By Maria Borga and Monika Sztajerowska of the Investment Division in the OECD Directorate for Financial and Enterprise Affairs.
Corporate divestments happen more often than you think
News of investment by a foreign multinational is usually celebrated but corporate divestments – just as break-ups – are less frequently advertised.
Yet, divestment is a frequent global phenomenon. OECD research shows that one in every five foreign-owned firms is divested every five years. A 2019 global survey also suggests that over 80% of companies are planning to divest some of their operations in the next two years, partly due to the current geopolitical and trade tensions. Until now, little has been known about the global scale of foreign divestment, and what it means for the companies and communities affected and their economies.
When you are left behind – what happens next?
Breaking up hurts, in particular when you are, or work for, a business unit that is cast away. OECD research also shows that firms that have been foreign-owned and then sold-off to domestic investors, experience a drop in sales and value-added of close to 30% and a fall in employment of 15%, among other impacts (Figure 1). Michael Moore’s 1986 film “Roger and Me” visualises how corporate downsizing can impact the lives of workers and local communities.
But these consequences tell only one part of the story. OECD research also shows that many of these abandoned foreign-owned affiliates continue to outperform peers that have never been foreign-owned. A 2013 study shows that workers in foreign-owned companies tend to be better equipped to excel in new (business) relationships and to earn higher wages. This leads us to conclude that Alfred Lord Tennyson’s words “’tis better to have loved and lost, than never to have loved at all” ring as true in the corporate world as they do in life.
What can policy makers do about it?
In the corporate world, new mergers and acquisitions are announced as frequently as engagements, and divestments as frequently as divorces and separations. General Electric’s announcement of a sale of more than USD 20 billion of its non-industrial segments in 2018 in an effort to generate resources is a recent example. More generally, in the aftermath of the global financial crisis, many firms – in particular in the financial sector –were obliged to rethink their global strategies and pull out from certain markets. Does this mean that divestments are simply a fact of corporate life or can we do something about them?
The old saying “it’s not you, it’s me”, is sometimes true: the OECD study finds that business-group wide considerations (such as the overall size, internationalisation, liquidity ratio and debt levels) are more important than the performance of the business unit itself. Another finding is that policies have a clear role to play, not only pure business considerations.
So what do we learn?
- Work on yourself: Considering changes in the cost structure for firms operating locally is an important part of the picture. High unit labour costs – a proxy of countries’ competitiveness – are one of the most important predictors of divestments. Meanwhile, higher labour market efficiency (e.g. hiring and firing costs) significantly reduces divestment probability.
- Be consistent and don’t cheat: Macroeconomic stability plays an important role. Exchange rate volatility increases the odds of a company being divested and the effect is stronger than exchange rate levels or political instability. Corporate partners, much like life partners, don’t like cheating: improved control of corruption significantly reduces the probability of getting dumped.
- Balance thinking about others and yourself: Thinking about the possibility of divestment may need to be balanced with other policy goals. Regulations that can bring important social and other benefits – e.g. increased environmental protection – can also increase divestments. Regulatory impact assessment and stakeholder engagement can help governments balance these various objectives.
- Deeper and more meaningful relationships remain stronger than shallow ones: Foreign affiliates operating in countries connected with that of its headquarters through a stable free trade agreement – such as a single market or a customs union (including the EU) – are significantly less likely to be divested than those that have no such agreement or only a shallow one in place.
Finally, what makes you fall in and out of love are two different things. What initially attracts partners may not be what keeps them in the relationship, if other things are not right. Research shows that investment attraction and retention react to different stimuli. For example, changes in taxation and infrastructure development appear relatively less important once the multinational firm has already located in the economy. Other OECD work also shows that governments can provide firms with useful aftercare services and engage in successful policy advocacy through their investment promotion agencies. The message is, hence, clear: given current macroeconomic and political instability, investment retention may need a bit more of policymakers’… love and care.
Ernst & Young (2019), Global Corporate Divestment Survey, www.ey.com/en_gl/divestment-study
Alfred Lord Tennyson’s In Memoriam: 27, 1850 https://poemsdisentangled.wordpress.com/2016/09/13/tis-better-to-have-loved-and-lost
CNN (2018), “The dismantling of GE continues: It is selling yet another business”, www.edition.cnn.com/2018/11/06/business/general-electric-current-sale-lighting/index.html
Borga M., Ibarlucea-Flores P. and M. Sztajerowska (2020), “Divestment Decisions by Multinational Enterprises: Trends, Impacts, and Drivers – A Cross-country Firm-level Perspective”, OECD Working Papers on International Investment, No. 2019/03, OECD Publishing, Paris. https://doi.org/10.1787/5a376df4-en.