Macroeconomic developments, heightened regulation, and pressure on margins and profitability are moving risk management to the top of the agenda for CEOs and their boards.
September 2014 | byOmar Costa, Jawad Khan, and Alfonso Natale
September 2014 | byOmar Costa, Jawad Khan, and Alfonso Natale
In 2025, almost 230 Fortune Global 500 companies will be based in the emerging world’s cities, up from 24 in 2000.
October 2013 | byRichard Dobbs, Jaana Remes, Sven Smit, James Manyika, Jonathan Woetzel, and Yaw Agyenim-Boateng
Emerging markets are changing where and how the world does business. For the last three decades, they have been a source of low-cost but increasingly skilled labor. Their fast-growing cities are filled with millions of new and increasingly prosperous consumers, who provide a new growth market for global corporations at a time when much of the developed world faces slower growth as a result of aging. But the number of large companies from the emerging world will rise, as well, according to a new report from the McKinsey Global Institute (MGI). This powerful wave of new companies could profoundly alter long-established competitive dynamics around the world.
MGI’s Richard Dobbs and Jaana Remes discuss the shifting global company landscape and how the coming wave of emerging-market companies could alter long-established global competitive dynamics for both company and city leaders.
Our research shows that the emerging economies’ share of Fortune Global 500 companies will probably jump to more than 45 percent by 2025, up from just 5 percent in 2000 (Exhibit 1). That’s because while three-quarters of the world’s 8,000 companies with annual revenue of $1 billion or more are today based in developed economies, we forecast that an additional 7,000 could reach that size in little more than a decade—and 70 percent of them will most likely come from emerging markets.1 To put this dramatic shift in the balance of global corporate power in perspective, remember that many of the world’s largest companies have maintained their current status for generations: more than 40 percent of the 150 Western European companies in last year’s Fortune Global 500 had been founded before 1900.
Corporate leaders can’t afford to be complacent about a change of such magnitude. In fact, we have seen all this before. In the 1970s and 1980s, Japanese carmakers began gaining global market share and, in some cases, outcompeted their US counterparts. More recently, South Korea’s Samsung has weakened Apple’s grip on the global smartphone market. In the decade ahead, this type of story will play out on a much bigger scale, and the rate at which newcomers topple industry leaders will probably accelerate.
Such up-and-coming companies could disrupt entire industries by designing superior products at lower cost, by bringing them to market faster, and by streamlining business processes. Many of these businesses, having been nurtured in difficult operating environments, are not only more agile than their counterparts from advanced economies but also prepared to invest for the long term, even if this cuts earnings in the next few quarters. Many new players will be setting their sights on expanding into international markets. Business leaders will have to monitor trends constantly to spot new markets and competitors. They need to meet three imperatives.
Today, just 20 major cities host one-third of all large companies. Tokyo is by far the leading hub, with more than 600 large companies. Only nine other cities around the world are home to 100 or more of such companies’ head offices (Exhibit 2).
Of the 20 cities with the largest number of big companies, only 5 are in emerging regions.
In emerging regions, the leading cities for business today are likely to capture a disproportionate share of company growth in the future. The number of large companies based in São Paolo, for instance, could more than triple by 2025. Beijing and Istanbul could have more than twice as many head offices as they do today. Yet company headquarters will become more dispersed across the emerging world: about 280 of its up-and-coming cities could host a large company for the first time, thus becoming new hubs in global industry networks.
Although many city officials focus on luring corporate head offices, relatively few companies actually move them. But as thousands of global businesses expand into new markets, giving themselves a real choice of locations, the more promising opportunity for cities lies in attracting foreign subsidiaries. China is without a doubt the most powerful growth engine for new global companies, and now is the time for forward-thinking cities to build their reputations among its business leaders. The largest foreign subsidiaries cluster heavily in just a few key cities in each region of the world. Thanks to the highly effective efforts of Singapore’s economic-development board, that country is far and away the location of choice for Western multinationals setting up operations in Asia’s emerging economies. Other cities should learn from Singapore’s approach.
The quality of the business environment isn’t the only consideration. Cities with reputations for a high quality of life—such as Prague, Sydney, and Toronto—have been more successful than others in attracting the foreign operations of multinationals. But in selecting locations for future expansion, the emerging world’s more diverse companies may consider a broader set of criteria, including the personal ties of executives educated abroad, the need to diversify family holdings, reputation building at home, or an exceptional willingness to enter frontier markets.
The rebalancing of the global business landscape will probably be even faster and more dramatic than the shift of economic growth to emerging regions. Large companies matter, and not just for their ability to create jobs and generate higher incomes; they are also forces for increased productivity, innovation, standard setting, and the dissemination of skills and technology. Their geographic shift will have profound implications for the nature of competition, including not only the race for resources and talent but also, more broadly, the emerging markets’ efforts to reach the next level of economic development and prosperity.
Richard Dobbs, James Manyika, and Jonathan Woetzel are directors of the McKinsey Global Institute, where Jaana Remes is a principal; Sven Smit is a director in McKinsey’s Amsterdam office.