The Rise of the Micro-multinational
We live in a world of combinatorial innovation. There have been other such periods before: In the 19th Century, standardised mechanical parts — wheels, pulleys, belts and gears — were combined and recombined to create new innovations. In the 20th Century — internal combustion engines, electronics and (eventually) microelectronic chips fuelled the economic and cultural transformations of that age.
Just as the mechanical innovations of the 19th Century led to dramatic changes in our way of life, the still-evolving computational advancements of the early 21st century will unleash yet another transformation of the world’s economy and culture.
Consider this: even the smallest company can now afford a communications and computational infrastructure the envy of large corporations 15 years ago. If the 20th Century was the age of the lumbering multinational company, then the early 21st belongs to the nimble micromultinational. The term, popularised by Google’s chief economist Val Harian, refers to the growing number of small companies that are multinational from day one — thanks to digital technologies and the Internet.
Micromultinationals pursue a “smart specialisation” strategy of niche offerings, delivered through a powerful mix of digital technologies, strong online presence and globally dispersed operations. The result is a potent business model perfectly suited to niche and high-tech products, able to scale from day one and reach across international markets at unprecedented speed. Talent gathering in disconnected geographic spikes or highly specialised local business ecosystems — the kind that exists in Bangalore or Shanghai — can be accessed at ease through internet-based collaboration. Greater access to commodity-type skills drives down prices, enabling rapid iterative prototyping — facilitating greater customer involvement in product development. Businesses remain attuned to rapidly changing global supply chains, enhancing flexibility and driving down costs.
A central characteristic of the micromultinational is the emphasis on spreading out production activities to regions where it is cheapest while simultaneously maintaining high-margin activities at its operating base. This facilitates the lowest costs while making it easier to sell to potential customers in fast-growing regions such as Asia. Outside talent hired for specific projects can become a way to introduce innovative ideas without needing to establish fixed personal assets.
Micromultinationals are Antifragile
Micromultinationals are particularly important amidst the current context of rapid globalisation and digitisation initiating a broader range of global flows and a rapidly expanding web of connections. There are now more entry points to a broader range of players than before, not only for the largest global companies but also emerging countries, small businesses and even individuals and entrepreneurs. These growing multidimensional global flows bring with it an expanded network effect, but as economists Ian Goldin and Mike Mariathasan contend in The Butterfly Defect: How Globalisation Creates Systemic Risk and what to do About it, increased connectivity creates and enables greater integration, but it also results in systems that are inherently complex.
This systemic complexity results in a world that is more and more unpredictable, leaving large multinational corporations — and especially those that are large, highly-leveraged and focused on the immediate — vulnerable to “black swans” — a term devised by Nassim Taleb referring to unexpected outliers with enormous impact that could not have been forecast with any certainty, only examined in hindsight (think World War I, 9/11, the Internet, and the rise of Google). Organisations that are antifragile — not just resilient to risks and stressors but which benefits from them — will be those that thrive in the years and decades ahead.
Micromultinationals are antifragile precisely because they are structurally decentralised — and this becomes their key advantage. They are not only able to weather unexpected events, but can readapt, restructure — and once again seize advantage of the opportunities presented. Businesses that adapt to this model can better negotiate a world fraught with systemic complexity. They can thrive in one that is inherently unpredictable. Contrast this with multinationals that, in their quest to achieve scale, become bogged down in bureaucracy, overstaffing and risk management, rendering them slow and often blind to important disruptive opportunities.
Advanced Manufacturing is the future
The resilience of the micromultinational model extends to manufacturing, which is a good thing. Manufacturing continues to play a central role in national economies. The World Economic Forum reports that over 70% of the income variations in 128 countries were explained by differences in manufactured product export data alone. The US Department of Commerce Bureau of Economic Analysis indicates that manufacturing has had the highest multiplier effect on the US economy than any other sector, contributing US$1.40 value add in other services for every US$1.00 added by manufacturing. In recent years however, manufacturing has become increasingly fragmented, with subsequent stages of a firm’s production process located in a growing number of countries across the globe.
Most manufactured goods tend to be connected to many other goods. For instance, a country successful at making a few kinds of garments will find it relatively easy to diversify into other kinds. This is the also the case for higher-end products such as machinery, electronics, chemicals and pharmaceuticals. Manufacturing creates a set of “stepping stones” to development and a more continuous progression of rungs than other economic activities.
This is intuitive: knowledge required to make one product will be applicable to similar products. Those products create jobs and ancillary services, then creating more jobs and services. Any modern product now requires more knowledge than what a single person — or firm — can hold. Take computers for example: a firm has to rely on others who know about battery technology, liquid crystals, microprocessor design, metallurgy, milling and lean manufacturing, among many other skills. Thus, manufacturing brings about an ecosystem of jobs and services, from engineering to marketing to PR that fuels the innovation and competitiveness of those products.
But manufacturing brings about service innovation as well. Today, modern manufacturing straddles between products and services. Products have become complex systems combining hardware, sensors, data, storage, software and connectivity in myriad ways — no longer solely electronic and mechanical. Consider Xiaomi: their success comes not only from their physical offering, a top-end quality phone priced at mid-range (significantly undercutting Apple and Samsung), but from their software platform — where the majority of their revenue is derived from advertising and app-store purchases.
Micromultinationals are well placed to take advantage of the paradigm shifts brought by digitisation and the Internet in manufacturing. By focusing on activities that require specialist, often cutting-edge, knowledge at its base and dispersing low-margin activities to those who can do it cheapest, micromultinationals shed the risks stemming from cost-based competition while capitalising on the income streams secured through its niche offering. As demand fluctuates from country to country, these businesses can reposition to where the demand is. Collectively, micromultinationals will be capable of not only resilience in the face of cost pressures, but will spawn ecosystems where the high-margin activities necessary to sustain their niche offerings lead to prosperous jobs for the economies that embrace them.
In a study by Brookings, a prominent DC think-tank, ‘Advanced Industries’ — characterised by high levels of R&D per worker and proportionally large STEM employment, have been found to support a greater number of American jobs. The benefits extend beyond bachelor degree-holders: those without earned between 50 to 70 percent higher than in other industries.
Micromultinationals dedicated to new and innovative industries can spearhead the R&D crucial to this, or partner with universities and research institutions to commercialise research as a ‘spin-off’ company. Research from McKinsey finds that most low-performing research-intensive US firms are “sleepwalking” through their R&D investment decisions, maintaining existing R&D initiatives and unwilling to incur greater risk. Contrast this with companies such as Aquion — spun out of Carnegie Mellon’s material science research department and now employing 130 workers in renewable energy storage manufacturing, the advantage small firms have is clear. Open innovation requires multichannel partnerships among firms, universities and research labs. Micromultinationals can not only manage those partnerships effectively, but are lean enough to execute on the (high-risk) opportunity.
Australia’s Opportunity
With this lies the opportunity for Australia. Growing digitisation has created a world where market access is uninhibited by economies of scale, and the opportunity to secure stable, prosperous incomes in the face of increasingly chaotic and complex business environments. In a report by Oxford Economics, “global-oriented SMEs” (that is, micromultinationals) generating more than 40% of revenue outside their home country will increase by 66% in the next three years.
Firstly, Australia already has a fledgling small-to-medium manufacturing sector. Research from the Manufacturing Excellence Taskforce Australia (META) has identified 2000 globally successful Australian micro-multinationals. Examples include Textor, which manufactures high-tech fabric used in fibre fluid management, RØDE Microphones, a global leader in sound equipment and ANCA, a machine tool maker. As these examples indicate, Australia is not only capable of competing in this new industrial world, but stands to benefit immensely from it.
Secondly, Australia is on the cusp of Asia, and while supply chains are indeed global, it is unlikely that manufacturing will leave Asia anytime soon. Low-cost activity is certainly leaving China, but much of this has passed to South-East Asia through FDI outflows from Chinese firms. As production is trimmed from China to Myanmar and the Philippines by firms such a Samsung, Microsoft and Toyota, they reinforce a regional supply chain with China at the centre, and Australia in its midst.
And finally — Australia can no longer rely on the industrialisation of other nations to fuel its own economic growth in the same way it did from China. The rise of advanced industrial automation has already and will irrevocably transform manufacturing from what was a labour-intensive endeavour to one requiring only capital. China was the last country to benefit in the way it did from manufacturing. Other contenders, like India, will have to rely on several engines of development — not just manufacturing, but agriculture and services too.
Put Policy to work
The rapid growth of the rich world before the 1970s was encouraged by public spending on infrastructure and basic research. The computer and the Internet sprang out of science when there was no immediate commercial aim. For Australia to utilise the full potential of the micromultinational model, money must again be found for basic research. Governments are vital to this vision, but they also need to get out of the way of entrepreneurs, reform their public sectors and invest wisely — NICTA and the numerous spin-off companies spawned from it being an excellent example. Infrastructure spending must be forward thinking, incorporating fibre-optic cables as well as ports and roads. Education is essential, vocational or otherwise, since skilled workers will be needed.
Australia can reinvigorate its manufacturing sector and the benefits that come with it, and shed its reliance on the prosperity of other nations. And in this new world, the micromultinational can be its key.
