Global briefing: Large firms in small economies/ Small yard, high fence?/ Japan & Argentina/ Windfall taxes/ New Zealand
In this week’s global briefing:
1. Large firms in small economies: Denmark’s recent experience with Novo Nordisk shows the economic contribution that large firms can make to small economies. The large number of large firms in small economies also creates material economic risks.
2. Small yard, high fence? The US imposed additional restrictions on technology investment into China, which will have broader effects on investment flows. Growing economic and policy challenges in China are also discouraging investment into China.
3. Japan & Argentina: These two economies have long been seen as idiosyncratic. But even as Japan’s economy normalises (stronger growth, higher inflation), Argentina’s political-induced economic dysfunction is stepping up.
4. Windfall taxes: Governments are reaching for new sources of revenue to fund spending pressures, with increasing use of windfall taxes on energy firms, banks, and others. The recent Italian experience is not unique.
5. New Zealand: New Zealand has a deep economic exposure to China and an ‘independent’ foreign policy. But recent foreign and defence policy statements show a reassessment of New Zealand’s strategic posture, with economic implications.
1. Large firms in small economies
The share price of Danish pharma giant Novo Nordisk soared last Tuesday by 17% on positive news of the strong health effects of its blockbuster anti-obesity drug. It is now Europe’s third most valuable listed company, just behind Nestle.
This has macro consequences for the Danish economy. Pharma value added makes up ~5% of Danish GDP, much of which comes from Novo Nordisk. And recent analysis estimated that Novo Nordisk had boosted Danish GDP by 2% since Q4 2019 – without which Danish GDP would have contracted over this period, rather than growing.
But this is not an isolated example. Small advanced economies have a disproportionate number of large firms. One measure I calculate is the number of firms on the Forbes Global 2000 on a per capita basis; small economies have many more than larger economies. And it is striking that 4 of the top 5 most valuable firms in Europe are from small advanced economies: LMVH, Nestle, Novo Nordisk, ASML, and Roche.
These large companies are much bigger as a share of GDP than large firms in large economies: Apple’s market capitalisation is significantly smaller as a share of GDP than these small economy large firms. This means that small economy performance is shaped by the performance of these large, internationally focused firms. When they do well (like Novo Nordisk), small economies do well – when they lag, they can drag on small economy performance.
This means that small advanced economies have significant idiosyncratic risk exposures, with the performance of these firms contingent on a wide range of factors outside policy.
Finland’s experience with Nokia is a canonical example. Prior to Nokia’s fall (from 2007) due to competitive pressure from Apple, Nokia accounted for ~4% of Finland’s GDP, accounted for ~25% of Finland’s growth from 1998-2007, ~20% of its exports, ~30% of its R&D, and >15% of its corporate tax revenue in 2007. It’s fall led to a sustained period of weak economic performance in Finland, reinforcing the impact of the global financial crisis.
Implications: Small advanced economies have, on average, generated superior economic performance relative to larger economies. But along with this goes significant concentration risk – to a handful of large firms and to the sectors/markets in which they operate. The materiality of these risks mean that they need to be managed. To understand the outlook for specific small economies, it is useful to look at the prospects of the top handful of MNCs.
The full note is available at: https://davidskilling.substack.com/p/global-briefing-large-firms-in-small