This article is written by an academic in Oxford for a newspaper in India run in conjunction with a newspaper in the US on a subject that is relevant anywhere in the world. It illustrates rather well the topic of this article. A few years ago, we had a clear notion of what made in Germany meant—it meant produced by German workers, sitting in a company with German owners with headquarters somewhere in Germany. Now, that is no longer the case. We consume goods and services whose origin and ownership we do not know and for the most part we do not care about. Should we? Does it matter who owns, runs, writes for this paper or, in particular, where in the world any of these people sit?
At first sight, the categorical answer that economics appears to give us is no. We really do not mind where the capital for the company comes from, the nationality of the board members or the location of the workers. We just want the cheapest of all of them to be selected. If investors in the US can provide cheaper capital to Indian firms than investors in India, Indian consumers should welcome foreign investment. If the best managers of car components are Japanese, Indians should welcome Japanese foreign direct investment into automobile manufacturing. If Indian technology companies employ the most highly skilled employees and have the best technical training in the world, then the UK should welcome the acquisition of its technology companies by Indian companies. On this basis, globalization is viewed as an unequivocal force for good because it allows the cheapest sources of capital, labour and management to be purchased from anywhere in the world.
To its supporters, the globalization message is as simple, powerful and important as its precursor nearly 200 years ago—free trade. Erecting barriers to the free flow of capital and corporate control is as pointless and detrimental as barriers to trade. Eliminating these barriers enhances competition and corporate efficiency. And yet many, if not most, countries still retain significant barriers (at least in relation to foreign acquisitions). In Europe, France erected restrictions around 11 industries because of their national importance; and there has been opposition in Spain to the acquisition of Endesa by the German power giant E.ON.
These impediments to acquisitions are created by a combination of laws, corporate ownership and corporate structures. Some of the most significant are in the US. State laws frequently prevent hostile acquisitions, poison pills make it expensive or impossible for acquirers to purchase target firms against the wishes of incumbent management, and staggered boards that prevent the replacement of boards of directors en masse make it difficult for acquirers to take control of US firms, even if they can seize ownership. In contrast, the UK is one of the most open markets to acquisitions, including foreign ones, and it is therefore no coincidence that a UK steel company, Corus, is being acquired by the Tatas.
Given the supposed advantages of international finance and ownership of firms, why do countries erect barriers to foreign acquisitions? Governments and their citizens appear to worry more about the location of ownership than simple economic theory suggests. One answer that rather more sophisticated economic theory suggests is that the location of control may matter. It might matter, for example, whether the headquarters of a firm are situated in London or Mumbai.
This issue of the location of control is one that I have been exploring with a number of colleagues in the UK. The distance between where a firm is run (namely, its headquarters) and its activities, may be of more significance than was previously thought. Let me take a simple example: In the UK, there is a confectionery manufacturer called Rowntree, which is based in York in the north of England. A few years ago, the company was taken over by the Swiss company Nestlé. The acquisition caused considerable disquiet not least because Rowntree was very closely associated with its home town of York and contributed in numerous ways to the life and welfare of the town. It was feared that this association would be lost with the acquisition.
On the other hand, Nestlé argued that Rowntree would benefit from improved efficiency and the global reach provided by its new owner. A foreign acquisition could, therefore, introduce a more commercial approach to running the company which would help to preserve its future. That, in essence, is the debate—a locally owned firm upholds the values of local communities and provides a degree of commitment that foreign owners do not possess. Foreign firms can inject more commercial management that is less influenced by the vested interests of management, employees and local politicians. Where does the balance of advantage lie?
The work that I have done with Wendy Carlin and Andrew Charlton suggests that foreign ownership improves the efficiency with which capital is allocated—in other words, the Nestlé arguments could be right. On the basis of economic efficiency, we should welcome the physical separation that global ownership creates between where control and corporate operations reside. What, however, is much more difficult to measure is the long-term implications that the Rowntree debate illustrates. Whether foreign control in the long term undermines the skill base, the research and development activities and the fabric of local communities is an issue to which I will return in a later article.
The author is Colin Mayer, Dean at the Saïd Business School, University of Oxford. The views are those of the author, and not those of either the Saïd Business School or The University of Oxford
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