Where is Home for the Global Firm?
Global markets are changing the relationship between firms and nation-states in important ways, says HBS professor Mihir A. Desai. His new working paper, "The Decentering of the Global Firm," offers a practical framework for business leaders to think strategically about where to locate their company's financial and legal homes, and managerial talent. Q&A with Desai. Key concepts include:
- Three critical aspects of a firm's national identity—its legal and financial home and its center for managerial talent—are increasingly distributed worldwide.
- There are benefits and costs to decentering, says Desai. The challenge for managers is to choose each home wisely.
- Firms that have left their traditional homebase include News Corporation, Shire Pharmaceuticals, Halliburton, and WPP Group, among others.
Not so long ago, multinational firms were associated with a specific national identity. Caterpillar was a prototypical U.S. company. Honda was a classic Japanese company. The location of headquarters of these and other firms served as proof, and nations took pride in the achievements of their homegrown companies.
But all that is changing as firms shape and adapt to global markets.
Says HBS professor Mihir A. Desai, "The defining characteristics of what makes a firm belong to a country—where it is incorporated, where it is listed, the nationality of its investor base, the location of headquarters functions—are no longer bound to one country. Why are these changes taking place, and what are their consequences?"
As an expert on international corporate and public finance, Desai presents a practical framework for firms to respond in his working paper "The Decentering of the Global Firm" [PDF].
To start, responding strategically to these changes requires a reconceptualization of what a corporate home is, says Desai. "Managers need to make conscious choices about how to unbundle the activities that have traditionally been centered in a home country headquarters."
When managers think about the best location or locations for managerial talent, for instance, they should be aware that reallocating talent is neither costless nor easy. Interpersonal relationships and internal communication networks rise in importance. As Desai writes in the paper: "Senior management teams that are not well-integrated will not be able to handle such reallocations, as trust and preexisting relationships will be particularly critical in these settings. Growing a culture is also much more challenging in such a 'decentered' setup, and such reallocations are best suited for more mature companies.
"These costs," he continues, "while readily identifiable and daunting, must be compared with the potentially large benefits created by managerial specialization and the ability to access differentiated resources easily."
In the following Q&A, Desai explains how and why firms are increasingly decentered. Managers will find food for thought to reconceptualize their corporate home and prepare strategically for the future.
Martha Lagace: What is decentering, and why is it an important phenomenon?
Mihir Desai: We've become accustomed to firms globalizing various aspects of their operations—for example, the fragmentation of production around the world, distribution outlets worldwide, and research and development facilities that capitalize on local talent pools. But we still basically think that firms belong to some home country where they are headquartered. This premise underlies the way we talk about firms and various governmental policies. I use the term decentering to refer to a series of changes that firms are undertaking that contradict that logic. In short, the critical aspects of a firm's national identity that we took as immutable are now rapidly being broken up and distributed around the world, much as other aspects of a firm have been distributed around the world.
In order to understand these changes, in my paper I provide a framework that illustrates the critical dimensions of national identity that are being reallocated and the considerations that should motivate managers as they undertake these changes. I show that there are three critical aspects of a firm's national identity: a legal home, a financial home, and a home for managerial talent. While all of these homes used to be collocated in the country where a firm was born, this is no longer the case. Managers have distributed these homes worldwide, and in the case of a home for managerial talent, they have splinted that as well. Now there can be several homes for senior managerial talent as well.
As one example, consider Genpact. In the early 2000s, Genpact (then known as GECIAS) was the wholly owned, outsourcing operation of General Electric and was the largest outsourcing operation in India. In 2005 GE decided to partially divest this subsidiary to a number of private equity players. By 2007, the firm was named Genpact and was preparing to go public. In the process, its legal home was changed, first to Luxembourg and then to Bermuda. Today, Genpact's only listing is in New York while its managerial talent sits primarily, but not exclusively, in India. With its NYSE listing, is Genpact a U.S. multinational? Or does its mainly Indian managerial talent and its extensive operations in India make it an Indian multinational? Or is Genpact a Bermudian multinational because it is incorporated in Bermuda? With its unbundled headquarters functions, Genpact's national identity is hardly clear-cut. Genpact represents how national identities are mutating and how it is becoming difficult to ascribe firms to particular nation-states.
In my paper "The Decentering of the Global Firm," I describe how these changes represent a natural extension of trends that have been operative for decades in how firms organize themselves, and therefore, these developments are likely not a transitory fad. And then I try to explain what considerations can help managers choose the appropriate legal home, financial home, and home(s) for managerial talent. Finally, I consider the implications for policymakers as firms make these decisions.
Q: How did you come upon these developments and the notion of decentering?
A: It was the happy confluence of several factors. It began in 2003 when some of my large-sample empirical research with [University of Michigan professor] Jim Hines led me to think harder about moves that several firms, including Stanley Works, had made toward "expatriating" or leaving the United States for Bermuda. While their move was blocked, I was struck by their motivations and the relative ease with which a firm could do this—and the consequences for shareholders, managers, and the government. At the same time, I was writing a case, "Nestlé and Alcon—the Value of a Listing," with Vincent Dessain (HBS MBA '87) of the HBS Europe Research Center and research associates Mark Veblen and Anders Sjoman on Nestlé's decision to spin off and list Alcon, its ophthalmological company. There were many fascinating angles to the decision to list Alcon, but one of the most striking was the fact that Nestlé's bankers fashioned a solution for Alcon that would preserve its Swiss identity for some purposes yet make it look completely American for various other reasons. It seemed to me that a firm could easily change its national identity as well as have more than one national identity!
Finally, in my MBA elective course International Financial Management, students are required to write a paper. Two really great students—Billy Rahm and Stefan Kowski (both MBA '06)—wrote a paper on the "repotting" of the manufacturer Celanese. Much as in a garden setting, they documented how a private equity shop effectively scooped up Celanese, stripped it of its German identity, and repotted it in the United States nine months later, thereby closing a large valuation gap. And there were other situations that were similar. I was struck by the ease with which this transaction was completed, the large returns earned in the process, and the fact that this motivation (closing a valuation gap) was completely distinct from any other motivations that I had seen.
Ultimately, I realized that all these things were of a piece. That is, these were not all weird, one-off transactions, but reflected something new in the geography of firms and the ways in which firms related to nation-states. And I wanted to put together a way for managers, academics, and policymakers to understand these nascent changes.
Q: Have there been more recent developments along these lines? What reactions have you received as you share these ideas?
A: Of course, once you write something like this, you come to see many things through these lenses. As reported in the Financial Times in October, several UK firms including Shire Pharmaceuticals and WPP Group have announced their intention to leave the UK, creating a major stir. Halliburton has moved its home for managerial talent to Dubai. Transocean recently announced it was reincorporating to Switzerland. News Corporation left Australia for the United States. Even Bono and U2 left Ireland!
I've had the good fortune of sharing my research with various audiences, including my International Financial Management class, some HBS alumni groups, and the advisory board of the HBS Europe Research Center. Some people react to these changes with dismay, because they feel that this phenomenon represents a breakdown of corporate ethics and national pride. Others, particularly managers in Asia and the Gulf, are more accustomed to thinking about these issues, and many have begun to make such changes. I'm somewhat more sanguine about these developments. I think they are responses to secular changes, and they will not be reversed with much handwringing.