Here are four scenarios in which firms make a decision where to locate their headquarters: at foundation, at tensioned times, during a strategy review, and due to mergers.
The question where the corporate headquarters (HQ) of the large multinational enterprises (MNEs) are located around the world is intriguing policy makers.
Countries supposedly fiercely compete for MNEs' HQ. In Norway, an explicit motivation for keeping state ownership in key companies is to ensure that their headquarters stay there.
However, do MNEs actually make deliberate decisions where to locate their HQ? It is true that in some specific cases, MNEs have changed the location of their HQ, but strong inertial forces make this a rare event.
A study by Courderoy and Verbeke reveals that less than 1.5% in their sample of Forbes2000 companies had ever changed HQ location. The overwhelming majority of MNE HQ are where the company was originally founded, even many decades later.
Do company boards decide in which country to locate their firm's headquarters? This question is likely to surprise many board members as they never actually made such a decision, or even been in a situation where the option as been discussed. The location of corporate HQ is a fact that is very seldom explicitly decided, but given by historical antecedents.
Nevertheless, in an article in Global Strategy Journal, Klaus Meyer and I discuss four scenarios in which firms deliberately make a decision regarding the country of HQ location: at foundation, at tensioned times, during a periodical strategy review, and due to mergers.
Scenario 1: At Foundation
At foundation, most founders are people embedded in their home environment, with personal ties that help accessing bank loans or other services, family and friend offering help when needed, and knowledge of local suppliers and customers.
Only in exceptional cases do entrepreneurs register their business abroad, but that may increase with globalization, especially for entrepreneurs who have previously lived abroad, or for founding teams with diverse origins.
Scenario 2: When tension grows
Second, companies may systematically assess the merits and demerits of their current location when they face substantive tensions in their home environment.
Such tension can arise in particular from access to capital markets, concerns about the tax and regulatory environment, and political risk. For example, when Tetra Pak moved from Sweden to Switzerland, personal income tax appears to have been a key motivation. Similarly, IKEA’s HQ relocations, first to Denmark and then to Netherlands, was due to both high corporate and personal income taxation in Sweden as well as more favorable Danish and Dutch regulations on foundations.
Scenario 3: Re-considering strategies
Third, companies may periodically review all aspects of their corporate strategy. Although it is not normal part of strategy reviews to consider the location of HQ, it is theoretically possible that some companies do that. The arguments that would actually trigger HQ relocation after such a review are likely to be similar as in the previous paragraph.
Scenario 4: Mergers
Fourth, when firms merge, they have to make a decision where they wish to locate their new joint HQ. The decision is often driven by the relative size or financial strength of the involved companies such that the stronger partner enjoys the continuity of HQ location, and its staff become the core staff of the new joint HQ.
The decision can also be based on the advantages of a certain location for a particular type of business. When companies from smaller home countries merge or are acquired, it is more likely that the other party is foreign, which subsequently increases the probability of HQ relocation. One such example is the fate of the once renowned Norwegian pharmaceutical company Nycomed, which due to various spin-offs and mergers since the mid-1990s experienced a HQ relocation merry-go-round that covered four different countries in two decades. The brand Nycomed still exits today, but it is now under the wings of a large Japanese MNE. Yet, small country companies sometimes get the upper hand, as exemplified by the recent merger between two certification companies – the Norwegian DNV and the German GL. The HQ of the merged company is in Høvik, just outside Oslo.
In conclusion, companies mainly make HQ location decisions when they are founded, or when multiple firms merge. For a small country like Norway, that provides a rationale for retaining state ownership in key companies. Corporate HQ may relocate during normal periods of business triggered either by external events, or by strategy review processes.
However, in these situations, the advantages of a firm staying at its home location are strong because many assets employed in the corporate HQ are location bound. As a result, international relocations are rare.
References:
Coeurderoy, R. and A. Verbeke (2016). The unbalanced geography of the World's largest MNEs: Institutional quality and head office distribution across countries. Global Strategy Journal. In press.
Meyer, K.E. and G.R.G. Benito (2016). Where do MNEs locate their headquarters? At home! Global Strategy Journal. In press.
This article is published in BI Strategy Magazine 2016.
BI Strategy Magazine is a Science Communication Magazine published by the Department of Strategy at BI Norwegian Business School.