Does It Matter Where a Global Company Is Headquartered?

“The concept of a company being ‘headquartered’ has become very irrelevant,” says BG Srinivas, executive director and group managing director of the information and communications technology company PCCW, and former president of Infosys, in conversation with Yale Insights. “Companies that balance global expertise and local investments and relevance will succeed.”

Srinivas says that the global ambitions of an enterprise are more important than which country a company was founded in or whether that was an emerging or developed economy. “Companies that claim to be truly global have become very transnational in their outlook,” he says. That allows a “global culture with a common way of doing things everywhere while ensuring relevance within each local market.”

So what is headquarters for? McKinsey warns that without clearly defining the unique role of a corporate center, headquarters often ends up just getting in the way. Too often it’s a muddle of a firm’s original center for operations layered with global oversight functions. “It is possible to imagine a headquarters with only the CEO and his or her direct reports as permanent staff with all other executives having fixed-term appointments then rotating back to a business unit or function,” writes Suzanne Heywood, a director in McKinsey’s London office. “To cross-pollinate ideas and knowledge, headquarters must attract talent but not retain it; instead, headquarters should be the ‘beating heart’ of the organization, constantly pumping talent to and from the business units.”

Some companies divide functions across several geographic hubs to mix and match country-specific benefits, such as the flexibility of Dutch corporate law. “A number of multinationals have recently opted to split their legal, fiscal and other personalities between various countries,” notes the Economist, offering Fiat as an example; the car maker has its legal home in the Netherlands, tax residence in Britain, and stock listing in New York. “LyondellBasel, a chemicals giant, became a British rather than a Dutch taxpayer last year. It remains registered for legal purposes in Rotterdam but is said to have just a handful of staff there. Its main corporate office is in Houston.”

Some academic work questions the idea that today’s giants are truly global. “Recent empirical findings repeatedly demonstrate that multinational enterprises operate regionally, not globally,” write Alan Rugman and Chang Hoon Oh in the British Journal of Management. In a review of existing literature, they find that on average, the 500 largest multinationals see 75% of sales within one of three regions: North America, Europe, and Asia Pacific. “Only a handful of these firms are global in the sense of having at least 20% of their sales in each broad region of the triad,” write Rugman and Oh. “Transaction costs increase when the country-level distance increases…. [T]he distance not only refers to geographic distance, but also to institutional, cultural, political and economic distances.”

Srinivas agrees that bridging those gaps is critical, and says that the way to do so is to by having a local presence. The successful global firms “really invested globally. They hired local talent and local capabilities in the markets they expanded into. That’s the only way to sustain. You can’t be exporting everything from where the genesis of the companies are.”

Srinivas points to a longer-term trend of global reach and expertise spreading from one industry to the next. Manufacturing firms developed globally distributed supply chains decades ago, while IT services followed suit only in the last 15 years. “In today’s digital age, access to information, access to understanding of different markets has become much easier,” Srinivas says. Firms can place important functions in Asia, Europe, or North America, or all three. “You can build out capabilities to address the business requirements of a global workplace in any one of these locations.”