protectionism. Already, the World Trade Organization reports a rise in such measures by the G-20 countries.
- The return of “industrial policy,” as advocated, for example, by British Prime Minister Theresa May. Domestic companies receive favorable regulatory treatment that gives them a competitive edge over multinationals.
- Domestic regulators want representatives on the ground in case of environmental disasters, accounting scandals or consumer fraud.
- Social responsibility. Localities are making their voices heard through demands for more affordable products, fair pay and environmentally friendly production—all of which can reduce revenues and increase costs.
- Political risk. The chance that an investment will go wrong because of unexpected political events is increasing. This risk factor entails higher hurdle rates for investment. Foreign direct investment (FDI) from the European Union fell from 6.9 percent of GDP in 2007 to 3.3 percent in 2015, while FDI from the United States fell from 2.9 percent to 1.8 percent.
Multinationals will need to change. We see two major adaptations:
- Corporate goals must go beyond short-term gain for shareholders and attend to the longer-term interests of all stakeholders. An oil company must protect the environment; a bank must promote the financial security of its customers and contribute to macroeconomic stability; a global fashion brand must be a good employer (or buyer). Social responsibility can’t just be a philanthropic appendage.
- Business models must shift to a global-local hybrid. Centralized governance and “cut and paste” business models won’t work in the new world of economic nationalism. Multinationals may need to evolve from being globally integrated enterprises to federations of quasi-independent subsidiaries. This will mean being a little less multinational—making fewer, deeper strategic commitments to particular markets.
Davide Taliente is Oliver Wyman’s managing partner in Europe, the Middle East and Africa. Constanze Windorfer is an engagement manager at Oliver Wyman.