Why multinationals are emerging as post-COVID winners

The COVID-19 pandemic hit financial markets hard. But new research shows globalisation is far from over, with multinational firms coming out winners.

Before the COVID-19 pandemic countries around the world enjoyed economic growth brought about by international trade and globalisation.

As the pandemic shockwaves reverberated across securities markets around the world, how did companies perform?

And what have been the long-term impacts on the benefits of globalisation?

New research looks specifically at US multinational firms and shows how these firms fared over time.

The paper from Monash Business School investigates the US securities exchange reaction to the pandemic from the moment of the WHO’s COVID-19 announcement by examining the association between firms with international exposure and those without.

Dr Hue Hwa Au Yong, a Senior Lecturer in the Department of Banking and Finance, and co-author Elaine Laing (from Trinity Business School Dublin) looked at the US Securities Exchange reaction following the announcement.

“Unlike the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis, the COVID-19 pandemic did not start off as a financial crisis but its effect on financial markets and economies is more far-reaching than previous financial crises,” Dr Au Yong says.

In their analysis, firms that are more multinational in their foreign operations (determined by the location of physical subsidiaries) are more resilient to global shocks of this nature.

In the wash-up of the global COVID-19 pandemic, they show what we can learn about firms with international exposure through foreign sales, foreign assets, imports, and exports.

Globalisation and economic growth

To slow the spread of COVID-19, the public health responses of many countries were to shut international borders, introduce quarantine measures and restrict the movement of residents.

These measures had serious economic consequences.

Dr Au Yong explains that if we use the manufacturing industry as an example, many companies flourished from global supply chains and just-in-time technology to minimize costs.

“This gave those firms the ability to export their products for foreign sales, offer customers more choices of goods and services,” she says.

“We thought that these companies would be more likely to be significantly impacted by disruptions in global trade.”

According to the current forecasts, a 13–32 per cent drop is expected in the merchandise trade along with a 30–40 per cent reduction in foreign direct investment in 2020 resulting from COVID-19.

Multinational firms may also cut their international investment by a third.

Supply chain interruption

There has also been a significant push by governments to bring the supply chain back home which is likely to increase these estimated figures.

“These observations call into question the costs of globalisation. Some researchers, practitioners and policymakers suggest that COVID-19 marks the end of globalisation as it highlights the costs of significant reliance on other economies, leading to the spill-over effect that we are now observing,” Dr Au Yong says.

Others suggest that the impact of COVID-19 is likely to be temporary and turning trade inwards will not help countries to ride out the effect of the crisis.

Is globalisation dead?

Have countries around the world gone too far in terms of internationalisation?

Should countries be more self-reliant for sales and funding? Will we observe a delinking of the global economy going forward?

The study confirms that while there has been a serious disruption to global markets and globalisation, the long-term effects may not be as drastic as first thought.

“We included all listed U.S. firms excluding the financial industry as of 1 January 2020 in our analysis,” Dr Au Yong says.

The daily market data was collected from the Centre for Research Security Prices database (CRSP).

Firm characteristic data was obtained from Compustat with the final sample based on the available data of 2836 firms.

“We measured a firm’s international exposure as determined by foreign sales, foreign assets, and the number of COVID-affected economies in the top three geographic segments based on the level of foreign sales and assets,” Dr Au Yong says.

They also examined the firm’s four offshore activities variables in the Top 5 COVID-affected economies.

International exposure is restored over the long run

The research shows that while international exposure through foreign sales, foreign assets, imports and exports was significant and led to a substantial downturn in returns in the short run, the effect actually reverses in the long run.

“Our findings show that firms with international exposure (or are more multinational) are more robust against economic shocks due to COVID-19 in the long-run,” Dr Au Yong says.

“Our findings support the view that a firm’s internationalisation and economic globalisation is a desirable feature of the modern economy despite the COVID-19 setback.”

This suggests that the geographical diversification benefits are limited if firms have most of their operations in COVID-19-affected economies.

“The geographical diversification benefits will have a greater weight if firms also have sales or assets in non-COVID-19 affected economies in their Top 3 geographical segments prior to the event date,” she says.

COVID-19 outbreak financial uncertainty

Their paper highlights the importance of geographical diversification in the context of international economic shocks in the long run.

“Our findings also support the case that globalisation and international trade makes multinational firms more resilient to economic shocks from the COVID-19 pandemic.

“In the long run, internationalisation contributes to multinational firms being more resilient to economic shocks caused by COVID-19.”

Published on 23 May 2023