Big firms to proliferate in emerging markets, study says
The number of large companies in emerging markets will surge in coming years, and they will become competitors but also customers for rich-country firms, a new study says.
Almost three-quarters of today’s 8,000 companies with annual revenue of US$1 billion or more are based in advanced economies.
By 2025, a further 7,000 will have joined their ranks, with seven out of 10 of them based in emerging economies, McKinsey Global Institute (MGI) projects.
Emerging markets have fallen out of favour with investors this year because of worries about the sustainability of China’s economic model, slower growth in India and Brazil and concern about the ability of the likes of Indonesia and Turkey to attract funds to plug their current account deficits.
MGI director Richard Dobbs said there would be hiccups along the way, but he saw little to stop the rise of the big emerging-market corporation.
“Yes, it’s going to be a turbulent ride for the next 20 or 30 years as we go through this massive transition. But the rise is going to happen. Some countries may stall, but there are enough emerging markets that there’s a degree of inevitability about this,” Dobbs said.
The first wave of development in emerging markets was based on cheap labour, MGI said. As wages rise, a second wave has unfurled – selling to newly rich consumers.
The third, overlapping wave is breaking as companies bulk up, propelled by urbanisation, income growth and exchange rate appreciation.
By 2025, emerging-market firms are likely to account for 40 per cent to 50 per cent of the Fortune Global 500, twice today’s share and up from just 5 per cent in the period 1980-2000, reckons MGI, the research arm of the consultancy McKinsey & Co.
The China region alone will account for almost a quarter of the Fortune Global 500 in 2025.
“By 2025, some of the global leaders in many industries may be companies we have not yet heard of, and many are likely to be based in cities that we could not point to on a map,” MGI said.
The projected trend will shift more of the world’s decision making, capital, standard setting and innovation to emerging markets.
“The corporate giants that emerge in the years ahead will be central actors shaping the global economy. They will fuel local growth in some regions and reconfigure global transport and communications networks,” the report said.
The proliferation of large companies is likely to generate increased competition for markets, resources and talent.
What’s more, companies based in emerging markets could be sources of low-cost innovation that could disrupt entire industries. But MGI said their growth will also represent a major opportunity for service firms and suppliers.
“Developed-world companies need to change their mindset from seeing emerging markets as a source of cheap labour and of consumption and add emerging markets as a source of corporate customers,” Dobbs said.