<<

. 2
( 3)



>>

FL Canada
Spain
South Korea
AM

Thailand
Taiwan
0% 50% 100% 150%
TE



1992 2020

Fig. 5.1 Projected global economic growth.

the UK will have a Trojan Horse effect in France, Germany, and Italy as
their cheaper/better products are exported within the EU.
By their nature MNCs have far more opportunities for ef¬cient tax
planning than one-country ¬rms, despite numerous regulatory efforts
on the part of governments (see the book Finance Express in this
series).

TECHNOLOGY ALLIANCES
In the 1970s, MNCs co-operated on developing technology by forming
separate corporate entities which they owned jointly with their
partners. This pattern shifted during the 1980s towards informal
40 GLOBAL FINANCE


alliances which they organize together to reduce R&D risks and
costs “ in general, it works best when the partners have different sets
of expertise. Between 1980 and 1994 there were almost 3000 interna-
tional alliances formed between ¬rms in the US, Japan, and Europe in
information technology businesses and about 1300 in biotechnology
during the same period. These two sectors have been the main focus
for such alliances in recent years, with new materials research coming
a distant third. The most common alliances are between US ¬rms,
followed by those between US and European companies.
While many people argue that MNCs help in the ˜˜technology
transfer™™ between countries, the overall picture is very mixed. To
the extent that an MNC has an ˜˜ownership advantage™™ in technological
knowledge, it may be unwilling to share it with other ¬rms, particularly
those in foreign countries.

THE FINANCING OF MNCS
Since the 1970s, there has been a gradual deregulation of stock markets
across the world and barriers to the free movement of capital have
been dropping. This has had the effect of reducing the cost of capital
for many ¬rms, enabling them to invest more for growth and undertake
more mergers and acquisitions.
Companies that are forced to ¬nance their operations in an illiquid
domestic market are likely to suffer from a limited availability of
capital and, often, a higher cost of capital “ many companies in smaller
countries are in this position, as are small private ¬rms everywhere
who do not have easy access to stock and bond markets. Capital
markets in many countries are ˜˜segmented,™™ meaning that the required
rate of return on stocks and bonds in that market are different from
comparable rates in developed markets such as the US and London.
Causes of segmentation include regulatory controls, lack of ˜˜trans-
parency™™ of information, insider trading, political risk, and cronyism “
for example, during the Suharto regime in Indonesia which collapsed
in 1997, ¬rms that did not reward the Suharto family were unlikely to
enjoy favorable treatment from local banks or regulators.
Since the 1980s, many companies have been able to escape the
limitations of their home capital markets to access ¬nance globally.
This involves a much higher level of information disclosure, and the
THE GLOBAL DIMENSION 41


need for a continuous effort to maintain positive investor relations,
both of which are very costly.
It is not necessarily easy for a company to raise equity globally for
the ¬rst time. They must raise their pro¬le to foreign investors and
demonstrate a good track record. In general, investment bankers advise
¬rms to begin the process by issuing bonds abroad ¬rst rather than
equity.
American Depositary Receipts (ADRs) are certi¬cates issued by inter-
national banks that represent underlying shares issued in a company™s
home market. Shares are held on deposit by the bank to guarantee the
ADRs and are regulated by the US authorities; this often makes ADRs
more attractive to investors, particularly in the US, than purchasing
shares on the country™s home stock exchange, which can be expensive
and problematic for foreigners.
The goal for most companies is to issue shares on the London Stock
Exchange, NASDAQ, or the New York Stock Exchange. These markets
provide the most liquidity and greatest access to investors globally.
The intense public scrutiny that comes with such a high pro¬le listing
means that ¬rms need to have a good business story to tell “ troubled
¬rms from small countries are unlikely to ¬nd that global equity issues
lead to a happy ending.
As with equity, the cost of borrowing abroad may be cheaper.
Although debt may be easier to raise abroad than equity, international
debt has special problems because of ¬‚uctuating exchange rates and
interest rates. As with any borrowing, companies need to try to match
the length of time of the loan to their capacity to repay. There is a very
wide variety of debt instruments available globally, ranging from very
short-term loans from banks to bonds with a maturity of many years.
The cost and availability of these depend greatly on the credit rating
of the ¬rm itself and of its home country, but overall, most ¬rms have
far fewer constraints and a better range of choices when borrowing
abroad than they do at home. Types of borrowing available include the
following.

» International bank loans “ lines of credit and syndicated loans (for
large sums) offer ¬‚exibility and comparatively low interest rates.
42 GLOBAL FINANCE


» Euronotes and Euro-commercial paper “ short to medium-term loans
denominated in currencies that are held outside their own countries
and are thus freer from the risk of government intervention.
» Eurobonds “ these are medium to long-term debts that are traded
between lenders and sold outside the country in whose currency the
bond is denominated, giving ¬‚exibility and freedom from government
regulation. Some of them are equity-related, meaning that they may
be converted for shares on terms set by the borrower.

BEST PRACTICE: NOVO
In the late 1970s, Novo Industri, a Danish pharmaceutical company,
recognized that its cost of capital was higher than its main foreign
competitors and decided to try to escape the limitations of the Danish
securities market to seek ¬nance abroad. Furthermore, it was clear that
the company would never be able to raise enough capital domestically
to fund its promising growth opportunities. Large sums were needed
to ¬nance factories and research, and delays would mean that its
foreign competitors would simply grab control of markets before
Novo could enter them. Novo could not hope to fund its growth by
reinvesting its pro¬ts because the process would be too slow and
it would miss the opportunity to expand. The company had a good
track record in its operations and excellent niche market strength
worldwide.
At the time, Danish investors were not allowed to invest in foreign
stocks and bonds in the private sector, so they tended to ignore
developments in foreign securities markets and foreign stock analysts
tended to ignore Denmark. Most Danish ¬rms did not publish annual
reports in English (although Novo did) and did not try to reconcile
or translate their results into US or British accounting principles. High
taxes on share pro¬ts had almost completely driven Danish private
investors out of the stock market and price/earnings ratios of ¬rms
were low “ Novo, like others, was trading at a P/E of 5. Danish stock
prices tended to move up and down in tandem.
In 1978, Novo raised $20mn in convertible Eurobonds outside
Denmark and obtained a listing on the London Stock Exchange. In the
short term this actually increased the cost of capital when investors at
home balked at the convertibility of the bonds, which had the potential
THE GLOBAL DIMENSION 43


of ˜˜diluting™™ the stock by increasing the number of shares in issue.
Novo™s share price dropped by nearly a third.
The following year, US investors became enthusiastic about the
potential of biotechnology. In 1980 Novo promoted itself in New York
and US investors began to buy its shares and convertible bonds in
London. By the end of the year its share price was double its 1997 price
and the company was 30% foreign-owned.
In 1981, Novo sought to expand its appeal to US investors by creating
American Depositary Receipts (ADRs), obtaining an over-the-counter
listing on NASDAQ and preparing for a listing on the New York Stock
Exchange. The challenge was to prepare accounts according to US
accounting standards and to ful¬l the stringent information disclosure
rules in the US. Its share price continued to rise, and the Danish
investment community persistently described the company as grossly
overvalued. When Novo made a $61mn share issue in New York, Danish
investors sold hard, while US investors piled in, con¬dent that the NYSE
listing would provide adequate liquidity, which had previously been
a worry. The company had achieved its objectives “ access to much
more capital at a signi¬cantly lower cost.


KEY LEARNING POINTS
» Multinational companies and their af¬liates are a hugely impor-
tant element in world trade, accounting for around a third of the
world™s GDP. Although the biggest MNCs are concentrated in
a few sectors, such as oil and autos, the diversity of MNC busi-
nesses is very wide. Since the 1980s, there has been a substantial
growth in the number of MNCs from newly industrialized coun-
tries, particularly in East Asia, a region that has become a third
major force in world trade (the others being the US and Europe).
» MNCs can have substantial effects on the economies of countries
and there is tension between them and governments who, while
wanting the bene¬ts that foreign MNCs can bring, wish to
regulate their activities.
» Companies have substantial opportunities to improve their
¬nancial position by issuing shares or borrowing in the global
markets. While the biggest MNCs enjoy these bene¬ts as a
44 GLOBAL FINANCE



matter of course, many smaller ¬rms are hampered by regula-
tions, high costs, and limited available capital at home. Although
the ˜˜escape™™ to global ¬nancing is dif¬cult and costly, many
well-run ¬rms have succeeded in achieving this during the last
two decades.
» Although a listing on a major world stock market, such as the
New York Stock Exchange, offers the potential for a large,
liquid supply of capital, companies need to manage the process
of getting there very carefully. Many ¬rms begin by issuing
Eurobonds, which helps to raise pro¬le and gain credibility
amongst international investors, and then graduate to listings on
foreign exchanges.


NOTE
1 Krasner, S. (1996) Power, Politics, Institutions and Transnational
Relations. In: Bringing Transnational Relations Back In (ed. T.
Risse-Kappen) Cambridge University Press, Cambridge.
05.02.06
The State of the Art
This chapter looks at the most controversial issues in globalization.
Movements against globalization are gathering momentum; what are
the issues? The reality of the EU™s policies and problems. How can the
developing world be helped?

» The anti-globalization backlash: Seattle and beyond
» Krugman on GATT and the WTO
» The European Union: restructuring business
» Vodafone and Mannesmann “ the deal that changed everything
» The European Union: enlargement
» EMU
» The EU and agriculture
» The developing world: food, development, growth, debt, and aid
» Misdirecting resources: Peruvian car manufacturing.
46 GLOBAL FINANCE


˜˜[The state] is the great ¬ctitious entity by which everyone seeks
to live at the expense of everyone else.™™
Fr´d´ric Bastiat, nineteenth century French economist
ee

THE ANTI-GLOBALIZATION BACKLASH: SEATTLE
AND BEYOND
In late 1999 a ministerial meeting of the World Trade Organization
gathered in Seattle to outline the agenda for a new round of global
trade talks (see Chapter 3 for an outline of the GATT agreements since
WWII). It rapidly degenerated into a shambles as serious disagreements
emerged, with the US, the EU, and developing countries crystallizing
into warring camps. Outside, there were violent clashes between police
and protesters, some of the 50,000 people, mainly trade unionists and
environmentalists, who had converged on the city to demonstrate
against trade-related issues. Eventually, the meeting collapsed.
During 2000 and 2001, an estimated one million people have taken
part in demonstrations at meetings in Washington, Melbourne, Prague,
Seoul, Nice, Barcelona, Washington DC, Quebec City, Gothenburg,
and Genoa. At the time of writing, the WTO intends to make a second
attempt to launch a new trade round in Doha, Qatar. For the ¬rst time in
many years, the trend towards increased free trade and ˜˜globalization™™
looks under threat, with a world recession looming and well-organized
political activism gaining strength.
Anne Krueger, deputy managing director of the IMF, said in 2001
that ˜˜the big risk is a slackening or slowdown in the rate of economic
growth could lead to a suf¬cient downturn in economic activity to
trigger a backlash among those who are now silent, but not neces-
sarily supportive, of globalization.™™ Anti-globalization is a form of
protectionism that could reverse liberalization and ˜˜the long period of
successful economic growth that the world has enjoyed.™™ (See Fig. 6.1.)
The debate between protectionism and free trade has been raging
for at least two centuries (see Chapter 8 for a discussion of the basic
arguments) and although most economists are broadly in favor of
free trade, many others “ including many politicians “ are not. The
controversy is not merely a matter for theorists: a worldwide switch
towards protectionism would have profound effects on industries and
individual ¬rms around the world.
THE STATE OF THE ART 47




Trade




GDP



*

* Forecast

Fig. 6.1 World trade and GDP by volume, 1980“2000. (Source: WTO.)

While the anti-globalization movement has no uni¬ed agenda, it
is a formidable collection of diverse groups, many of which are
well-informed and in possession of substantial funds; for example,
Anita Roddick, British CEO of the successful Body Shop eco-friendly
cosmetics chain, was among the protesters at Seattle. The WTO, actu-
ally a modestly-funded body with only 530 employees that can only
function by the consensus of its 142 member countries, has become a
symbol of all that protesters see as wrong with the world “ including
the power of multinationals, ecological issues, Third World famine and
debt, developed world job insecurity, and urban homogenization.
Defenders of the WTO point out that many of these issues are not
con¬ned to regions directly in¬‚uenced by free trade, multinationals, or
First World governments. For example, the ex-Soviet bloc has devas-
tated much of its environment under its former command economies
and the destruction of South-East Asian and Amazonian rain forests
is driven largely by inward development (land grabbing). The noted
economist Paul Krugman believes that in so far as global economic
integration creates transparency it is probably a force for wiser envi-
ronmental policies. He points out that states in the developed world
are in any case hardly consistent in their pursuit of free trade policies,
frequently ¬nding reasons to block imports.
48 GLOBAL FINANCE



KRUGMAN ON GATT AND THE WTO
˜˜To make agreements work there has to be some kind of
quasi-judicial process that determines when ostensibly domestic
measures are de facto a reimposition of trade barriers and hence a
violation of treaty.
˜˜Under the pre-WTO system, the General Agreement on Tariffs
and Trade, this process was slow and cumbersome. It has now
become swifter and more decisive . . . The raw fact is that every
successful example of economic development this past century “
every case of a poor nation that worked its way up to a more or less
decent, or at least dramatically better, standard of living “ has taken
place via globalization; that is, by producing for the world market
rather than trying for self-suf¬ciency. Many of the workers who do
that production for the global market are very badly paid by First
World standards. But to claim that they have been impoverished
by globalization, you have to carefully ignore comparisons across
time and space “ namely, you have to forget that those workers
were even poorer before the new exporting jobs became available
and ignore the fact that those who do not have access to the global
market are far worse off than those who do.™™


The Uruguay trade round tabled a number of important issues to
be resolved in the next round, notably the liberalization of trade
in agriculture and services. Doing so would bring huge economic
bene¬ts “ according to Drusilla Brown of Tufts University and Alan
Deardorff and Robert Stern of the University of Michigan, a tariff
reduction on agricultural and industrial products and services by 33%
would increase world GDP by a one-off $600bn, more than eight times
what was achieved by the Uruguay round.
Although easing the trade barriers to services will be comparatively
easy, it will be much more dif¬cult to obtain consensus on agriculture,
which has always been one of the world™s most protected industries in
both rich and poor nations.
THE STATE OF THE ART 49


Countries with major agricultural exports, such as Australia and
Argentina, have formed the ˜˜Cairns Group™™ to press for freer trade.
While the US is of¬cially committed to this, American protection and
subsidy of domestic agriculture is very high, and it could be very dif¬cult
politically to achieve reform. Japan and the European Union (EU) are
also hag-ridden by subsidy arrangements that protect their largely
inef¬cient farming. The prospect of expanding the EU by admitting
some Eastern European countries with vast, but vastly inef¬cient, farms
is recognized as a looming policy problem.
The EU is pressing for the inclusion of three additional agenda items
for the next trade round: competition, environment, and investment.
Suspicions abound amongst other member states about the motives
for broadening the agenda, particularly regarding the environment.




Y
While the EU says that it merely wants to clarify the WTO™s rules on
matters such as eco-labeling products and genetically modi¬ed foods,
FL
there are fears among the developing countries that the EU will use
environmental issues as a pretext for blocking agricultural imports. The
liberalization of food tariffs would transform the economies of many
AM

poorer countries.
The EU™s politicians are under heavy pressure from their voters
to keep food clean following the outbreak of mad cow disease and
other scandals, and they point to the USA™s resistance to agreement over
TE



global warming as evidence of a lack of American will for environmental
reform.
Another problem is in agreeing anti-dumping rules. ˜˜Anti-dumping™™
is where a WTO country may impose high tariffs on items that it
believes are being ˜˜dumped™™ (sold below cost) in its territory by
another nation. Manufacturing nations such as Japan and South Korea
are worried that anti-dumping rules can be misused to prevent imports
of their goods to the US and Europe, while many poorer countries are
starting anti-dumping investigations. China, which is the major target
of anti-dumping tariffs after the US, is to participate in WTO for the ¬rst
time, and negotiations are expected to be dif¬cult.
Much is at stake here for the prosperity of individual businesses,
nations and the world at large. For the ¬rst time in decades, the
50 GLOBAL FINANCE


prospect of the economic pendulum swinging away from free trade
towards protectionism is becoming a real possibility.


THE EUROPEAN UNION: RESTRUCTURING
BUSINESS
The European Union (EU) is the largest trading bloc in the world,
representing 40% of world trade and 20% of world GDP. Closer inte-
gration, economic reforms, and the potential enlargement of the Union
to include parts of Eastern Europe present many opportunities and
challenges for business.
A tradition of consensus and continuity has always been strong in
much of northern continental Europe. The EU way of doing business
has tended to be ˜˜caring™™ and stakeholder-orientated, in contrast to
the ˜˜Anglo-Saxon™™ model of the US and, to a lesser extent, Britain.
On the continent, employee protection, heavy regulation, oligopolies,
and a large public sector have been an apparently permanent fact of
life.
During the 1990s, Japan™s go-go economy went into reverse. US ¬rms
restructured and surged ahead while large companies in continental
Europe did poorly, failing, on average, to make enough pro¬ts to cover
their cost of capital. By 1999, returns had improved to an average 14%
on invested capital, but this was still much lower than the US ¬gure
of 27%. Today, everything is changing. Globalization, monetary union,
deregulation, and privatization have stimulated ¬rms to try to become
more ef¬cient.


VODAFONE AND MANNESMANN “ THE DEAL
THAT CHANGED EVERYTHING
Mannesmann, a giant German telephone company, had sought
investment in the US and Britain during the 1990s to help fund
its expansion in Europe, largely by friendly acquisition. To do
so, it had to adopt the standards of accounting and information
disclosure expected in the US and UK stock markets. By 1999,
60% of the company was in the hands of institutional investors in
the US and UK.
THE STATE OF THE ART 51



Hostile takeovers were frowned upon in continental Europe.
Legal barriers, trade unions, and consensual politics combined to
prevent what were seen as an undesirable practice. In Germany,
there had not been a single case of a hostile bid succeeding.
Vodafone AirTouch, a fast-growing British mobile telephone
operator, achieved the unthinkable in 1999 when it successfully
launched a hostile takeover of Mannesmann. A key factor was that
the foreign investors in the German ¬rm supported the bid “ there
was no controlling shareholding to block the sale, which set a
record as the world™s largest-ever hostile takeover.
The deal was widely perceived as a crucial event in the penetra-
tion of the ˜˜equity culture™™ into Europe. No European company
could feel invulnerable to attack, and the wave of mergers and
management buyouts, already underway, surged, driven largely by
US investment.


The ownership of large continental ¬rms has tended to be closely held
among a small number of allies, in contrast to the British and American
¬rms where there are generally very large numbers of shareholders.
Until recently, the identity of owners could easily be kept secret on
the continent, and control has been achieved by such techniques as
issuing special categories of shares to insiders that have enormously
enhanced voting rights “ up to 1000 times that of ordinary shares in the
case of Sweden. Using this method, Investor, a large Swedish holding
company, owns 2.7% of Ericsson yet has 22% of the shareholders™
votes.
Complex cross holdings between ¬rms and banks are another way
of retaining control. In 1999, according to a study by Marco Becht,
of ECARES and Ailsa R¨ ell, of Princeton University, over 50% of listed
o
¬rms in Germany, Austria, Italy, and Belgium had more than half their
voting rights in the hands of one shareholder or controlling group.
Pressure from international investors is breaking up this ownership
pattern.
The M&A boom may eventually wane, but other business reforms
are also occurring. Competition for increasingly globalized markets are
forcing large companies to restructure, while the advent of the single
52 GLOBAL FINANCE


currency, the euro, offers opportunities for economies of scale within
the EU, leveling prices and driving them downwards. Deregulation has
radically reduced the price of telephone calls, while state-owned ¬rms,
such as German and Italian railways, are preparing for privatization.
Inef¬cient companies are unlikely to survive for long.


THE EUROPEAN UNION: ENLARGEMENT
In the post-war ruins of continental Europe, industrialized coun-
tries were faced with the problem of how to rebuild their ravaged
economies. In 1952, seven years after the end of WWII, France, West
Germany, Italy, Belgium, Holland, and Luxembourg formed the Euro-
pean Coal and Steel Community (ECSC) to promote free trade between
its members in what were then vital resources. It was hugely successful,
and in 1958, following the 1957 Treaty of Rome, a far more ambitious
project, the European Economic Community (EEC), now known as the
European Union (EU), was formed with the intention of abolishing all
barriers to the movement of goods, capital, and people between its
member countries. This ˜˜customs union™™ is to be followed eventually
by ˜˜economic union,™™ entailing a complete harmonization of member
states™ economic policies.
In 1973, the six member group expanded to nine with the admission
of Denmark, the UK, and Eire. Greece, Spain, and Portugal joined
during the 1980s and Austria, Finland, and Sweden joined in 1995. The
Maastricht Treaty, signed in 1992, is regarded as a major step towards
closer political and economic union between EU members. Achieving
further integration has not been an easy matter because member states
are very diverse in terms of population size, unemployment levels,
living standards, industrial structures, and so on. For instance, while
the UK has the second largest population, it has the lowest proportion
of agricultural workers, the third largest GDP but only the tenth largest
GDP per capita and the slowest growth rate since 1960.
Following the collapse of the Soviet Bloc in 1989, the EU promised
to welcome Eastern Europe into the union as a ¬nal end to the Cold
War. Progress has been slow, however, because of practical problems of
integration. The EU™s motives for enlargement are not na¨ve “ if the East
±
had been abandoned to chaos, ˜˜the very idea of European integration
THE STATE OF THE ART 53


would have undermined itself and eventually self-destructed,™™ said
Joschka Fischer, Germany™s foreign minister in 2000.
In 1998 the EU ¬nally launched the enlargement program which
now comprises of 13 applicant countries:

» Bulgaria, Cyprus, Czech Republic;
» Estonia, Hungary, Latvia;
» Lithuania, Malta, Poland;
» Romania, Slovak Republic, Slovenia, and Turkey.

Restructuring these countries™ systems to comply with EU requirements
for democracy, the rule of law, economic stability, and the adoption of
all current EU law is a hugely dif¬cult task. At the time of writing the
EU has postponed the ¬rst admissions to 2004 at the earliest.
The economic challenge is substantial. Admission of the 10 Central
and Eastern European countries (Turkey is a separate case) would
increase EU GDP by 5% but increase its population by 29%. The
purchasing power of the average income would drop by 16%. While
there are opportunities for growth, EU enlargement will be hard to
digest.

EMU
Meanwhile, the introduction of the euro, the single currency, by most
existing members is intended to complete the EU™s single market by
providing price transparency and removing forex risk. The strength of
the euro will ultimately depend, as with all currencies, on how well
the economy performs.
As we saw earlier, the euro has encouraged mergers and other deals.
By creating a single market for capital it gives investors and ¬rms more
¬‚exibility. For example, the number of corporate bonds being issued
is increasing in Europe, mainly denominated in euros.

THE EU AND AGRICULTURE
One of the most problematic areas for the EU is its Common Agri-
cultural Policy (CAP), run by the European Agricultural Guarantee
and Guidance Fund (EAGGF), also known by its French title ˜˜Fonds
Europeen d™Orientation et de Garantie Agricole™™ (FEOGA). When the
54 GLOBAL FINANCE


Treaty of Rome was signed in 1957 more than 20% of workers in the
six original signatory countries were in agriculture, which was then
very depressed. The CAP was created to revive the industry, protect it
from imports, and provide stable incomes for its workers. Today the
average proportion of agricultural workers in EU countries is 3.9%, a
massive drop.
CAP guides farm production and guarantees incomes. Target prices
are set for each product based on a pro¬table price for the highest-
cost EU production area, rather than on world prices. The EU sets a
guaranteed price at 7“10% below the target price, and intervenes to buy
up produce if prices fall to this level. There are also separate target and
guaranteed prices for individual products in many small areas within
the EU. Guaranteeing prices to producers means that the EU must levy
tariffs on competing imports. In addition, EU farm exporters receive
subsidies to bring the export prices up to the guaranteed price.
Within a few years of the creation of the CAP, the output of small,
high-cost farms predictably surged. The system of price intervention
has created the well-known butter mountains, wine lakes, and so on,
consisting of unwanted surpluses of produce ultimately paid for by EU
consumers. Economists argue that CAP has resulted in resources being
applied inef¬ciently within the EU and also that it discriminates against
more ef¬cient Third World producers that desperately need export
income.
By the late 1980s, reforms to CAP resulted in limits being set on
the production of certain products such as cereals, a reduction in
guaranteed prices and effort to discourage highly intensive farming
while protecting farm jobs and marginal farmers. Land has been taken
out of use, with farmers being compensated for what is not produced.
Arguments for further reform include the need to help the EU™s 18.5
million unemployed (compared with the 7 million subsidized farmers)
and the ¬nancial impossibility of subsidizing farmers at current rates in
the potential new member states in Eastern Europe.

THE DEVELOPING WORLD: FOOD, DEVELOPMENT,
GROWTH, DEBT, AND AID
Conceivably, the developed world could ignore the plight of poorer
nations, turn inwards and still prosper. Many policy-makers believe,
THE STATE OF THE ART 55


however, that helping poorer countries to help themselves is not
a matter of charity, but rather one of enlightened self-interest. The
president of the World Bank, James D. Wolfenson, stated this view
clearly in a 1997 speech, saying:

˜˜We can insulate ourselves from whole sections of the world for
which crisis is real and daily but which to the rest of us is largely
invisible. But we must recognize that we are living with a time
bomb and unless we take action now, it could explode in our
children™s faces.™™
˜˜If we do not act, in thirty years the inequities will be greater.
With population growing at 80 million a year, instead of 3 billion
living on under $2 a day, it could be as high as 5 billion . . . in thirty
years, the number of con¬‚icts may be higher. Already we live in
a world which last year alone saw twenty six interstate wars and
23 million refugees . . . without economic hope we will not have
peace. . .™™
And economics is fundamentally changing the relationships
between the rich and the poor nations. Over the next twenty ¬ve
years, growth in China, India, Indonesia, Brazil and Russia will
likely redraw the economic map of the world as the share in global
output of the developing and transition economies doubles. Today
these countries represent 50% of the world™s population but only
8% of its GDP. Their share in world trade is a quarter of that of the
European Union. By the year 2020, their share in world trade could
be 50% more than Europe™s . . . we share the same challenge. The
¬ght against poverty is the ¬ght for peace, security and growth for
us all.™™
James D Wolfenson1

In short, many feel that the developed world cannot afford to turn its
back on the rest of the world if it is to assure its own future prosperity
in the long term “ the risks are simply too high. There is a broad
agreement among interests as diverse as big business, government, and
the anti-WTO groups that reducing the world™s gross inequalities is a
vital long-term objective.
The devil is in the detail. While some countries have had notable
development success over many decades, such as Japan, Singapore,
56 GLOBAL FINANCE


and South Korea, many nations suffer from intractable problems that
economic theory has dif¬culty in either explaining or curing. The key
issues are inter-related.
» Food “ it is generally recognized that human activity is the prin-
cipal cause of the endemic malnutrition and periodic famines that
devastate parts of the developing world. Poor farming methods, a
lack of environmental controls, bad transport infrastructure, a failure
to stockpile food, and military action to cut food supplies have
been signi¬cant features of the famines in countries such as Biafra,
Ethiopia, Somalia, and Rwanda.
» As we have seen, the developed world does not allow a free market
in its own agriculture, with a tendency to keep prices high and
encourage surpluses through subsidy. Many LDCs have taken the
opposite approach: keeping food prices arti¬cially low for the bene¬t
of their politically-active urban populations. The problem is that
farmers reduce their output and switch to other crops. For example,
Mexico used to keep domestic corn prices low to maintain a cheap
price for tortillas, the staple food of city dwellers. Farmers switched
to crops free of price controls and corn shortages increased to the
point that it had to be imported.
» Developed world farming is highly productive overall: one US farmer
can produce enough to feed 80 people. In contrast, most LDC farmers
can barely feed their own immediate families. Low agricultural
productivity in LDCs may often be due to the extreme dif¬culty
that farmers face in introducing new cultivation methods. Better
seeds, machinery, fertilizers, and irrigation systems are expensive and
without a stable system of agricultural bank lending, a poor farmer
may well be making a rational choice when he decides to ignore new
technologies rather than take on a very risky debt burden. An urgent
need for land reform is also a factor in some regions, particularly in
Latin America where 2% of landowners possess 75% of the farmland.
In China, for instance, allowing farmers to own their own land and
sell their produce has had a dramatically increased output.
» Development strategies “ until the 1970s the majority of LDCs and
their advisers believed that the key to economic development was to
industrialize. Trying to mimic the structures of developed economies,
however, is increasingly seen as ineffective and in recent years more
THE STATE OF THE ART 57


emphasis has been placed on agriculture. Large agricultural projects
such as dams and irrigation systems require heavy investment, but
many others, such as farming education programs, do not require
large sums of money. Striking a balance between agricultural and
industrial development is now seen as the best development path.
˜˜Import substitution,™™ where an LDC sets up industries to produce
goods that replace imported products, is widely believed to have
been a failure. By protecting local ¬‚edging industries with high tariffs,
gross economic inef¬ciencies were created.


MISDIRECTING RESOURCES: PERUVIAN CAR
MANUFACTURING
Peru has a population of 24 million, most of whom cannot afford
to buy a car. In the 1970s the country had six different car
manufacturers, all with low output. These ¬rms were unable to
bene¬t from economies of scale (see Chapter 7, Ford) and their
cost of production was much higher than world market prices,
making exports impossible. Valuable resources were spent on auto
production that could have been better employed elsewhere.

» Promoting exports has been a more successful approach than import
substitution. Japan™s dramatic postwar success in developing into
the world™s second largest economy was based largely on exporting
manufactured goods. Other East Asian economies, such as Singapore,
Taiwan, and Korea, have also had success in this approach.
» ˜˜Structural adjustment™™ is the effort to reduce the size of the public
sector in LDCs, control in¬‚ation, encourage private saving and invest-
ment through tax reform, and reduce national debt. These are all
pro-free market measures that have been strongly promoted by the
IMF and the World Bank during the 1980s and 1990s in response
to the problem that while many LDCs™ GDP per head grew in the
60s and 70s, much of the population did not share in the new
wealth.
» Population growth “ in the 1800s Thomas Malthus, an English
economist, predicted that the population of Europe and America
would grow faster than the food supply, leading to disastrous poverty.
58 GLOBAL FINANCE


He did not foresee the improvements in agricultural methods that
transformed productivity, nor that Western population growth would
begin to slow. But are the LDCs living in a Malthusian world? LDC
populations are growing at about 1.7% annually, compared with
0.5% in industrial nations, which means that at the present rate LDC
populations will double every 41 years. Looking at the parlous state
of many LDC economies, it is daunting to contemplate such a massive
increase in their populations.
» Figure 2.1 in Chapter 2 shows that since the Industrial Revolution
the world™s population has grown dramatically. Not much is known
about the possible consequences, but the fear is that LDCs will not
be able to support massive increases in the number of children. One
interesting approach to analyzing fertility patterns is to look at why
parents choose to have large or small families. Recent studies suggest
that parents in the developing world may be acting rationally when
they choose to have large families because children supply valuable
labor and are the only way to ensure ¬nancial support in old age.
If incomes rise or there are increased employment opportunities
for women, the opportunity cost of having a child increases (there
are better things to do) and birth rates may start to fall. Economic
development, therefore, may be the answer to reducing the rate of
population growth.


KEY LEARNING POINTS
» In 1999 a backlash against globalization began that has swept
around the world, focusing on the WTO as its chief target. In
2001 a senior WTO of¬cial remarked that the major problem
with WTO/GATT is not that countries are against free trade, but
that its implications have not been properly explained to the
public.
» The US, the EU, and the developing world have contending
objectives for the next trade round, with the developing world
wanting a stronger voice in negotiations. China is to join the
WTO for the ¬rst time as part of its continuing efforts to open
up to international business.
THE STATE OF THE ART 59



» During the 1990s, the tide turned in continental Europe as
corporations began to try to become more ef¬cient. Pressure
from foreign investors is encouraging better disclosure, broader
ownership, and a wave of deal-making. Global competition
and the single European market are forcing companies to use
their capital more effectively and expand outside their national
borders.
» Plans for EU enlargement to admit 13 new member countries are
being delayed as applicants need to converge economically and
politically with EU norms before they join. The new members
are poor “ enlargement is being handled delicately to avoid
problems.
» The EU™s single currency has boosted investment and company



Y
restructuring for ef¬ciency by providing a single European
FL
market for investment capital. It is expected to help lower prices
by removing exchange rate risk within the EU and creating price
transparency.
AM

» The EU™s agriculture is inef¬cient because of the protectionist
Common Agricultural Policy (CAP) that favors farmers over
consumers. Created at a time when 20% of EU workers were
in agriculture (there are now less than 4%), the CAP is being
TE



reformed. Further reform will be needed to cope with the admis-
sion of Eastern European countries that have large agricultural
sectors.
» There is a consensus that the rich countries cannot afford not to
help poorer countries develop. While the NICs have successfully
transformed themselves into vigorous free market economies,
other LDCs are in serious trouble. The current emphasis is on
encouraging free markets, a balanced mix of better agriculture
and industry, and exporting rather than import substitution. It is
hoped that the rapid population growth in LDCs will self-adjust
downwards as nations get richer “ as it has, for instance, in
Japan and Singapore.
60 GLOBAL FINANCE


NOTE
1 ˜˜The Challenge of Inclusion,™™ address to World Bank Board of
Governors, Hong Kong, September 23, 1997.
05.02.07
In Practice: Global
Success Stories
Speci¬c challenges facing three very different MNCs and how they are
responding.

» Ford Motor Company “ life as a giant
» NTT DoCoMo “ the battle for new global markets
» Nestl´ “ global corporate responsibility.
e
62 GLOBAL FINANCE


˜˜If I was to describe to you a business where you have to manage
worldwide overcapacity, huge ¬xed costs, government-supported
industry in certain countries and too many players, you would
have to be mad to say it™s something you want to get into.™™
Bill Ford, chairman of Ford Motor Company


FORD MOTOR COMPANY “ LIFE AS A GIANT
Ford Motor Company is the quintessential multinational. Henry Ford,
the ¬rm™s founder, was a key ¬gure in the development of mass-
production methods that had such a transforming effect on economic
growth in the twentieth century “ in 1913, he achieved a 90% reduction
in car assembly time, a classic illustration of how economic growth
can be achieved by ¬nding ways of producing more using existing
resources.
The world™s second largest car manufacturer after General Motors,
in 2000 Ford had a turnover of $170bn but a relatively low income
before taxes of $8.2bn. The company employs nearly 350,000 people
across the world and sold some 7.4 million cars and trucks in 2000.
Like its main competitors, its principal markets are in the developed
countries of North America and Western Europe “ although Ford has
a controlling share of Mazda, it only sells some 26,000 units in Japan,
approximately half of its sales in Argentina.

The problem: overcapacity
A new car is a ˜˜big ticket™™ item for the consumer, costing a substantial
proportion of annual salary, if not more, which means that people
often have to borrow money to make their purchase. To persuade
more customers to buy cars, Ford and its rivals have developed
substantial consumer loan and corporate leasing operations. In Ford™s
case, its ˜˜Financial Services Sector™™ generated $28.8bn in revenues in
2000.
For many decades, car manufacturers operated a ˜˜push™™ system,
producing vehicles in huge numbers in expensive plants and delivering
them to the consumer via a tightly controlled network of dealers. As
more and more manufacturers around the world entered the ¬eld, the
markets of the developed world progressed towards near-saturation
IN PRACTICE: GLOBAL SUCCESS STORIES 63


despite valiant efforts to introduce new product types in the hope of
extending markets.
Today, says Jacques Nasser, Ford™s CEO, ˜˜If you look at it in a
macro sense, there™s too much capacity. . . If you™re not ¬t and lean,
and are burdened with excess assets that are not utilized well, it™s
not fair to the customers and employees and shareholders.™™ This is
something of an understatement “ auto pundits argue that worldwide
there is an overcapacity of some 30%, severely destabilizing the market,
de¬‚ating prices, reducing pro¬ts that are already low, and encouraging
governments to adopt protectionist policies to preserve jobs.
In the long term, however, there are plenty of potential car buyers
in the developing world, particularly in China, South-East Asia, Eastern
Europe, and Latin America. With trade barriers falling, the established
car companies are increasing their presence in these regions. One
dif¬culty is that most of these potential consumers cannot afford to
purchase vehicles at present “ future sales will depend on overall
economic growth. Another problem is that developing countries may
not have an infrastructure that is adequate to support modern auto-
motive plants that need high quality machine and engineering support
groups associated with other industries. Thirdly, there is a need for a
workforce with the skills and training necessary to manufacture and
assemble components and subsystems, and to manage and maintain
the equipment. Finally, a country has to have a logistical system able to
move supplies and components in suf¬cient quantities and to deliver
the completed product ef¬ciently.

Getting even bigger: economies of scale
Car manufacturing is a mature industry, with vast ¬rms dominating the
markets, particularly through their ability to achieve economies of scale.
As with other ¬rms, Ford is over-dependent on the North American
market and ¬nds its numerous plants across the world dif¬cult to
manage because of restrictive labor agreements. The advent of e-
commerce and pressure from the environmental lobby also represent
major challenges to pro¬t growth “ laws regulating exhaust emissions
and fuel consumption are increasing in severity.
Analysts expect only the biggest ¬rms to survive in the medium
term. Ford is one of only six ˜˜¬rst tier™™ companies worldwide that are
64 GLOBAL FINANCE


likely to dominate the market in years to come. Ford and its rivals in
the ˜˜Global Six™™ have three main strategies they can adopt.

1 Reducing the asset base to free capital for more focused investment.
In 1998, Ford gathered all of its component divisions into a single
entity and created Visteon as a global supplier, retaining the core
businesses of engine, chassis, and assembly. Visteon was then ˜˜spun
off™™ as a separate public company in 2000 by distributing its shares
tax-free as a dividend to existing Ford shareholders; one effect of
this was to reduce the number of employees by some 7%. General
Motors also adopted this strategy by divesting Delphi.
2 Acquire other ¬rms and build alliances. This is again principally
an effort to cut costs while gaining control of more product brands.
There has been a frenzy of industry mergers in the last few years,
with Ford purchasing Land Rover for $2.6bn in 2000, Volvo™s car
business in 1999 for $6.45bn and Kwik-Fit, a European light repair
chain, in 1999 for approximately $1.4bn. With the advent of e-
commerce threatening to shorten the supply chain, Ford has entered
into a purchasing joint venture, Covisint, with GM, DaimlerChrysler,
Renault and Nissan, intended to create a business-to-business supplier
exchange on a single global Internet portal. This move could reduce
manufacturing costs by up to $3000 per vehicle. Covisint hopes
to become the world™s largest virtual marketplace, moving all auto
commodity purchases onto the net. If it is successful, more e-alliances
are to come in distribution, retailing, and vehicle marketing.
3 Making superior products. Customer loyalty is particularly valuable
in the auto industry, where it is estimated that the cost of marketing a
product to an existing customer is about 20% of attracting a new one.
A ˜˜superior™™ product can be de¬ned in many ways, but it essentially
revolves around customer perception which varies internationally.
US consumers want convenience, Europeans need fuel economy and
the Japanese require compact vehicles, for instance.
R&D “ from basic research in materials and methods to vehicle
design “ is vital. By distributing the R&D role globally, there is
an opportunity to take advantage of local pockets of expertise
for all vehicle programs, and to ˜˜localize™™ designs based on global
platform standards and common components for the local consumer.
The R&D challenge is to ¬nd ways of ful¬lling these needs while
IN PRACTICE: GLOBAL SUCCESS STORIES 65


pushing the standardization of parts and design to reduce costs. Ford
has relocated product development centers to the countries where
speci¬c products are sold to help deal with national preferences. In
2000, it introduced the ˜˜Think™™ line of electric-powered vehicles
with plastic bodies based on technology purchased in Norway.
Said CEO Jacques Nasser, ˜˜we really believe that consumers want
alternative products . . . We™re using the Think as a way of incubating
and hatching new technologies such as fuel cells. The technology
will then migrate to other vehicles.™™ Ford has also announced plans
to sell a hybrid gas-electric sedan using an internal combustion engine
mated to an electric motor and achieving a fuel economy of 80 miles
to the gallon “ and has suggested that the US government create a
tax credit for such vehicles to offset their increased purchase cost.

As a prime mover in one of the twentieth century™s chief engines of
growth Ford has always been involved with governments. Prior to
the development of fascism in the 1930s, Ford had little regulatory
dif¬culty in entering foreign markets, but by 1939 it had been driven
out of Japan and much of Europe. Despite its global reach today,
the company is an example of just how little large MNCs can be
truly said to be globalized: about 66% of units are sold in North
America and most of the rest in Europe, with unit sales in the rest of
the world accounting for less than 10% of the total. It undoubtedly
remains a family-controlled company with a culture based ¬rmly on
its national origins. For example, Ford ¬rst purchased stock in Mazda
in 1979 in the hope of acquiring Japanese skills and expertise, but
the two companies did not exchange anything other than ¬nished
vehicles. It was only when Ford acquired a controlling position in
1996 that true synergies and collaboration began to emerge “ the ¬rst
jointly designed vehicle for the US market is the Ford Escape/Mazda
Tribute.
Ford™s business is highly vulnerable to state regulation, which varies
considerably from country to country. As well as the problems of
trade barriers and the ever-present pressures to protect the workforce
from downsizing, laws on safety standards and governing fuel economy
and emissions have dramatic effects on vehicle costs and designs.
Attempts to design and integrate components separately for each
country™s set of regulations led to massive inef¬ciencies and waste,
66 GLOBAL FINANCE


as components built for one market could not be used in others,
leading to local oversupply and shortages because of minor regulatory
changes. To solve this, Ford has developed a sophisticated strategy of
˜˜homologation™™ in its engineering process to address these problems.
All components are evaluated against all relevant regulations globally
to ensure that components from one region can be used in any other
on the same platform as often as possible. The impact of this and
other standardization procedures for fasteners and connectors alone
frees signi¬cant amounts of capital for the company to use in more
productive ways.
One of the problems of introducing environmentally-friendly vehi-
cles is that they are more expensive for the consumer, at least until a
mass market can be created. As was mentioned earlier, Ford suggested
that its electric/internal combustion engine hybrid should attract a
tax credit to offset its higher retail price. In effect it is arguing that
governments should help to pay for creating a world of environmen-
tally sound vehicles. Lobbying of this kind is generally done through
trade associations such as the AAMA in the US, ASAA in Europe, and
Working Party 29, a world forum for harmonizing regulations through
the United Nations.
˜˜It is tough because governments guard their prerogative to set
standards. Outside groups have also been suspicious that we™re trying
to lower standards when we™re really not. We™re just trying to harmonize
them, saying you choose the right thing. Certainly let™s do the research
jointly, so that we all can say, ˜here are the results,™ and we agree on
that. But there has been some opposition. . . we™ve made some progress,
in terms of trying to get some simple standards harmonized between
Europe and the US,™™ says Martin Zimmerman, Executive Director,
Government Relations and Corporate Economics at Ford.


KEY INSIGHTS
» Technical change often leads to increased worker productivity
and lower costs, leading to increased output and economic
growth without adding new resources. Henry Ford™s creation of
mass production techniques in the early twentieth century is a
well-known example of this.
IN PRACTICE: GLOBAL SUCCESS STORIES 67



» To some extent Ford is a victim of its own extraordinary success.
Car manufacturing has developed from a cottage industry to
maturity over the last century, and the major markets of the
developed world have little room for growth.
» Although millions in the developing world would like to
purchase a car, they do not have the means to do so. In
Brazil, for instance, only 1 in 11 people owns a car. The need for
a good infrastructure, high-tech suppliers and skilled labor are
other major barriers to market growth in the short to medium
term.
» Cost cutting has become paramount. Rather than integrating
vertically, Ford and others have aggressively pursued mergers
and alliances during the 1990s. In a heavily regulated environ-
ment where the weakest ¬rms will not remain independent
for long, Ford has chosen to concentrate on its core busi-
ness “ making cars “ and divested its parts division, Visteon. In
an attempt to eliminate duplication and cut costs, transnational
auto manufacturers like Ford are changing their relationships
with their parts suppliers, reducing their number, attempting to
collaborate more closely on product design and development
and outsourcing many processes.
» Ford may be a global company, but its strengths derive from its
US roots. Transnationalism brings huge headaches in the regu-
latory sphere, with every national market subject to different,
constantly changing rules. Ford™s ˜˜homologation™™ design system
attempts to minimize the costs of conforming to a multitude of
standards across the globe.



NTT DOCOMO “ THE BATTLE FOR NEW GLOBAL
MARKETS
For decades the telecommunications industry was regarded as an
uneventful collection of state-controlled utilities. Deregulation and
the advent of the Internet and mobile telephony changed every-
thing “ today it is a ˜˜hot™™ sector with huge sums being risked by
a large number of private competitors worldwide. Mobile telephony
68 GLOBAL FINANCE


was one of the great successes of the 1990s. By the end of the decade,
the number of mobile subscribers worldwide was over 400 million; in
OECD countries, about 1 in 4 people had mobile phones, whereas 10
years before the ¬gure was about 1 in 100, an average annual growth
for the decade of 56%. In 1999, global mobile revenues were around
$300bn.
There is no sign of a slowdown. Global revenues are expected to
double to $600bn by 2003 and the number of subscribers may reach 1.2
billion by 2004. As might be expected, the three largest regions in the
cellular market are the richest areas “ Western Europe, North America,
and Asia-Paci¬c “ but consumers in poorer countries are ˜˜leapfrogging™™
to mobile phones, especially where ¬xed line telephones are hard to
obtain or expensive. Much of the growth is being by the introduction
of prepaid tariffs that attract lower-income groups such as the young
or people in LDCs. Market saturation is not expected in developed
countries until 2010.
Free marketeers applaud these developments that have transformed
an industry dominated by state-owned monopolies. The OECD, for
instance, argues that, ˜˜Analysis clearly shows a strong correlation
between market growth and market openness. During the 1990s, those
markets that had liberalized the most, and had four or more operators,
have consistently outperformed markets with monopolies, duopolies,
or three operators.™™
The extremely rapid growth of mobile telephony has thrown compa-
nies and regulators into chaos, however. There are a number of reasons
for this, including the following.

» Mobile use is outpacing ¬xed line use in some areas, threatening
revenues from the traditional phone business.
» The appetite for data transmission grows and grows “ huge invest-
ments are needed in infrastructure that can accommodate the
increase in traf¬c. The appetite for speed just grows and grows.
» No one is quite sure how to price services or licenses in a rapidly
changing market.
» Manufacturers are competing ¬ercely to introduce newer, ˜˜smarter™™
products, in many cases before there is the infrastructure or compel-
ling content to make them appealing to consumers.
IN PRACTICE: GLOBAL SUCCESS STORIES 69


» There is also ¬erce competition between a multitude of rival techno-
logical standards, confusing and frustrating consumers.
» The convergence of e-commerce, the Internet, and mobile telephony
is a huge headache for companies in the industry “ they all want to
be in the game, but it is not clear which strategies and services will
ultimately be successful.

Telcos have borrowed massively to fund their growth, and by 2001
many of them were in trouble. In Europe, telecom ¬rms paid $115bn
for government licenses to operate ˜˜3G™™ services, the new (third)
generation mobile technology. Stock prices collapsed as technical bugs
slowed the introduction of 3G. British Telecom, Deutsche Telekom,
Vodafone, and others began to ask European governments for some of
their money back. So far, governments have not accommodated them



Y
and the debt-heavy telcos are now potential acquisition targets.
FL
Japan™s largest telco, the Nippon Telegraph and Telephone Corpora-
tion (NTT DoCoMo) is in a position to take advantage of the situation as
it obtained free 3G licenses in Japan. Among the $15.5bn in recent NTT
AM

acquisitions are a 16% stake in AT&T and investments in KPN Mobile of
the Netherlands, the UK™s Hutchison 3G, Hong Kong-based Hutchison
Telephone, and Taiwan. To help ¬nance this, DoCoMo carried out
Japan™s biggest sale of new shares by a listed company in January 2001.
TE



In 2001 the company also took out a $10bn loan from ¬ve Japanese
banks and sold $180bn worth of 5- and 10-year bonds. An additional
¥100bn in bonds were issued in October, 2001.
I-mode, its proprietary mobile service offering Internet access, has
been a huge hit in Japan, capturing 22 million subscribers by mid-2001.
Although NTT has also launched the world™s ¬rst 3G service, it believes
that it will not be the key to future revenue growth in the short to
medium term. I-mode™s boss, Kei-ichi Enoki, commented in 2001 that,
˜˜I don™t think the business model will fundamentally change from 2G
to 3G. The essence of the cellular phone business will be the same.™™
DoCoMo feels that 3G technology will not be able to carry the large
video and sound clips that many see as a potentially hugely lucrative
new service because costs to the user will be prohibitive.
While the jury is still out on 3G and its successor 4G, NTT has been
making hay in the meantime with i-mode. The company purchased
a large stake in AOL Japan to provide its mobile service with more
70 GLOBAL FINANCE


net-related facilities and content. I-mode users can currently access
tens of thousands of Web sites offering news, information, banking
services, shopping, ticketing and reservations, sports, dating, character
and melody download, and, importantly, access to the outside Web at
large (although sites must be suitably formatted for the small screen).
Like its Japanese rivals KDDI and J-phone, DoCoMo has solved
the problem of how to charge customers for content. I-mode mobile
Internet surfers are charged small monthly fees to access certain
˜˜of¬cial™™ sites with a few clicks, while users must input the URL
addresses of ˜˜unof¬cial™™ sites manually.
I-mode is an interesting solution to the problem mobile operators face
in getting to the super-fast, seamlessly integrated mobile Internet that
everybody wants. With minor modi¬cations of established technology,
such as HTML (the Web page design language) and fees based on
packets of data downloaded (giving the user unlimited connection
time), i-mode offers users a far more attractive and convenient service
than the US and European attempts at introducing Wireless Application
Protocol (WAP). I-mode is, in effect, more of a brand of innovative
services than a ground-breaking technology.
NTT sees its DoCoMo subsidiary as being more than a mobile
operator: ˜˜Our information distribution services businesses now stand
on the verge of signi¬cant growth. As mobile multimedia develops,
DoCoMo intends to support not only ˜person-to-person™ communica-
tions but also ˜person-to-machine™ and ˜machine-to-machine™ commu-
nications. I-mode was a ¬rst step in this direction, linking people and
computers. At once, mobile phones were transformed from commu-
nication tools into terminals for receiving information on a real-time
basis. Examples of ˜machine-to-machine™ services include a system that
monitors quantity and type of products remaining in vending machines
and a service that allows remote control of machinery by a computer.
Looking further ahead, anything that moves, including motor vehicles,
is a candidate for wireless services. Looking at the potential for growth,
the business possibilities are breathtaking.™™
With the 2G-based i-Mode launch in 1998“99, DoCoMo had already
shifted its view of the mobile phone business, deciding that data
rather than voice was the way to add value. DoCoMo has stepped
back from the ¬erce competition to win new mobile customers
IN PRACTICE: GLOBAL SUCCESS STORIES 71


and is concentrating on extracting more revenue from its existing
subscribers.
I-mode is not the ˜˜killer app™™ that will clinch the titanic battle for
control of the world™s mobile markets; time will tell, but it is more prob-
able that it will ultimately be seen as an effective medium-term tactic
to stay in a game which could be fought intensely for a decade or more
and is as likely to be as powerful an agent for change as the Internet.


KEY INSIGHTS
» The ease and ¬‚uidity with which NTT has been able to acquire
positions in, and alliances with, foreign telcos (as have foreign
telcos in Japan with NTT™s competitors) is indicative of just how
much has been achieved by the process of globalization, in the
sense of freer trade, technology exchange, and capital ¬‚ows
between the major trading blocs. In the 1970s, for instance,
such deals would have been unthinkable.
» Nevertheless, there is little evidence here of the development
of truly ˜˜transnational™™ MNCs. NTT has enjoyed favorable treat-
ment over licenses in its mother country, Japan, while telcos of
European origin fell foul of their own states™ licensing policies.
National origin continues to be a major factor in the intricate
chess game played between MNCs and governments.
» The extraordinary speed of developments in communications
has plainly outpaced governments™ capacity to respond effec-
tively. At the time of writing, a world recession looks likely,
which may dampen down the exuberance of IT-based industries
and give states a chance to catch up and consider just how
much laissez-faire they are prepared to accept in what has been
dubbed the ˜˜Information Age.™™


NESTL ´ “ GLOBAL CORPORATE RESPONSIBILITY
E
Nestl´, the world™s largest food company, was founded in 1867 by a
e
Swiss pharmacist, Henri Nestl´, who developed the ¬rst substitute for
e
breast milk for babies. Faced with a small domestic market, the company
went global early. Today it has a total workforce of approximately
72 GLOBAL FINANCE


225,000 people in 479 factories scattered across 81 countries, with
less than 2% of total sales being generated in Switzerland. Being a
Swiss company, however, insulates Nestl´ from some of the short-
e
term pressures from ¬nancial markets “ because quarterly reports are
not required, the company is not affected by the four monthly share-
price jitters that can disturb its major competitors in the US, and
can concentrate on longer-term growth. That approach has paid off,
producing an average annual increase in shareholder return of 20%
over the last 10 years. The company™s shares are listed on the stock
exchanges of Zurich, London, Paris, and Frankfurt, with ADRs offered
in the US by Morgan Guaranty.
Nestl´ products are available in nearly every country around the
e
world. It is the brand manager™s dream, with more than 130 main
brands in food and personal care products. 70% of the company™s sales
come from six worldwide corporate brands, Nestl´, Nescaf´, Nestea,
e e
Maggi, Buitoni, and Friskies. For decades it has steadily acquired more
well-known brands, including Findus frozen foods, Vittel mineral water,
Crosse & Blackwell preserves and Rowntree confectionery. Its total
sales were over $49bn in 2000, with pro¬ts of $3.7bn. About a third of
sales are generated in the Americas and another third in Europe. The
remainder is split roughly equally between food sales in the rest of the
world and the global sales of pharmaceuticals and bottled water, which
is managed as a separate division.
The company places great emphasis on expanding its markets
geographically. ˜˜One of our major challenges and opportunities is
to understand local consumer habits in the local environment. A classic
reason for failure is to believe that a sound concept and a good product
in one part of the world is enough in itself to ensure success in
another part of the world. Understanding the local environment would
probably imply adjustments to a product and to a concept . . . There
are some experiences that show the contrary, but in the food area,
local understanding is fundamental,™™ says Claudio Bartolini, senior vice
president of Nestl´™s Dairy Strategic Business Unit.
e
Nestl´ has attracted criticism for its activities in LDCs over issues such
e
as environmental practices, employment conditions, and its marketing
methods. The best known controversy is over the company™s original
product, milk for babies. For 20 years pressure groups have promoted
IN PRACTICE: GLOBAL SUCCESS STORIES 73


a boycott of the company™s products on the grounds that powdered
baby milk can cause unnecessary health problems when misused.
Like so many nineteenth century innovations, baby milk powder
was a genuine advance. In the days before refrigeration, perishable
food such as milk was hard to store, and any process that increased
shelf-life was a boon. It was not until the 1960s that an awareness
began to emerge of some of the problems of the overuse of processed
foods “ speci¬cally, that they are not perfect nutritional substitutes
for the unprocessed foods they replace. In the case of baby milk
powder, the main objections center on medical arguments that breast
feeding is preferable and the obvious need to follow the instructions
for preparation. In developed countries this causes few problems, as
mothers generally have good access to healthcare advice, are adequately
nourished, and are sophisticated consumers.
In LDCs, however, circumstances are different. In the late 1970s,
consumer groups began to claim that breastfeeding was declining
in LDCs as mothers switched to substitutes, leading to higher infant
mortality “ estimates run as high as one million deaths annually. The
health problems, they said, were due to several factors:

» no access to clean water to mix with the processed milk;
» lack of fuel leading to a failure to heat the milk to the correct
temperature;
» mothers possibly being unable to read the instructions for prepara-
tion, and mixing the formula in the wrong proportions;
» mothers possibly overdiluting the formula in an effort to save money;
» a failure to sterilize bottles;
» the fact that, unlike breast milk, substitutes do not contain antibodies
that protect infants from disease.

Consumer groups claimed that companies selling breast milk substitutes
were exacerbating these problems by giving away large quantities of
their products as part of their marketing strategy to promote brand
loyalty. Nestl´, as the largest ¬rm in the industry, was a major focus of
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their ire (its rivals in the baby milk business include Hipp, Milupa, and
Meiji).
In 1979 a UNICEF/WHO-sponsored conference concluded that there
was a need for a code of practice to govern the marketing of breast milk
74 GLOBAL FINANCE


substitutes. The World Health Assembly, the of¬cial governing body
of WHO, produced a code which Nestl´ signed in 1984, restricting
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advertising, requiring labeling information on the hazards of use, and
prohibiting companies from giving free samples, promoting the prod-
ucts in hospitals and clinics or employing nurses to advise mothers. The
consumer groups agreed to suspend the boycott of Nestl´ products
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that began in 1977.
Today, Nestl´ endorses the code of practice, and states that it ˜˜does
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encourage and support exclusive breastfeeding as the best choice for
babies during the ¬rst months of life™™ and ˜˜does warn mothers of the
consequences of incorrect or inappropriate use of infant formula™™. It
also says that it believes that ˜˜there is a legitimate market for infant
formula when a safe alternative to breast milk is needed.™™
The code itself is not enforceable. In the 1980s and 1990s various
countries, including the Philippines, Thailand, Kenya, Malaysia, Costa
Rica, and Brazil, introduced controls over the marketing of baby milk.
Consumer groups revived the boycott, claiming that Nestl´, along with
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industry competitors, were violating the spirit of the code, in particular
by making donations of baby formula to hospitals. Ironically, increasing
HIV infection in Africa has created a new demand for baby formula to
prevent the spread of the disease, and there is now a dilemma for both
companies and regulators over how to respond.


KEY INSIGHTS
» Firms with small home markets have to seek growth abroad.
Like Nokia, the mobile phone maker (featured in Chapter 7
of the ExpressExec book Valuation), Nestl´ took this leap in
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the late 1800s, merging with the Anglo-Swiss Condensed Milk
Company, controlled by American Charles Page in 1878. With
its broad diversity of products and decentralized management
system, the company is one of the very few MNCs that could be
described as ˜˜transnational.™™ It is market-focused, concentrating
on horizontal expansion, both geographically and by acquiring
new products.
» Regional management of operations has enabled Nestl´ to take
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advantage of local cultural biases and preferences to enhance
IN PRACTICE: GLOBAL SUCCESS STORIES 75



the appeal of its products locally. Brands not known in Europe
or North America are mainstays in Asia, like Milo, a milk-based
chocolate drink. In many cases Nestl´ markets identical products
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under different names in different regions.
» Most large companies, particularly those selling to consumers,
are subject to intense public scrutiny by pressure groups, partic-
ularly in the developed world but increasingly also in LDCs.
The days when such groups could be dismissed as radical
extremists are long gone. Public attitudes have changed on
many issues over the last few decades. Problems of LDC devel-
opment, globalization, energy conservation, environmentalism,
˜˜green™™ and genetically-modi¬ed food, product labeling, and so
on are everyday topics of discussion in the media and are impor-
tant factors in government policy-making. They have profound
effects on the way large companies do business. Like other ¬rms,
Nestl´ has to respond to these issues, and actively participates
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in the process, publishing detailed information on its efforts at
environmental conservation and adhering to a wide range of
international codes of business practice.
» Nestl´ has occasionally been accused of ˜˜going slow™™ on reform.
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It is hard to see how any large corporation could do otherwise.

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