The disfiguring of big business
Geopolitics is warping multinationals’ commercial decisions
Firms are reshaping their operations, at the expense of their profits
TO HEAR DONALD TRUMP tell the tale, America’s intervention in Venezuela will be a huge boon for American oil firms.
They will win lucrative investment opportunities and spend lavishly on them. The oil will flow and the profits will gush.
Yet the oil firms themselves—and the investors who own them—are not persuaded.
After attending a meeting on Venezuela at the White House, ExxonMobil’s CEO dismissed the country as “uninvestable”.
Since an irritated Mr Trump responded by threatening to exclude Exxon from Venezuela, its share price has actually risen.
For the markets, it seems, any sort of respite from political meddling in a company’s commercial decisions, even if motivated by pique, is a distinct plus.
Alas, such moments are not as frequent as they used to be.
For several years now, commentators (including The Economist) have warned that politicians’ efforts to influence where companies make and sell their wares will undermine the benefits of globalisation and so make multinationals less efficient and less profitable.
Sadly, lots of data already suggest that big, global firms are indeed reshaping their operations in response to political interference—and that reorganisation is not helping the bottom line.
The era of the geopolitical multinational has arrived.
Behemoths beset
Big Western multinationals (defined as firms that receive more than 30% of their sales abroad) account for 70% of the global value of listed firms.
Their profits have swollen to $2.4trn a year.
They employ around 100m people around the world.
McKinsey, a consultancy, reckons multinationals are responsible for two-thirds of global exports.
They are ubiquitous and iconic.
In 2024 5m news articles mentioned one.
Even children far too young to make purchases recognise the golden arches of McDonald’s or Nike’s swoosh.
Multinationals’ march across the world gathered pace in the 1990s, as many Western and developing countries liberalised trade and investment policies.
By the time China joined the World Trade Organisation in 2001, global trade had reached 49% of global GDP, up from 38% a decade earlier.
Flows of foreign direct investment (FDI) soared, peaking at $3trn (5.3% of GDP) in 2007, just before the global financial crisis.
But even in the aftermath of the crash the rich world’s corporate giants were for the most part free to build factories and sell goods where they liked—which, very often, meant China.
International expansion produced many benefits.
Firms gained access to cheap labour and cheap suppliers.
Slowing growth in the West could be balanced by new, fast-growing markets (again, especially China).
Scale meant that firms could cut costs.
That helped when it came to battling local incumbents, which tend to understand their home markets better than foreign interlopers.
Yet over the past decade, despite all the attractions of globalisation, Western firms have become more parochial.
In 2016, according to fDi Markets, a data provider, American multinationals directed just 44% of their capital expenditure to their home market.
That share has climbed steadily since, to an estimated 69% in 2025.
Data from the Bureau of Economic Analysis show that in the five years to 2023 sales by the foreign arms of American multinationals fell by 1% in real terms, whereas domestic sales grew by 8%.
The share of American firms’ employees who are based in America nudged up from 67% to 68% over the same period.
European companies, too, are favouring America over farther-flung markets.
The number of employees of European firms in America grew by 8% to 3m between 2018 and 2023, faster than the expansion in the rest of the world, according to Eurostat, the EU’s statistical agency.
Europe is also investing more in America.
Between 2018 and 2024 the continent’s stock of FDI in America grew from $2.8trn to $3.6trn.
America welcomed some 17% of European greenfield FDI (building a new mine or factory, say, rather than buying one) last year, up from 12% in 2018 (see chart 1).
Data from Morgan Stanley, a bank, show that the share of European firms’ revenue that comes from America grew from 16% to 20% between 2018 and 2024.
Even as they pile into America, Western firms are losing enthusiasm for China.
The country now accounts for 2% of the value of greenfield FDI outflows from America, down from 7% a decade ago.
European flows have declined from 5% to 3%.
European and American firms cut employment in China by almost a tenth between 2019 and 2023.
China used to host more American workers than any other foreign country; now it has slumped to fourth in the rankings (see chart 2).
A number of big companies, including Starbucks, a coffee chain, IBM, a tech firm, and Airbnb, a short-term lodging platform, have pulled out of China, completely or in part.
There is more to the trend than Western firms’ retreat from China, however.
A recent study by the Federal Reserve looked at FDI flows, M&A activity and the capital expenditure of multinationals.
Researchers found that companies were increasingly active in countries that are ideologically aligned with their home country.
The finding held for investment even when America and China were removed from the analysis.
In a similar vein, capital spending fell at subsidiaries located in countries that were diverging ideologically from the home country.
That ideological affinity was measured by how often the two countries voted the same way at the UN general assembly.
Such affinity, it turns out, has almost as close a correlation with the sums invested as physical proximity between the two countries concerned.
Geopolitics, in other words, has become almost as important to investment decisions as geography.
This wholesale realignment of multinationals is not solely owing to geopolitics.
Shifting patterns of economic growth also play a part.
In the past five years America’s economy has hummed along nicely.
Annual GDP growth averaged 2.6% in 2022-25, outpacing much of the rich world.
In contrast, China’s growth was lower than expected over the same period, averaging 5.1% a year.
Europe, for its part, stagnated.
Underlying much of America’s economic outperformance are its consumers.
Between 2020 and 2024 they accounted for 37% of the growth in global consumption.
Chinese consumers furnished only 12%.
Another non-geopolitical factor is the growing competition from Chinese multinationals.
In many areas China’s technological capabilities surpass the West’s.
Multinational carmakers, such as Volkswagen and Nissan, are setting up joint ventures with Chinese firms to gain insight into their cutting-edge technology.
A survey by Kearney, a consultancy, asked firms why they planned to invest in different markets.
For those looking to spend in China, technical innovation topped the list.
Chinese brands are gaining cachet with consumers, too.
One of the woes of Starbucks and other Western coffee brands in China is the emergence of Luckin Coffee.
The Chinese firm now has three times as many coffee shops in the country as Starbucks, Costa and Peet’s, two other Western chains, combined.
A similar pattern applies globally.
Li Ning and Anta, two Chinese sportswear firms, are gaining market share, threatening Nike and Adidas.
Chinese firms dominate the smartphone market in Africa and South-East Asia.
But political meddling also plays a big part.
The West’s growing desire to avoid economic dependence on China, and to hobble it technologically, has led to subsidies, tariffs and export controls that have encouraged multinationals to shift their activity elsewhere.
Russia’s invasion of Ukraine has added to the impetus to build more redundancy and duplication into supply chains and operations and, where possible, to place them closer to home or in allied countries.
Mr Trump’s “America First” administration has also bullied the multinationals of allied countries into investing there.
The meddling goes beyond America.
Europe is pursuing its own industrial policy, attempting to green its economy and develop more autonomy from both China and America.
Emerging markets, including Saudi Arabia, the United Arab Emirates and India, have a raft of policies to attract more investment from rich-world multinationals.
China has been explicitly and energetically fostering certain favoured industries for a decade under the slogan “Made in China 2025”.
The curse of significance
These policies are reshaping global business most clearly in industries that the West and China consider strategic.
In 2021, in the wake of the covid-19 pandemic, the administration of Mr Trump’s predecessor, Joe Biden, launched a review of supply-chain vulnerabilities.
This identified a list of products deemed too important to leave entirely in the hands of foreign suppliers, including semiconductors, batteries for electric vehicles (EVs), critical minerals and pharmaceuticals.
The EU came up with a similar list, which added cloud-computing capacity for good measure.
In both America and Europe, a raft of measures to encourage domestic producers followed.
Under the Trump administration the focus and form of intervention has changed.
Green technologies have fallen out of favour but, as the row over Venezuela shows, oil has been added to the list.
Mr Trump’s interference has also become more extreme.
Aside from sweeping tariffs and outright economic coercion of places like Venezuela, he has also taken government stakes in mining firms, struck deals with chipmakers for a cut of their China sales and bullied pharmaceutical firms into cutting the prices of some products.
Strategic firms have cut ties with China more rapidly than others.
Using national statistics The Economist looked at American multinationals in seven industries (chips, pharma, software, computer equipment, other electronics, cars and telecommunications gear) between 2019 and 2023.
These firms’ sales, staff and asset bases reveal sharp and widespread decoupling.
In six of the seven industries they cut staff in China; in five sales in China fell and the value of Chinese assets declined.
The median drop was 15% for staff, 12% for sales and 7% for asset values.
Those decreases were markedly bigger than the average across all industries.
Between 2019 and 2023 R&D spending by American firms in China on tech manufacturing (most of which is semiconductors) and chemicals (most of which is pharmaceuticals) fell in real terms.
Over the same period total American R&D expenditure in China grew by a third.
In those two industries R&D spending was channelled to more friendly places, such in India, Singapore and South Korea.
European multinationals in sensitive industries are also retreating from China.
The relevant data on manufacturers of computer components, including chips, are available only for firms from four EU countries, but in all four cases, they cut investment in China between 2021 and 2023, by an average of 46%.
Firms from three of the four cut staff and saw sales fall.
Venture capital provides another illustration of the trend.
Between 2017 and 2019 Chinese startups accounted for 4% of European and American companies’ venture-capital spending in strategic industries—chips, quantum, biotech, critical minerals, artificial intelligence (AI) and EVs—roughly on a par with investments in British startups, according to data from PitchBook, a research firm.
That share has shrunk almost to zero.
Over the same period corporate investment in strategic startups based in America’s allies, such as Britain, Canada and Israel, has grown rapidly.
The retreat is bound to hurt Western multinationals.
Semiconductor firms and their suppliers are particularly at risk.
Their combined sales in China reached about $174bn in 2024, or about 30% of their total.
In contrast, the average share of sales in China of Western companies in the S&P 1200, an index of big global firms, was just 6%.
Other sensitive industries are also exposed, including data-centre firms (15% of sales in China, we estimate), carmakers (10%) and pharmaceuticals (8%).
The effect of political meddling in strategic industries is compounded by the fact that their importance to the world economy is growing.
Data from fDi Markets shows that in 2015 strategic sectors accounted for 11% of global FDI.
By 2025 that proportion had grown to 38%.
Governments are sticking their oar in, in other words, just as tech firms are spending lavishly on AI data centres and the next generation of chip-producing factories.
On the face of it, some of the interventions may help business.
Mr Trump’s antagonistic approach is making the EU think twice about slapping America’s big tech firms with huge fines.
His intervention in Venezuela may eventually create opportunities for American oil companies.
But such erratic behaviour creates uncertainty and chills business activity.
And it may hurt firms in the long run.
Research by the IMF shows that, although protectionist industrial policies may benefit firms initially, they reduce their productivity (and so profitability) in the medium term.
One way this happens is by adding to costs.
Lots of firms are duplicating supply chains.
A survey by the EU Chamber of Commerce in China found that 26% of multinationals were planning a fully or partially separate supply chain for their China operations.
That figure was much higher for firms in sensitive industries, such as machine tools and pharmaceuticals.
Plenty of companies are building products just for the Chinese market using Chinese suppliers, from a Western engineering firm that makes robots using local chips to customised ranges of trainers produced by Nike.
That pleases locals, but the duplication weighs on balance-sheets.
Another expense comes from investing in places that are less than ideal, often to gain access to a market without paying tariffs, notes Tiago Devesa of McKinsey.
BYD, a Chinese Ev-maker, is building a factory in Hungary to dodge the EU’s levies.
Samsung, a South Korean chip manufacturer, and TSMC, a Taiwanese one, have built plants in Texas and Arizona, respectively.
In 2023 TSMC estimated that construction would cost four or five times as much as building in Taiwan.
And even once a plant is built, running one outside Asia is pricey.
Vagner Rego, the boss of Atlas Copco, a Swedish industrial-machinery firm, says it increased its investments in assembly plants in America three years ago, but finding affordable local suppliers remains a challenge.
Such costs may already be hurting multinationals’ bottom line.
The Economist examined the profitability, measured by return on invested capital, of Western non-financial firms with sales over $10bn for 2023 and 2024.
We split the 750-odd companies up into multinationals and domestic firms.
In seven of the nine industries examined multinationals’ profits trailed those of their domestic rivals (see chart 3).
Globe-trotting firms did perform better in two industries, IT and communications.
But those industries are utterly dominated by tech giants Alphabet, Apple, Meta and Samsung.
Domestically focused competitors to such leviathans are almost by definition minnows and their lower margins are hardly surprising.
What is more, in six of the nine industries domestic firms have extended their lead over multinationals since before the pandemic in 2018-19, albeit only slightly.
Only in three has the profitability of multinationals improved relative to local firms.
Jurisdictional jujitsu
All this suggests that a new breed of multinationals is fast evolving.
The chairman of a big European manufacturer outlines what the future may hold.
Western firms’ operations in China will look increasingly different from those elsewhere in terms of the suppliers and technology they use and the goods they produce.
Growing geopolitical risks will force firms to incorporate more redundancy and flexibility into their operations.
That will probably entail more diffuse production in multiple locations around the world, although many of these facilities will be final-assembly plants, not necessarily whole factories.
Companies will have to think more carefully about which industries they enter where.
Building drones in China, even for civilian use, is clearly a bad idea but it may be fine to do so in America.
“You don’t want to be on the wrong end of the stick at the wrong time,” he warns.
This image of a sprawling, hesitant and segmented corporate giant is a far cry from the hyper-efficient firms of the past.
It suggests a future in which many of the long-held advantages of globe-trotting companies, such as economies of scale and a focus on cutting costs, will continue to be eroded.
That will leave them harder to manage, less nimble and less profitable.
Politicians, who tend to like the idea of all-conquering national champions, should prepare instead for a world of muchdiminished multinationals.
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