(originally published by Booz & Company)

How Multinational Corporations Are Buffered from Financial Crises

Multinationals can increase exports from markets hurt by a decline in local sales.

Title: Immediate Responses to Financial Crises: A Focus on U.S. MNE Subsidiaries (Fee or subscription required)

Authors: Desislava Dikova (Vienna University of Economics and Business), Roger Smeets (University of Amsterdam), Harry Garretsen (University of Groningen), and Hans Van Ees (University of Groningen)

Publisher: International Business Review, vol. 22, no. 1

Date Published: February 2013

U.S.-based multinational firms can use their flexibility and wide-ranging operations to make swift strategic moves that ensure they will withstand—and perhaps even capitalize on—sudden economic storms, this paper finds. The authors’ analysis of more than 20 years of data shows that in times of extreme financial turbulence, multinationals can often tap their exporting infrastructure and international network to quickly shift output from slumping markets to those with more favorable conditions. By increasing exports to offset declines in local sales, the firms can keep plants open and avoid or limit layoffs.

The few studies that have examined the effect of crises on multinationals’ activities have focused largely on long-term operations rather than on immediate strategic responses. But when a crisis unfolds, as the authors of this paper note, most global corporations survive. Their real goal in times of economic uncertainty should be to minimize the damage they sustain and to exploit any new advantages or opportunities that might appear.

The authors examined the strategic moves made by U.S.-headquartered multinationals in the wake of a banking, currency, or debt crisis (whether alone or combined) that afflicted a country or region in which their subsidiaries did business. In total, they studied the effects of 83 major financial crises from 1983 through 2005, tracking the responses of the majority-owned subsidiaries of U.S.-based multinationals in 51 countries in the two years following a crisis. (The authors say that their findings about local and regional crises warrant further research, including assessing corporate reactions to the 2007–09 global crisis; presumably, multinationals would make similar shifts in a global storm, so long as some markets fared better than others.)

Whereas previous studies have examined the risk of downturns in specific industries or regions, or concentrated on one type of crisis, the authors of this paper say they utilized the most comprehensive database available to capture all those factors over a long time period. Importantly, they were also able to gauge whether countries went through “twin” or “triple” crises—periods when more than one type of shock swept through the economy.

To do so, the authors obtained historical data on the timing and type of systemic crises, as well as sales information from the U.S. Bureau of Economic Analysis, which not only tabulates the total subsidiary output of multinational firms, but breaks down production into local sales in the host country, sales to the United States, and exports to other countries. They focused on the manufacturing sector to ensure they were comparing firms with similar operational challenges and capabilities.

Most countries endured two types of financial crisis (banking, debt, or currency) at one point or another during the study period. Some countries (such as Argentina, Brazil, Nigeria, the Philippines, Turkey, and Venezuela) were hit by all three. Worse yet, several nations went through two crises at the same time (for example, Indonesia, South Korea, Malaysia, and Mexico) or even three simultaneously (namely, Argentina, the Dominican Republic, and Ecuador).

After controlling for several factors, including the companies’ market size and labor costs, the authors found that the effects of banking and debt crises on subsidiary sales were minimal when the crises occurred at separate times. However, in the wake of currency crunches, multinational subsidiaries increased their export sales (excluding sales to the U.S.) by 4.5 percentage points in the year following the crisis and by 3.3 percentage points two years later. Because the prices of locally made products decline when a currency depreciates, those products become more attractive in export markets, the researchers note, encouraging subsidiaries to divert output from sputtering local markets to more prosperous foreign destinations.

When a local economy was buffeted by two or three crises striking simultaneously, there was even more of an impact on subsidiary sales. After dual shocks, the authors found that exports to the rest of the world (again, excluding the U.S.) jumped substantially—by 4.9 percentage points the year following the shocks and 5.6 percentage points two years after. (The additional increase was marginal in the case of triple crises. Why dual shocks had a bigger impact than triples is not explained.) Furthermore, preceding either dual or triple crises, local sales were several percentage points higher, showing that subsidiaries made a determined shift toward the global market in anticipation of turmoil on the domestic front.

Taken together, the authors write, the results support their theory that financial upheaval increases the value of “across-country” growth over “within-country” development, as multinational firms can exploit their ability to shift resources and target different markets. In the best of times, subsidiaries are designed to operate as a foothold for future growth in local economies, but when those foreign markets stumble and their demand temporarily dries up, multinationals can redirect their production facilities toward international exporting.

In other words, managers at multinational firms would do well not to panic during times of financial discord. Instead of ordering layoffs or plant closings in the face of lower local demand, managers should call on other subsidiaries in their corporate network to determine where else their products might sell and then assist with the distribution. Differentiating between types of crises, and determining whether the local economy is in store for a multipronged set of downturns, can also help managers implement the right plan.

“Rather than initiating a long-term strategy change aiming at a termination of local operations,” the authors write, “managers can use the multinational’s network to immediately assist subsidiaries in [crisis]-stricken locations, thus retaining local labor and maintaining their commitment to the local community in difficult times.” 

Bottom Line:
When economic strife hits, the global operations of multinationals are an asset that allows them to shift their focus from troubled domestic fronts to more robust foreign markets, in effect mitigating the risks plaguing a specific country or region. Particularly when more than one type of financial crisis strikes at the same time, export sales from the affected area tend to increase, thanks to the flexibility of the multinationals’ production capabilities and target markets. 

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