CORPORATE VIEW

The rise of the micro-multinationals

New technology and business models mean that companies can go global from day one and use their small scale to compete in the big league.

In the past, companies followed a fairly predictable trajectory. They began as local concerns; expanded regionally; consolidated nationally before a handful a large companies ventured overseas to become multinationals. While this process has accelerated – Japanese companies went worldwide faster than US firms, Korean companies were quicker still and China’s corporates became global even more rapidly – the basic stages of development remained the same.

Today, small and medium-sized enterprises (SMEs) can go global at launch, or strategically enter new markets at their own pace – there’s no need to gradually scale up a business or even have a physical presence in every market where a company plans to operate. “In the 21st century, you don’t have to be big to go global,” explains Raj Subramaniam, global marketing and communications at FedEx Services. “Today, all you need is a mobile device, a shipping platform and a big idea.”

Democratising business

Opportunities to create and grow companies have been revolutionised by the advent of new technology. “Even tiny companies with a handful of employees have access to communication services that only the largest multinationals could afford 20 years ago,” says Hal Varian, chief economist at Google. “These micro-multinationals can operate on a global scale because the cost of computation and communication has fallen dramatically.”

Laura Tyson, professor at the Haas School of Business at the University of California and Sarah Lund, partner with the McKinsey Global Institute agree: “Digitisation disrupts everything: it expands opportunities for more types of firms… to participate in the global economy.” They note that platform companies such as Alibaba and Amazon “are turning millions of small enterprises around the world into micro-multinational exporters.”

According to Ann Mettler and Anthony Williams of Brussels-based think tank Lisbon Council for Economic Competitiveness and Social Renewal, micro-multinationals have benefited from the increased openness of the global economy, which enables them to enter markets with a minimum of bureaucracy and overhead expenses. The ‘transaction costs’ identified by Nobel laureate Ronald Coase are minimised, potentially reducing the dominance of established firms. At the same time, transportation systems and logistics platforms have become cheaper and more efficient.

Furthermore, new sources of finance have facilitated the accelerated global expansion of SMEs. In June, Amazon announced that it had loaned more than the equivalent of €880 million to around 20,000 merchants on its platform in the past 12 months alone while in May, PayPal said its Working Capital programme had provided the equivalent of €2.6 billion in loans since 2013. “Amazon is providing capital to small businesses to help them expand inventory and operations at a critical period of their growth,” explains Peeyush Nahar, vice president for Amazon Marketplace. In the world of trade finance, Danish shipping company Maersk Line has begun offering importers and exporters lower cost financing for their shipping costs: it doesn’t require collateral as it is carrying the goods at sea and has detailed buyer and seller information in its database. Maersk Line expects to have lent $200 million by the end of the year.

Not just tech

Technology companies selling digital services have been at the forefront of the micro-multinational trend. However, ‘real world’ micro-multinationals are also flourishing, due to a variety of factors relating to globalisation.

Firstly, improved communications and electronic sales channels such as e-commerce have made it easier than ever to reach new customers. According to research by FedEx, 80% of SMEs generate revenue through e-commerce.

Secondly, companies selling physical goods have been aided by sustained falls in the cost of transportation and logistics. In the US, traditional transport modes – trucking, rail, water and air cargo – reached a near-record low of 7.5% of GDP in 2016 compared to 18% in 1979 before transportation was deregulated. Comparable historical figures don’t exist for the EU but costs are currently 9%-10% of GDP, according to the European Commission.

While the barriers to entering a new market have declined, micro-multinationals have retained all of the advantages of being small. According to Tyson and Lund, they have an “unparalleled ability to respond promptly to changing market developments, a collaborative DNA that often translates into superior innovation performance and the lack of the institutional inertia and legacy relationships plaguing larger organisations.” These characteristics help small companies differentiate themselves in a crowded marketplace.

In the spirits and beer industry – initially in the US and more lately in Europe – there has been a huge growth in craft production, which focuses on authenticity and provenance. While small, these companies have a global mindset and use the power of the internet to reach a huge potential market.

“Europe's brewing sector is experiencing a renaissance,” explains Pavlos Photiades, president of industry association The Brewers of Europe. “Medium-sized undertakings are demonstrating a tremendous capacity for innovation while smaller breweries are reaching out to new generations.” The number of new breweries opening across the EU almost doubled from 2010 to 2016: there were 588 new microbreweries established in the year from 2014 to 2015, a rise of 13% on the previous year.

Similar developments are occurring in other sectors that have traditionally been dominated by global firms such as cosmetics. Micro-multinationals’ flexibility means they can pre-empt consumer trends and, because they can target global niches, they don’t have to compromise their vision. “To be a disrupter, you have to ignore everything and everybody and instead just focus on one thing: the consumer,” says Brandon Truaxe, founder of The Ordinary, a new skincare brand which uses innovative ingredients, simple packaging and is competitively priced.

The SME sector in Germany – known as Mittelstand – could be seen as a forerunner of today’s micro-multinationals. Many of its companies have successfully found global niches for their products. According to Germany Trade & Invest, 40% of the country’s medium-sized companies export and their international activities are growing: they earned around 20% of their turnover through exports in 2010 – around €186bn – a 13% increase since 2004.

A plurality of products and services

The prevailing wisdom about the emerging business environment – typified by platform companies such as Airbnb – is that easy access to global markets will result in “winner takes all markets” in which “small differences in performance give rise to enormous differences in reward”, according to Robert Frank and Philip Cook, authors of the Winner-Take-All Society. Certainly, in some technology-driven areas that seems to be the case: the creation of a platform with strong networking effects – such as Facebook’s – makes the possibility of credible competition extremely difficult.

Yet even in the technology-driven world, this is not entirely true. Although Uber has gathered more investment than other ride-sharing companies (and dominated the headlines), its recent setbacks have highlighted the potential of competitors such as Lyft, which take a more conciliatory approach to regulations.

In the ‘real world’ economy, the rise of micro-multinationals shows this tendency to be even more pronounced. In reality, the ability to access a global marketplace should enable companies to specialise and innovate, not just in areas such as boutique gin production but in household products that until recently were dominated by a handful of multinationals. To be sure, the mass market will be served by a handful of global providers – but there will be plenty of opportunity for niche firms with new business models.

The example of Local Motors, an Arizona-based car company with a European headquarters in Berlin, indicates the ingenuity and dynamism that micro-multinationals can bring to traditional industries: Local Motors is not going to displace global car giants but complement them. The company has an online network of 12,000 freelance designers from 121 countries that collaborate on car design: its most recent product is Olli, an autonomous shuttle that is powered by IBM Watson’s cognitive abilities.

Local Motors does not have huge manufacturing facilities and instead uses a network of micro-factories to rapidly produce products: Olli went from design to production in just three months, is already on trial in the US and will soon be trialled in Copenhagen.Local Motors’ size enables it to match product development to the speed of technological change and consumer preferences, according to Jay Rogers, co-founder and CEO. It’s a blueprint that is enabling the rise of micro-multinationals in many sectors across the world.

Of course, not all of the barriers to global expansion by micro-multinationals have been pulled down: plenty of non-tariff barriers and restrictions on the provision of services remain. Indeed, the trajectory of regulatory change is not solely in micro-multinationals’ favour, as the removal of Uber’s licence in London in September and tougher restrictions on Airbnb in Barcelona and other cities show. Significant questions also remain unanswered about the potential profitability of many micro-multinational business models. Nevertheless, after a century in which bigger has usually been better, the tide is starting to turn: micro-multinationals are staking a claim to the future.

 

Sources

  • http://fedexbusinessinsights.com/en/sme/micro-multinationals-and-how-they-will-define-our-era/
  • http://www.imf.org/external/pubs/ft/fandd/2016/09/varian.htm
  • https://www.project-syndicate.org/commentary/digital-globalization-opportunities-developing-countries-by-laura-tyson-and-susan-lund-2016-03
  • http://www.lisboncouncil.net/publication/publication/81-the-rise-of-the-micro-multinational-how-freelancers-and-technology-savvy-start-ups-are-driving-growth-jobs-and-innovation.html
  • http://www.businesswire.com/news/home/20170608005415/en/Amazon-Loans-3-Billion-20000-Small-Businesses
  • http://www.logisticsmgmt.com/article/logistics_costs_fall_for_first_time_since_great_recession_new_report_says
  • http://www.brewersofeurope.org/site/media-centre/post.php?doc_id=924
  • https://www.ft.com/content/dec5132e-2f2a-11e7-9555-23ef563ecf9a?mhq5j=e1
  • https://www.gtai.de/GTAI/Content/EN/Invest/_SharedDocs/Downloads/GTAI/BLG/blg-mittelstand-in-germany.pdf?v=2

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