Global Business 3rd Edition by Mike Peng

Exercise 14

A number of MNEs have moved headquarters (HQ) overseas. In general, there are two levels of HQ: business unit HQ and corporate HQ. At the business unit level, examples are numerous. In 2004, Nokia moved its corporate finance HQ from Helsinki, Finland, to New York. In 2006, IBM's global procurement office moved from New York to Shenzhen, China. In 2009, Nomura transferred its investment banking HQ from Tokyo to London. Examples of corporate HQ relocations are fewer, but they tend to be of higher profile. In 1992, HSBC moved corporate HQ from Hong Kong to London. Similarly, Anglo American, Old Mutual, and SAB (later to become SABMiller after acquiring Miller Brewing Company) moved from South Africa to London. In 2004, News Corporation moved corporate HQ from Melbourne, Australia, to New York. In 2005, Lenovo set up corporate HQ in Raleigh, North Carolina, home of IBM's former PC division that Lenovo acquired. The question is: Why?
If you have moved from one house to another in the same city, you can easily appreciate the logistical challenges (and nightmares!) associated with relocating HQ overseas. One simple answer is that the benefits must significantly outweigh the drawbacks. At the business unit level, the answer is straightforward: the "center of gravity" of the activities of a business unit may pull its HQ toward a host country. See the following letter to suppliers from IBM's chief procurement officer informing them of the move to China:
IBM Global Procurement is taking a major step toward developing a more geographically distributed executive structure.... By anchoring the organization in this location, we will be better positioned to continue developing the skills and talents of our internal organization in the region,... Clearly, this places us closer to the core of the technology supply chain which is important, not only for IBM's own internal needs, but increasingly for the needs of external clients whose supply chains we are managing via our Procurement Services offerings. As IBM's business offerings continue to grow, we must develop a deeper supply chain in the region to provide services and human resource skills to clients both within Asia and around the world.
At the corporate level, there are at least five strategic rationales. First, a leading symbolic value is an unambiguous statement to various stakeholders that the firm is a global player. News Corporation's new corporate HQ in New York is indicative of its global status, as opposed to being a relatively parochial firm from "down under." Lenovo's coming of age is, no doubt, underpinned by the establishment of its worldwide HQ in the United States.
Second, there may be significant efficiency gains. If the new corporate HQ is in a major financial center such as New York or London, the MNE can have more efficient and more frequent communication with institutional shareholders, financial analysts, and investment banks. The MNE also increases its visibility in a financial market, resulting in a broader shareholder base and greater market capitalization. Three leading (former) South African firms, Anglo American, Old Mutual, and SABMiller, have now joined the FTSE 100-the top 100 UK firms by capitalization.
Third, firms may benefit from their visible commitment to the laws of the new host country. They can also benefit from the higher-quality legal and regulatory regime they now operate under. These benefits are especially crucial for firms from emerging economies where local rules are not world-class. A lack of confidence about South Africa's political stability drove Anglo American, Old Mutual, and SABMiller to London. By moving to London, HSBC likewise deviated from its Hong Kong roots at a time when the political future of Hong Kong was uncertain.
Fourth, moving corporate HQ to a new country clearly indicates a commitment to that country. In addition to political motivation, HSBC's move to London signaled its determination to become a more global player, instead of being a regional player centered on Asia. HSBC indeed carried out this more global strategy since the 1990s. However, in an interesting twist of events, HSBC's CEO relocated back to Hong Kong in 2010. Technically, HSBC's corporate HQ is still in London, and its chairman remains in London. However, the symbolism of the CEO's return to Hong Kong is clear. As China becomes more economically powerful, HSBC is interested in demonstrating its commitment to that important part of the world, which was where HSBC started. (HSBC was set up in Hong Kong in 1865 as Hongkong and Shanghai Banking Corporation.)
Finally, by moving (or threatening to move) HQ, firms enhance their bargaining power vis-à-vis that of their (original) home-country governments. Tetra Pak's 1981 move of its corporate HQ to Switzerland was driven primarily by the owners' tax disputes with the Swedish government. A few years ago, Seagate Technology, formerly registered in Silicon Valley, changed its incorporation to the Cayman Islands in search of lower taxes. More US firms may follow such a move. Having already paid overseas taxes, US MNEs naturally resented the Obama administration's proposal to extract from them $109 billion in additional US taxes. "Doesn't the Obama administration recognize that most big US companies are multinationals that happen to be headquartered in the United States?" asked Duncan Niederauer, CEO of NYSE Euronext in a BusinessWeek interview. Likewise, as three of Britain's large banks-Barclays, HSBC, and Standard Chartered, the three best-run ones that did not need bailouts-now face higher taxes and more government intervention, they, too, have threatened to move their HQ out of London. The message is clear: If the homecountry government treats us harshly, we will pack our bags.
The last point, of course, is where the ethical and social responsibility controversies erupt. According to the Economist, Italy "regularly goes into hysteria over whether Fiat will stay." After Fiat's acquisition of Chrysler in 2009, whether the combined group's HQ would be in Turin or Detroit became an emotionally charged debate. (Fiat's HQ eventually stayed in Turin.) Although the absolute number of jobs lost is not great, these are high-quality (and high-paying) jobs that every government would prefer to see. For that reason, different cities in China, such as Beijing and Shanghai, offered very lucrative packages to attract regional HQ. For MNEs' home countries, if a sufficient number of HQ move overseas, there is a serious ramification that other high-quality service providers, such as lawyers, bankers, and accountants, will follow them. In response, proposals are floating to offer tax incentives for these "foot-loose" MNEs to keep HQ at home. However, critics question why these wealthy MNEs (and executives) need to be subsidized (or bribed), while many other sectors and individuals are struggling.
Case Discussion Questions :
What are the drawbacks and benefits associated with moving business unit and corporate HQ to another country?