Last year was a turning point for the global economy. According to the International Monetary Fund, in 2013, emerging economies made up a higher proportion of the world’s collective GDP (adjusted for purchasing price parity) than advanced ones. That might seem like bad news for the old guard, but, in fact, it is an opportunity. Although the last twelve months have not been kind to emerging markets, forecasters still project significant long-term growth in many up-and-coming economies. In telecommunications, for example, a 2014 MarketLine report projected 16.4 percent market volume growth in emerging markets by 2017, four times the projected growth in Europe over the same period.
But it isn’t at all clear that Western corporations have recognized this new reality or how it will change their ways of doing business. Boston Consulting Group’s 2013 Global Readiness Survey found that only nine percent of multinationals’ top executives were based in emerging markets. Some corporations appear more ready and able than others to embrace these new economic realities, but it depends on which side of the Atlantic they are on. According to 2012 estimates from Morgan Stanley, companies headquartered in Europe generated just over 30 percent of their revenue from emerging markets, but U.S. companies got less than ten percent of their revenue from them. Corporate goals and management structures, which are similar among European and American firms, do not explain the difference. In fact, trends suggest that much of the wide transatlantic gap is a product of history -- and of colonialism in particular.
The United States is a former colony, of course, whereas many European countries are former colonial powers. And their former colonies, from Brazil and Colombia to India and Indonesia, make up a significant part of emerging markets. Western European corporations have a competitive advantage: a legacy of colonialism that provides cultural, linguistic, and political ties to many of these countries. The fact that the United States has no such legacy will be a liability as U.S. firms try to catch up to their European competitors and seize new opportunities in the world’s fastest-growing regions.
THE TIES THAT BIND
Jumping into new international markets is a leap of faith. To make the jump less risky, companies will look for the familiar. The economic, social, and cultural characteristics of a former colony might still be foreign (or they might not -- Spain and Portugal share a common language with their former colonies in South America, as France does with many former colonies in Africa), but they are far less foreign than those of a country with no deep historical ties to one’s homeland. For European firms, there is also familiarity in many emerging economies’ political institutions, usually in part a product of European-style governance. For example, the legal systems and constitutions in many former European colonies, such as those of Côte d’Ivoire, Kenya, and Malaysia, are modeled after ones in the former colonial power.
In some cases, former colonial powers continue to maintain formal political and economic ties to their erstwhile colonies. For example, sovereign nations once ruled by the United Kingdom are today part of the Commonwealth of Nations, an intergovernmental organization that facilitates political, commercial, and cultural ties with the United Kingdom. All that makes it easier for businesses to set up shop abroad, send employees to work as expatriates, and hire local talent. Companies are also better able to negotiate special commercial ties and preferential access to markets.
Historical ties go both ways. In many African and Asian countries influential political leaders, government bureaucrats, and military commanders who now hold the economic strings have often been educated and trained in the former colonial power; they value the relationships developed during those formative years. Recent research by IZA, the Institute for the Study of Labor in Bonn, shows that African leaders, in particular, tend to work more closely with former colonial powers than leaders from any other part of the world to attract foreign direct investment.
As a result of their advantages, European companies often win out on bids for development projects, securing lucrative opportunities in key national industries, such as aerospace, defense, telecommunications, and infrastructure. French companies hold major stakes in many African industries, such as Air France’s 20 percent share of Côte d’Ivoire’s national airline, Aire Côte d’Ivoire. Finagestion, a Paris-based holding company, controls many water and electricity concessions in Côte d’Ivoire and Senegal. The Spanish telecommunications giant Telefónica, meanwhile, serves 218 million customers in Latin America and is the leading telecommunications provider in many of Spain’s former colonies, such as Argentina, Chile, and Peru.
With more than 50 colonies during its imperial peak in the early twentieth century, the United Kingdom was the world’s largest colonizer. Today, it also leads the Financial Times Global 500, a ranking of the world’s largest companies, for business by former colonial powers. Today, 31 United Kingdom–based companies are represented on the Global 500, with many direct and expanding business interests in former British colonies. France is second with 23 such companies, followed by Germany (20), the Netherlands (eight), and Spain (six). With the exception of Germany and Spain, the presence of European companies on the Global 500 roughly mirrors their relative size as colonial powers. Nonetheless, the United States does not lag behind for its lack of colonial heritage: 183 American companies are represented in the rankings. In many emerging markets, however, the colonial advantage is still undeniable.
Europe’s leading multinational corporations demonstrate that edge. British American Tobacco (BAT), a $103 billion company and the sixth-largest on the London Stock Exchange, has a presence in over 180 markets. In 2012, 99 percent of its revenue came from outside the United Kingdom. The company’s ties to former British colonies are key to its internationalization: BAT is sold in 35 of 53 former British colonies, covering frontier markets, such as Malawi, Papua New Guinea, and Togo, that few other global tobacco players have dared to touch. In Uganda, where BAT has been operating for 85 years, it controls over 80 percent of the cigarette market. Deeply embedded in Uganda’s agricultural and social development, BAT works closely with the government on improving the livelihoods of farmers and eliminating child labor.
Meanwhile, Telefónica, a $61 billion firm that is Spain’s largest in terms of market capitalization, operates in 12 former Spanish colonies. It earns over 50 percent of its revenue, nearly $40 billion, from Latin America, where Spain’s colonial legacy is strongest. Telecommunications, in particular, seems to benefit from colonial relationships, since former colonies and colonial powers usually have large immigration flows, which create the need for a reliable communications provider that operates in both markets. In general, the telecommunications industry is also highly regulated in many countries in Latin America, locking in the advantaged position that Telefónica won early on through its access to key decisionmakers and shared language and history.
Like Telefónica, two other major telecommunications corporations, France Telecom, valued at over $26 billion, and the United Kingdom’s Vodafone, worth nearly $140 billion, have expanded quickly along former colonial lines. A third of the countries that France Telecom serves are former French colonies; Vodafone operates in 19 former British colonies, which make up nearly a third of its global footprint. Both offer specialized services in different parts of the world: Vodafone’s subsidiary, Safaricom, for example, caters to Kenya with a popular mobile payment system called M-Pesa, and France Telecom recently launched a new African subsidiary, Orange Horizons. Vodafone generates 29 percent of its revenue, or $22.4 billion, from emerging markets. In 2012, about ten percent of French Telecom’s revenue, or $5.4 billion, came from Africa and the Middle East.
European countries with smaller colonial legacies, such as the Netherlands, still benefit from a long history of trading around the world. The Anglo-Dutch consumer goods corporation Unilever, valued at over $117 billion and jointly headquartered in London and Rotterdam, has more than two billion customers worldwide and over 400 brands. It produces everything from shampoo to tea and condiments in 190 countries, and makes 55 percent of its revenue, $38.3 billion, from emerging markets, with 252 manufacturing sites around the world. Unlike many other companies that sell standardized products in multiple countries, Unilever caters to individual markets. Take shampoo. In Pakistan, where many women wear veils, perspiration builds up on the scalp, so Unilever sells a specially formulated salt-cleansing shampoo. In China, Unilever used to include black sesame in its shampoo, which many Chinese believe adds shine to black hair.
Unilever’s strategy has a lot to do with Dutch history. Although their direct colonial holdings were less than those of the United Kingdom, France, and Spain, the Dutch dominated international trade for centuries. Arguably the world’s first multinational, the Dutch East India Company, founded in 1602, traded in a wide variety of goods and built forts, maintained naval operations, and signed treaties with local rulers in countries across Asia. The Dutch West India Company, founded in 1621, was the driving force for Dutch settlement and expansion into the New World. Collectively, the two companies created a foundation for later Dutch corporate operations, signaling an openness to adapt business to new cultures. That mindset, combined with the spirit of trade and exploration and the long-developed infrastructure for international commerce, has given the Netherlands a significant advantage around the world. It is no surprise, therefore, that so many major modern Dutch companies have extensive global reach, from the technology provider Philips, which operates in 100 countries, with about 75 percent of its revenue from outside western Europe, to the beer-maker Heineken, which operates in 70 countries, with over 60 percent of its revenue from outside western Europe.
FOLLOW THE LEADERS
Many U.S. companies cannot call on a colonial legacy to make inroads into foreign markets. And, unlike their European competitors, they must abide by more restrictive laws at home such as the Foreign Corrupt Practices Act, which prohibits the bribing of foreign government officials. The Dodd-Frank financial reform legislation also requires companies such as electronics makers to go through a lengthy certification process from the Securities and Exchange Commission if they use minerals from the Democratic Republic of Congo and several neighboring countries.
Still, it would be wrong to assume that U.S. companies are hopelessly handicapped. Consider the examples of Germany and Italy. Both countries are, of course, former colonial powers themselves, albeit smaller ones than France or the United Kingdom. But today, many former German and Italian colonies in East Africa are economically weak and don’t attract much international investment. In no small measure, that is because of ongoing instability in countries such as Burundi, Eritrea, and Somalia. Nevertheless, Germany still has 20 companies in the FT Global 500, such as Siemens, Bayer, and Volkswagen, with sizable business in emerging markets. Siemens generates nearly 20 percent of its revenue, $21 billion in 2012, from Asia alone. Bayer gets nearly 40 percent of its revenue, over $21 billion, from emerging markets, and Volkswagen gets over a quarter of its revenue, some $71 billion, from them. Even Italy, with a far smaller economy than Germany, has Eni, an oil and gas provider, and Luxottica, the world’s largest eyewear company, both of which get roughly a quarter of their revenue -- $41.7 billion for Eni and $2.1 billion for Luxottica -- from emerging markets.