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McKinsey on Finance

Perspectives on Corporate Finance and Strategy Number 29, Autumn 2008

How climate change could affect corporate valuations 1 Efforts to reduce climate change can profoundly affect the valuations of many companies, but executives so far seem largely unaware. Growth and stability in China: An interview with UBS’s chief Asia economist 8 Will the country’s economic fortunes fade as growth elsewhere declines? Jonathan Anderson doesn’t think so. The future of corporate performance management: A CFO panel discussion 14 Two leading CFOs agree that when global companies attempt to improve their performance, simple, transparent metrics are more important than theoretically pure ones. Why cross-listing shares doesn’t create value 18 Companies from developed economies derive no benefit from second listings in foreign equity markets. Those that still have them should reconsider.

McKinsey on Finance is a quarterly publication written by experts and practitioners in McKinsey & Company’s Corporate Finance practice. This publication offers readers insights into value-creating strategies and the translation of those strategies into company performance. This and archived issues of McKinsey on Finance are available online at, where selected articles are also available in audio format. A McKinsey on Finance podcast is also available on iTunes. Editorial Contact: To request permission to republish an article, send an e-mail to Editorial Board: David Cogman, Richard Dobbs, Massimo Giordano, Marc Goedhart, Bill Javetski, Timothy Koller, Werner Rehm, Dennis Swinford Editor: Dennis Swinford Design Director: Donald Bergh Design and Layout: Veronica Belsuzarri Managing Editor: Sue Catapano Editorial Production: Lillian Cunningham, Roger Draper, Drew Holzfeind, Mary Reddy Circulation: Susan Cocker Cover illustration by Gwenda Kaczor Copyright © 2008 McKinsey & Company. All rights reserved. This publication is not intended to be used as the basis for trading in the shares of any company or for undertaking any other complex or significant financial transaction without consulting appropriate professional advisers. No part of this publication may be copied or redistributed in any form without the prior written consent of McKinsey & Company.


How climate change could affect corporate valuations
Efforts to reduce climate change can profoundly affect the valuations of many companies, but executives so far seem largely unaware.

Marcel W. Brinkman, Nick Hoffman, and Jeremy M. Oppenheim

As global warming spawns new regulations, technological remedies, and shifts in consumer behavior, its effect on the valuations of many sectors and companies is likely to be profound. The shocks to some industries could be severe—potentially as severe as, for example, the effect of the introduction of wireless telephony on the telecommunications sector during the 1990s and of shifting oil prices on the oil and gas sector during the 1970s and 1980s. Yet executives have so far paid scant attention, either because they don’t understand the effects of climate change on their businesses or they believe them to be too uncertain or distant to model. To gauge, even at this early stage, the stress that climate change will place on the cash flows of large public companies, we assessed the impact of a series of carbon mitigation scenarios on benchmark companies in six sectors.1 The change in cash flows— compared with a business-as-usual scenario, but without explicitly considering the responses of individual companies over time—indicates how much pressure efforts to reduce carbon emissions will exert on valuations and how much volatility a sector’s current business systems will face. Such an analysis cannot, however, predict the actual impact on cash flows, valuations, or share prices. Not surprising, we found that carbonabatement efforts will put dramatically different levels of stress on the cash flows and valuations of different industries. The level of change for individual public companies within a given sector could of course substantially exceed the average, depending on their current position and their ability to respond to new technologies, changes in consumer behavior, and regulation.
Varying levels of stress

1 The six sectors are aluminum, automotive,

beer, construction, consumer electronics, and oil and gas. We tested their sensitivity to three levers for reducing emissions (regulatory moves, technological shocks, and shifts in consumer demand) and analyzed the potential impact of climate change events on the cash flows and 2008 net present value (NPV) of an archetype company in each sector under different climate change scenarios and assuming different climate change drivers and levels of impact. The events that might take place in these companies and sectors were examined in the short term (2008–11), the medium term (2011–16), and the longer term (2016 onward) in the context of their carbon intensity, geographic footprint, and ability to pass through costs and to redeploy capital.

We assessed company cash flows in each industry in three scenarios: a business-as-usual scenario, a scenario involving the greatest degree of change executives can now imagine


McKinsey on Finance

Autumn 2008

(the executive scenario), and a scenario that Fundamental demand shifts In some industries, shifts in demand will many scientists believe would be required have a broadly negative impact on company to stave off a high likelihood of catastrophic cash flows and therefore valuations. Oil climate change–related events (the experts’ scenario). We chose a basket of six industries and gas consumption, for example, would have to decrease by an average of around to understand how the impact could vary. In some industries, the mitigation of climate 0.2 percent a year from now until 2030 to meet emission reduction targets associchange will become a significant corporateinvestment theme, either creating fundamen- ated with success in stabilizing greenhouse gases. The upstream oil and gas industry tal shifts in demand or leading to new competitive dynamics and business models. would therefore experience falling demand over the long term (2016 and beyond) In others, cash flows will be less stressed as short-term cost pressures are passed through as the economy shifts toward cleaner sources of energy (including solar, wind, and to customers, thus allowing profit margins carbon capture and storage), and as to revert to average levels in the longer run oil-consuming sectors (such as automotive (Exhibit 1). The nature of the impact MoF 29 2008 and power generation) increase their will depend on whether an industry shows Carbon valuation emphasis on energy efficiency. Upstream underlying structural resilience or expeExhibit fundamental shifts in demand or sigcompanies could experience falling proriences 1 of 3 Glance: Climate change will have a major effect on shareholder value in many but not all sectors. with a duction and sales volumes by 2015, nificantly changed competitive dynamics. Exhibit title: Opportunity or threat?

Exhibit 1

Opportunity or threat?
Climate change will have a major effect on shareholder value in many, but not all, sectors.

Potential impact on industry valuation of carbon-abatement measures, given level of changes currently anticipated by executives, %
Short term (≤7 years) Long term (≥8 years)

Selected industries Auto

Key drivers –30 –20 –10 0 10 20 30 Short term Increased regulatory pressures—eg, increase in emissions standards (European Union, California) and consumer incentives Higher input costs Packaging regulations Limited passing through of costs to consumers Long term Technology shifts to new drive trains—if to high degree, costs more than covered by passing through to consumers; otherwise costs not passed through No long-term structural changes anticipated


–30 Beer –15 –5


0 Building materials –15 Oil and gas –10 +5 0

Limited impact

+30 Downstream: impact of carbon pricing on refining

Increased growth from tightened building regulations Increased input costs because of carbon pricing Upstream: decrease in oil demand, because of substitution (volume effect only)



How climate change could affect corporate valuations


substantial impact on cash flows. If that happened, valuations would fall by around 5 percent in the executive scenario and by around 15 percent in the experts’ scenario. The potential impact on value is relatively low because of the short-term nature of the valuations of upstream companies—which mostly reflect their current high-yielding discovered and developed reserves. These have an average lifespan of 10 to 15 years and will be largely depleted by the end of the next decade. The value of the cash flows affected could fall further if a dramatic decline in demand pushed down prices.

rates of entry and exit as new technologies or regulatory restrictions emerge and the competitive landscape changes.2 The way a company reacts to changing technologies and business systems will determine its performance.

2 During similar periods of discontinuity in

other sectors in the past, levels of entry and exit rose significantly. As the telecom sector moved to wireless, for example, only 17 of the top 30 global telecom companies (by market capitalization) in 1997 were still in the top 30 in 2007. 3 In some scenarios, 1 percent of global penetration by 2015.

In the automotive sector, novel technologies will create new competitive dynamics and transform business systems in the next one to five years. Cash flows could be affected both positively and negatively. In the short term, tighter emission standards will have an impact on the mix of cars sold, helping manufacturers with lineups of smaller, more fuel- and emission-efficient cars. Such By contrast, other industries could enjoy con- standards will affect the margins of both winners and losers and thus their cash flows siderable gains. Companies in the buildingmaterials sector—particularly those that do and valuations, which may already reflect some potential changes in value. business in places where building efficiency is not yet a major issue—will probably beneChanged fuel efficiency and emissions fit from rising demand for improved energy standards, combined with high oil prices, efficiency and insulation products, which will will spur the introduction of new driveincrease their cash flows. In developed train technologies, such as electric and hydroeconomies, more stringent building stangen, which could start to reach scale by dards are already creating demand for 2015.3 A number of competing technologies, such offerings, and the same thing will hapincluding more efficient internal-combustion pen in developing markets as well. Analysts engines and hybrids, will be introduced, are already calculating the impact on demand of existing regulations and factoring and so will vehicles powered by compressed natural gas, hydrogen, or electricity. The it into company valuations. As compared with the business-as-usual scenario, the valu- impact on valuations will depend both on which of these proves dominant and on ation of a representative building-materials company in the developed world increases by the ability of the automotive OEMs to pass along the costs of new technologies and 35 percent in the executive scenario and parts to consumers or to capture value from by 80 percent in the experts’ one. If more other segments of the value chain. stringent regulatory measures do not materialize, valuations could fall by 10 to While the actual impact on industry valu20 percent as a result of possible shortations is highly uncertain, it is not term cost pressures. unimaginable that its discounted value Changing competitive dynamics could rise by 10 percent as compared Efforts to offset climate change will structur- with the business-as-usual scenario if the ally transform certain sectors—including electric or hydrogen technologies become automotive and aluminum—which will expe- dominant, in combination with a new and rience more volatile returns and increased cheaper way of generating power, which


Exhibit 2 of 3 Glance: Regional regulatory differences and the access of companies in some regions to cheaper power will make margins within the primary aluminum industry more volatile, creating both winners McKinsey on Finance Autumn 2008 and losers. Exhibit title: Winners and losers

Exhibit 2

Impact on EBITDA1 in primary aluminum industry from introduction of direct emission costs and increases in carbon pricing Hypothetical event: Direct emission costs are introduced in European Union, and cost of carbon increases to $55 (from $25) per metric ton in 2013. Increased costs are not passed through to EU customers, as marginal prices are set outside region. Primary producers in Asia, North Africa, Middle East, and rest of world are not yet subject to direct emission costs.2 Benchmark company Winner Loser

Winners and losers
Regional regulatory differences and the access of companies in some regions to cheaper power will make margins within the primary aluminum industry more volatile, creating both winners and losers.

24 18 EBITDA margin, %


28 19 7

Before Power source
Hydro/renewable Coal


Before After



Distribution of production facilities by geographic location, %

Asia, North Africa, Middle East, and rest of world 20 40 North America

Asia, North Africa, Middle East, and rest of world Europe 40 100

Europe 100

EBITDA = earnings before interest, taxes, depreciation, and amortization. In a scenario in which aluminium prices increase to re ect additional carbon-related costs (ie, costs are fully passed through to consumers), EBITDA margins of benchmark and losing companies will remain constant while EBITDA margin of winning companies will rise from to %.

could let OEMs raise margins by charging higher prices. Certain types of regulatory interventions, however, could raise the industry’s costs, with no concurrent price offsets. In that case, the industry’s value could fall by as much as 65 percent. Nonetheless, well-positioned players with clear leadership in technologies and products should always be able to outperform their competitors. In the aluminum industry, carbon reduction efforts will affect the cash flows and valuations of primary aluminum producers in three ways:

Direct effects. Although the aluminum industry does not face direct emissions costs at present, they may be introduced in the European Union under phase III of the EU Emissions Trading Scheme. The impact on valuations will depend on carbon pricing and the extent to which the industry receives free emission allowances. Without any subsidies or offsets, a carbon price of $55 per metric ton would raise production costs by 11 percent.4 Indirect effects. Since energy represents more than 30 percent of the costs of

4 Based on initial cash production costs of

$1,853 per metric ton.

MoF 29 2008 Carbon valuation Exhibit 3 change could affect corporate valuations How climateof 3 Glance: Stringent standards in the consumer electronics industry would reduce energy consumption and even reduce costs. Exhibit title: Lower consumption, lower costs
Exhibit 3 Consumer cost savings from adoption of 1-watt standby standard1 (based on implementation in California)2


Lower consumption, lower costs
Stringent standards in the consumer electronics industry would reduce energy consumption and even reduce costs.

With an extremely small impact on profit margins . . . US Environmental Protection Agency (EPA) estimated that cost to manufacturers of adopting 2-watt standard would range from –$2.00 to $0.50 per unit. Net costs for manufacturers are expected to decrease to 0, even with 1-watt standard, thanks to innovation and economies of scale driven by regulation.

. . . consumer electronics companies can help consumers save significant amounts of energy. Current average standby loss, watts Digital TV Personal laser printer All-in-one stereo system CD player DVD player 7.33 6.1 5.7 4.0 1.7 0.74 3.15 Annual average cost savings per device (with 1-watt standard),4 $ 5.46 5.36 4.96

Reduction of power consumption for device on standby to ≤ watt. In , California had % higher residential electricity prices ( . per kWh) than US average but lower than EU. Based on energy-consumption test of popular digital TV models in United States in . Assumes product in use % of time, except for TVs (in use % of time); does not account for any ef ciency savings while in use. Source: Australian National Appliance & Equipment Energy Ef ciency Committee; Consumer Electronics Association; Energy Information Administration, US Department of Energy; IDC; Nielsen; US Environmental Protection Agency; McKinsey analysis

primary aluminum producers, more expensive power from higher carbon pricing will put significant pressure on margins. Without any subsidies or offsets, for example, a carbon price of $55 per metric ton would raise production costs by 17 percent.

5 Earnings before interest, taxes, depreciation,

and amoritization.

Changing demand. As cars become lighter to reduce emissions, demand for aluminum from the automotive sector is expected to rise. This increase, however, may be offset by lower demand from the packaging industry (as a result, for instance, of stricter regulation of nonreturnable containers) and by a shift toward the use of secondary aluminum from increased recycling. If carbon emissions are strictly limited, demand for primary aluminum may fall dramatically as less-energy-intensive materials replace it.

Regional regulatory differences and the access of companies in some areas to cheaper power will make margins in the primaryaluminum industry more volatile, creating both winners and losers. In the short to medium term, efforts to reduce carbon emissions will probably exacerbate the margin differentials between players with facilities in Asia, the Middle East, and North Africa, on the one hand, and in Europe (and potentially North America), on the other (Exhibit 2). Take, for example, a company with only coalpowered European production facilities. If carbon prices increase to $55 per metric ton, from $25, but the price of aluminum doesn’t increase to cover them, the company’s EBITDA5 margins would fall to 7 percent, from 19 percent. In the long term, however, the short- to medium-term advantage enjoyed by alumi-


McKinsey on Finance

Autumn 2008

num producers in lower-cost regions like China, the Middle East, and North Africa will probably fall: the global standardization of carbon costs will erode margin differentials.
Structural resilience Some sectors will experience minimal longterm stress from carbon-abatement efforts: they will be able to pass along any shortterm cost pressures to customers and will not face substitution by other products or significant shifts in demand. In such cases, profit margins would revert to average levels over the medium to long term. The consumer electronics industry, for example, will probably have the technology to deal with regulation in a way that will not harm the bottom line.

to change as these factors start to affect their performance. The immediate impact on cash flows (and therefore discounted valuations) might be limited, but it will eventually be significant in some industries. As nations and companies start acting more aggressively to reduce carbon emissions, major shifts in the valuations of sectors and companies will start to become clearer and more predictable. Over the next 18 to 24 months, a number of regulatory and policy events, such as the December 2009 Copenhagen conference to replace the Kyoto treaty, will probably reduce the uncertainty and spark a rethinking of how carbon reduction efforts will affect valuations across a wide range of industries. Several steps can help companies and their executives as they start to position themselves to thrive in a low-carbon economy.
Assess the impact of abatement efforts A critical first step is reviewing a company’s exposure to regulatory measures (such as carbon pricing, new standards, taxes, and subsidies), new technology, and changes in consumer behavior. In our experience, the strategy mind-set required for this analysis doesn’t come naturally to most executives. They will have to ask themselves, for example, how specific changes would affect a company’s competitive position if other companies adopted new business models or how a company can gain a competitive edge by moving more quickly. Strengthen regulatory capabilities Companies should ensure that they have a consistent strategy, informed by analysis, to participate in regulatory-policy discussions and to engage with policy makers effectively and coherently across business units. The best companies will bring public and private stakeholders together to shape

Consumer electronics represents a large and growing portion of residential electricity demand. Using technologies that exist today, the industry can make its products dramatically more efficient at low and diminishing costs (Exhibit 3). We expect increased efficiency-improvement pressures, including limits on standby and active power consumption, as well as efficiency-labeling requirements. The overall impact on the value of the industry will in our view be limited. Some of its revenue and margin opportunities could have a positive impact of up to 10 percent on its discounted cash flows in the executive scenario, or up to 35 percent in the experts’ one. Higher costs that could reduce the industry’s value by 7 percent could, however, offset these opportunities.
The value of preparation

Much uncertainty remains over the course of regulation and the pace of change for the other climate change–related forces, such as technology, that will influence abatement levels. The value of companies is likely

How climate change could affect corporate valuations


the regulatory environment—both policy principles and specific regulations— so that socially efficient solutions are also economically attractive.
Build capabilities to deal with uncertainty The type of analysis we have conducted only scratches the surface of what is possible. Sophisticated scenario-planning techniques can give managers an overall view of how the economy—and their markets, in particular—might evolve under different climate change outcomes. Many companies will succeed in managing the major transformations their sectors face only if they invest in generating more sophisticated forecasts and deeper insights into climate change–related developments. Adjust investment review processes In accordance with the realities of climate change, decisions about new corporate investments should be geared toward carbonand energy-efficient technologies that will remain competitive over investment life cycles. As part of a portfolio of options, companies may find it necessary to make bets (in new technologies, for example) that are specifically related to climate change. Develop new external links Venture capital firms, universities, and scientists are logical starting points in efforts to build external networks that can help

companies understand and manage the impact of climate change. In the hope of developing new solutions, some companies in the electric-car segment, for instance, are creating consortia that include power companies, suppliers of high-tech car batteries, and local governments.
Review investor relations Companies will need to focus on how and when to signal the value of their climate change bets so that investors can assess them. Each company will have to explain its overall level of preparedness for the future, the way climate change–related events could affect its specific cash flows, and what differentiates it from its competitors in these respects.

So far, companies have had limited success in communicating their climate change– related activities, often because these moves form only a small part of a larger portfolio. In 2008, for example, the Spanish power generator Iberdrola spun off part of its renewables division—among other reasons, to access greater value. BP has looked for ways to realize the value of its alternative-energy investments, proposing a partial flotation. However, very few public companies have succeeded in explaining the more deeply hidden effects of climate change on their cash flows and competitive strategies. MoF

This article is based on a project that McKinsey undertook jointly with the Carbon Trust during the spring of 2008 to assess the impact of climate change on investments. In September 2008, the Carbon Trust published a long report on that subject, titled “Climate change: A business revolution?” It is available at The authors wish to thank Elizabeth Bury for her contribution to this article. Marcel Brinkman ( is an associate principal in McKinsey’s London office, where Nick Hoffman ( and Jeremy Oppenheim (Jeremy_Oppenheim@ are partners. Copyright © 2008 McKinsey & Company. All rights reserved.


Growth and stability in China: An interview with UBS’s chief Asia economist
Will the country’s economic fortunes fade as growth elsewhere declines? Jonathan Anderson doesn’t think so.

David Cogman and Thomas Luedi

Even before the financial crisis descended on Wall Street in mid-September, the persistent slowdown of Western economies had observers in developed markets increasingly worried that the malaise would inevitably spread to the major emerging markets as well. After all, most of their stock markets slumped dramatically this year—and their economies face continuing inflationary pressures. China, in particular, is struggling with the twin challenges of declining demand from importing countries and an overheated domestic economy. Many executives are now wondering whether their hopes over the past few years for growth in China were not misplaced. On the eve of the Beijing Olympic Games, we met in Shanghai with long-time emergingmarket observer Jonathan Anderson to discuss whether these concerns were justified. Anderson, the author of The Five Great Myths About China and the World and head of Asia-Pacific Economics for UBS, sees quite a different story emerging.
McKinsey on Finance: Some commentaJonathan Anderson: The bottom line

is that China will slow gradually as the world around it does, by around one percentage point next year, perhaps slightly more. Indeed, in the first half of this year, everything seemed to be going weak. Exports and trade were slowing, domestic consumption was on the decline, the property and construction sectors were under very sharp pressure, and a few bubbles burst. And while employment was strong and wages actually grew at a good clip, food became so expensive

tors worry that a slowdown in Europe and the United States will have an overwhelmingly negative effect on the Chinese economy. How realistic are these concerns?


that it started to cut into other kinds of expenditures—meaning that spending in areas such as telecom and discretionary was weak. But as we move through the second half of the year, inflation is slowing, so the People’s Bank of China can start to loosen monetary policy. That means property construction will likely rebound by the fourth quarter, and price indicators should then stabilize. On the urban-consumption side, many food prices are starting to level off. With wages still growing and employment still high, that should mean better consumption numbers over the next 12 months. Overall, we’re on track for real GDP growth of around 10.5 percent this year, and just under 9 next year.
McKinsey on Finance: So China’s already

by borrowing short in the money market and then faced a fire sale when the mark to market went against them. The average Chinese or Asian institution bought a lot less, in a relative sense, and had no leverage on the liability side—and they’re perfectly happy to hold them to maturity. So regardless of a US slowdown and what’s happening in Europe and the rest of the world, Chinese growth should be all right for the next few years. China has massive surpluses on its current account, and it has the world’s largest stock of reserves. It’s also just been through a big bank cleanup, which means that regardless of any near-term misbehavior, balance sheets are much better than they were five or six years ago. Also, Chinese tax revenues to GDP are rising dramatically, and there’s a surplus on a cash basis. That means the country can spend money to help stabilize the economy. There’s also a much broader consumption base, so for the first time in three or four years, even farmers are making money.
McKinsey on Finance: Energy prices are at an all-time high, as are prices for raw materials. Won’t that have an impact on China’s economic growth? Jonathan Anderson: Clearly, there

seen the worst of it?
Jonathan Anderson: Yes. The good

news for China, and most of the emerging world, is that most of the impact of the slowdown has already been felt, and it wasn’t a very big hit. Most of the fallout from the subprime banking mess hit the financial markets—particularly the equity markets, where there’s been a big sell-off over the past nine months. But if you look at the real impact on growth, on domestic money markets, on financial liquidity and so forth, the emerging markets generally have sat this one out. There’s been almost no impact in China or the rest of Asia, because although Chinese, Taiwanese, and Korean banks were buying some mortgage-backed and subprime assets, they weren’t leveraging. Owning these assets in itself isn’t lethal, but rather the fact that many institutions levered up 10 or 20 times

will be an impact if these prices continue to skyrocket. It’s a very different situation if coal is at $100 and oil is at $120 and food prices are at today’s levels than if they all triple over the next two or three years. Eventually, high prices would start to hurt growth. Furthermore, this is not a China-specific issue. Chinese demand may be driving energy prices up, but the Chinese aren’t the


McKinsey on Finance

Autumn 2008

only ones suffering. High global prices affect everyone, and in fact, China is not necessarily even the country with the highest exposure. Nor is it clear that we’re looking at a longterm environment of rising commodity prices. A lot depends on your supply outlook. There are good arguments that oil may actually stay around $120 and $125 a barrel. Food prices may have jumped enormously in the past 12 months, but they’re starting to look “peakish.” Fertilizer prices are now falling. Grain prices are falling. We could see things stabilize or even fall off. There’s no guarantee that commodities will continue to go up.
McKinsey on Finance: And after the next

What pressures are compelling them to do so?
Jonathan Anderson: It’s always been

a stated policy goal. There’s a broad view that countries are better off when they have relatively free and open capital flows, but also that they want to take it slowly and gradually. Moving too quickly to capital liberalization is something that can be damaging: one of the key causes of the Asian financial crisis at the end of the 1990s was flinging open the doors and letting money rush in at too rapid a pace. In the meantime, allowing domestic investors to seek better returns elsewhere helps reduce the volatility of wealth in China. If you lock them up at home, then they are very exposed to big boom– bust cycles in the domestic economy.
McKinsey on Finance: As we’ve just

few years?
Jonathan Anderson: At the middle of

the next decade, big demographic changes will start to kick in, bringing significant structural changes to China’s industrial base. Low-end light manufacturing will likely go through wrenching structural shifts because wages are rising aggressively for unskilled labor and there are shortages of skilled workers. This is one scenario the big multinationals complain about very heavily. China’s financial system will also go through another set of wrenching changes in the next five to seven years. They’re probably going to open up the capital account on the external side, and banks, as a result, will begin to see money leaving the system. They’ll also start to see their margins squeezed and a lot more volatility as they get back to areas like bonds and external capital flows. These all have the potential to destabilize.
McKinsey on Finance: Why will China

seen—China’s A-share markets have come down by almost 50 percent over the past six months. In any other economy, that would be a major event. Why, in China, did it almost go unnoticed?
Jonathan Anderson: This is actually the

eventually have to open a capital account?

third big collapse of the Chinese equity market in the past 15 to 18 years, so in some sense it is business as usual: this is a market that goes up and down by enormous margins. Furthermore, China can have these massive boom–bust cycles with such alarming regularity because the equity market is awfully small. If you look at the actual free float—the traded shares, with market exposure, held by corporations and households in China, excluding government holdings—it started at about 3 percent of financial wealth at the bottom of this cycle, in 2005. At its peak, in October 2007, it was up to about 15 percent of financial wealth—and now it’s come back

Growth and stability in China: An interview with UBS’s chief Asia economist


down to around 10. These are not big numbers, and as a result, there are no big wealth effects when this market goes up and down.
McKinsey on Finance: Do you see China’s approach to equity markets and capital as a long-term liability? Jonathan Anderson: It’s certainly an

cent nonperforming loans in the late 1990s and early 2000s. They’ve since cleaned that up, but as long as bank finance is the primary fuel for the economy, there will be problems. That’s why China’s been moving to open up its equity and bond markets. But the starting position is still pretty low, and it’s going to be a long time before equities and bonds contribute a meaningful amount to finance in China.
McKinsey on Finance: How did policy makers think about the role of equity markets in improving governance at big flagship companies? Jonathan Anderson: The hope in the

environment that raises risk profiles. Twenty years ago, China’s socialist economy didn’t have working equity or bond markets. Everything was done within the budget, through interbudgetary transfers. Since then, all of the growth, all of the liberalization, and most of the new investment has basically come from the banking system. Asset holders and borrowers had really no place else to go—and no way to get out of the economy. So these big ups and downs of overlending followed by a bust do create big risks for the banking system. This is why Chinese banks had 35 to 50 per-

1990s was that all these marginal, not-sogood state companies could be listed, and through the magic of equity ownership they would suddenly improve and turn around. That turned out to be a false hope,

Education Earned MA and PhD candidacy in economics in 1990 from Harvard University

Career highlights UBS Investment Bank (2003–present) • anaging director and head of Asia-Pacific M Economics (2007–present)
• Chief

economist for Asia (2003–07)

• Chief

Goldman Sachs (2001–03) China economist International Monetary Fund (1992–2001) representative in Russia representative in China (1996–99)

• Resident • Resident

Jonathan Anderson

Fast facts Author of The Five Great Myths About China and the World Ranked highly among various broker polls including Asiamoney, Institutional Investor, TheAsset, and FinanceAsia Speaks fluent Mandarin Chinese and Russian


McKinsey on Finance

Autumn 2008

and for the past ten years they continued to be marginal players with mediocre performance. Part of the reason is the state of the Chinese equity market, which has always been a heavily retail-oriented market of either large private investors or small retail holders. Without the big institutional mutual funds or large institutional investors, it wasn’t an environment where outside owners could exert much influence on the way companies were run. That’s changing over time, as the mutual funds and large institutions come in, but the investment industry is nowhere near where the government wants it to be, particularly in comparison with the United States and Europe. Because of this, in part, the strategy now for listing larger state companies is more to push them abroad to go to the H-share markets— to Hong Kong and to some extent to Singapore and the United States, where they face a much stronger history of shareholder activism. And of course, the international professional-services firms come in and clean up the balance sheets, so investors get much better visibility than they would with a domestic listing.

but when companies prepare quarterly reports to international standards for outside shareholders, this automatically ensures that investors have a clearer view of the company’s strategy. I suspect that until they listed abroad, many of these large company managers did not know what a return on asset or a return on equity was and had never thought about what their cost of capital was. Now they have to answer this question five times a day. It’s like a crash course MBA: it doesn’t necessarily change anything immediately—but it can’t be bad. Perhaps more important is that such an IPO drastically eliminates the potential for major misbehavior. At one time, many Chinese companies were linked by strange holding structures, and whenever there were big problems, managers could just shift assets and liabilities around between balance sheets. It was too easy to hide a lot of quasifiscal acts like speculative transactions just by moving things around. That’s gone now.
McKinsey on Finance: You mentioned some wrenching structural changes in China’s future. How serious will those be? Jonathan Anderson: The big issue

‘ In terms of fundamentals for the next couple of years, the emerging world is going to be where all the action is’

McKinsey on Finance: Yet these Hong Kong IPOs are typically for 5 percent or even less of a company that’s a subsidiary of a giant state-owned parent company. How can an IPO that small have a tangible impact on management? Jonathan Anderson: It won’t radically

right now is rural migration. From, say, 1995 until 2003, an ever-increasing supply of young, unmarried workers came out of the interior and went to the manufacturing areas and the coast. This fueled the rapid expansion of China’s light manufacturing, with wages that grew very slowly—2, 3, 4 percent a year. The average rural migrant was making perhaps $65 to $70 a month in net cash wages. But in the last three or four years, wages have picked up, growing at 10 to 15 percent a year, maybe even slightly faster, depend-

change the way a company does business,

Growth and stability in China: An interview with UBS’s chief Asia economist


ing on whom you talk to. Today, the average wage is $135 to $140 a month. Within five years, at this pace, with the renminbi moving, it’s going to be $300 a month. Why the change? Because of demographics. China’s running out of young, cheap, single, rural labor. The one-child policy came into effect about 30 years ago, so if you look at the under-30 demographic cohort, there’s actually a declining number of people under 30 every year. And with 100 million rural migrants already working outside of their home towns and villages, there’s not a lot more to drag out. As a result, wages are starting to rise. It’s not the end of the Chinese manufacturing story. But this is the rising part of the labor supply curve—and it’s going to continue, because the demographic pressures are going to be there for a long time to come. Vietnam, India, Cambodia, and Indonesia are all already lower than China in terms of wages. That gap is going to widen very quickly.

What that means is that China’s going to start to price itself out of markets for things like sporting goods and textiles. It’s not happening quite yet—nor will it be an abrupt change when it does. It isn’t easy to find 50 or 60 million people elsewhere who are going to work for cheaper wages. But we’re at the beginning of that turning point where new investment is going elsewhere. Eventually, China’s share in all of those markets will fall—even as its competitive advantage further up the value chain continues to grow, such as in electronics and technology. The good news is the emerging world is still growing at record rates, and even if you take some of this gloss off the story, it’s still a very vibrant place. We may not see the best market performance over the next six to nine months, but in terms of fundamentals for the next couple of years, the emerging world is going to be where all the action is. MoF

David Cogman ( is an associate principal in McKinsey’s Shanghai office, where Thomas Luedi ( is a partner. Copyright © 2008 McKinsey & Company. All rights reserved.


The future of corporate performance management: A CFO panel discussion
Two leading CFOs agree that when global companies attempt to improve their performance, simple, transparent metrics are more important than theoretically pure ones.

With edgy investors warily watching every report, companies are under intense pressure to improve their performance. The challenge is all the greater for global companies, whose performance-management efforts must stretch across industries, geographies, and cultures. Yet many performance-improvement efforts fail because of excessive complexity, a lack of transparency into the performance of the whole organization, or a disconnect between performance measures and compensation and rewards. These are among the perspectives of a panel of experts convened at McKinsey’s 2008 Global CFO Forum, in London. What follows is an edited and abridged version of the discussion between panelists Alain Dassas, the CFO of Nissan, and Michael Mack, the CFO of Deere. Bertil Chappuis, a partner in McKinsey’s Silicon Valley office, moderated the discussion.
McKinsey on Finance: Michael, tell us about Deere’s journey to instill a new

performance-management philosophy into the company.
Michael Mack: We’ve long believed that we’re known for making great products, but when we examined our performance back in 2000, we realized that if we were honest with ourselves, we haven’t always been a great investment. And we wanted to make our business as great as our products.

So to start, we established what we called shareholder-value-added [SVA] performance metrics, which are very much like the more familiar metrics of economic value added [EVA] or economic profit. We also measured operating return on assets, though we adjust our targets as a function of volume—setting them higher if we’re in a higher-volume


environment—to recognize the operating leverage inherent in a business like ours. Ultimately, I think it’s fair to say that we transformed our company from an operating perspective and certainly from a financial perspective. For example, prior to 2001 we were in the bottom quartile in terms of return on invested capital, whether measured against peers or even very broad ranges, like the top 500 industrial companies in the United States. In fact, after we adopted our initiatives to improve performance management, in 2001, we not only became top quartile; we were top decile by 2003—about four years before the more recent strength in the global agricultural environment. We’ve also dramatically improved the efficiency of our working capital—we turn our assets now about two-and-a-half times faster as a whole company than we did before.
McKinsey on Finance: This wasn’t your

can visualize. And there are very few fancy financial calculations around these metrics in terms of how we calculate economic profit. We also have been very transparent. You can look in our annual report every year since we adopted this, and we’ve shown the calculations for the company total as well as by division. So there was nowhere for underperformers to hide. And in fact, when we started to publish these numbers, we weren’t doing very well, and part of turning things around was highlighting what needed to be improved. That was part of a broader effort, around communications, that made a real difference—staying on point, on message, and relentlessly consistent in communicating with any audience, internal or external, about how this works and what we’re trying to do.
McKinsey on Finance: Did you change

first effort to improve performance. Why did this effort work where others had not?
Michael Mack: I recall being personally

the company’s compensation and rewards in any way to support the shareholdervalue-added goals?
Michael Mack: Yes. We designed a variable compensation scheme to reinforce the strategy. Basically, part of the bonus of every salaried employee in the company— about 25,000 people—is based on this operating-return-on-asset metric.

part of an earlier EVA project that didn’t work, because it was too complex. If the point of these efforts was to talk a few people in the finance department into supporting your goals, a complex program might have been OK. But the idea is to permeate deep into the organization, globally, and get people to behave differently. That kind of effort has to be very simple rather than theoretically pure. I think we have accomplished that. For example, as I mentioned, we look at operating return on assets, rather than return on invested capital, because we thought the former was more intuitive to people who work in factories than those who work in sales branches. They know what a receivable is; they know what inventory is. So it’s something they

We could, of course, have set quite different goals for different business or for different regions, based perhaps on different risk factors, different specifics of the markets. But we opted not to do that. And while in some ways this is not as pure theoretically, getting it 80 percent right but well understood and well executed is far better than having it 100 percent right theoretically. And in retrospect, that was the right decision.


McKinsey on Finance

Autumn 2008

The panelists

Alain Dassas is CFO of Nissan Motor (2007–present). Prior to joining Nissan, he spent ten years at Renault, in several roles, including president of the Renault Formula 1 Team and senior vice president of finance. Alain serves on the board of directors at RCI Banque, Renault Finance, and Renault Samsung Motors.

Michael Mack, senior vice president and CFO of Deere (2006–present), joined the company in 2001 as vice president of marketing and administration. He is chair of the Iowa State University Engineering College Industrial Advisory Council and is a registered professional engineer.

One of the consequences is that you can go anywhere in the company—whether it’s India, China, the United States, or Russia— and even people deep in the organization can articulate how their particular division or unit is performing against this metric, because whether or not they are going to get a bonus depends on how they’re performing. The second compensation metric that reinforces the SVA approach is based on economic profit; it’s a medium-term incentive that affects about 6,000 employees. So performance incentives are not just for a few employees at the top; they go pretty deep in the organization, and this is based on growing the business as well. It’s not just the return on assets or return on invested capital—it’s based on raising the bar every year and some absolute number for economic profit. That creates an incentive to

reinvest in the business, even when this exceeds the cost of capital. And I think that is how one can balance the short-term requirements and work on our efficiency, as well as the longer-term requirements to reinvest in the business and achieve growth.
McKinsey on Finance: Alain, Nissan

formerly used a return-on-capital approach but recently switched to free cash flow. What’s your experience, relative to what Mike described?
Alain Dassas: Until a few years ago,

Nissan was managed by volume, which was not exactly the best way to get profitability. Then it was managed by profit. Then we switched to ROIC, which is still one of our major metrics. But as Michael said, it’s a bit of a complicated measure, especially to explain to the whole company. So

The future of corporate performance management: A CFO panel discussion


we decided to switch to the more familiar concept of cash. Everybody inside the company understands what cash is—and it’s fairly straightforward from understanding cash to understanding cash flow and free cash flow. The idea is to find a metric that can be the basis for evaluating the financial performance of our company, and free cash flow is a very comprehensive measure of all the activity of the company—P&L, balance sheet, and every item on the total balance sheet. It’s also useful to improve visibility into the short-term performance of the company. Our finance function probably has not been as visible as those in some Western companies. Using cash flow is one way to make everyone aware of the importance of certain financial ratios, both internally and externally, for investors and financial analysts.
McKinsey on Finance: How is that

free cash flow, compared with revenue, was in 2007, and the goal from 2008 to 2012 is to reach 5 percent of revenue. The way we do this is very pragmatic. It covers all activities of the company in our four regions,1 and we’re trying to focus the responsibility on every factor that can generate cash or use cash. We want to avoid being overstretched, but we want to be sure that we cover as much as possible—and that includes a lot of items that are outside the working capital and capital expenditures. It’s not yet a measure for evaluating management performance, but it will be next year. And as Michael said, we want to involve not only the top 10 to 20 executives but rather 1,500—which is a large part of the company’s management—and to include a free-cash-flow component in their evaluation. MoF

implemented on a global scale?
Alain Dassas: We started, only a few

1 Europe, Japan, United States,

and the rest of the world.

months ago, to have the company focus on free cash flow, and we’ve tried to have common principles to evaluate cash flow and free cash flow. We know what our

Bertil Chappuis ( is a partner in McKinsey’s Silicon Valley office. Copyright © 2008 McKinsey & Company. All rights reserved.


Why cross-listing shares doesn’t create value
Companies from developed economies derive no benefit from second listings in foreign equity markets. Those that still have them should reconsider.

Richard Dobbs and Marc H. Goedhart

Conventional wisdom has long held that companies cross-listing their shares on exchanges in London, Tokyo, and the United States buy access to more investors, greater liquidity, a higher share price, and a lower cost of capital. In the 1980s and 1990s, hundreds of companies from around the world duly cross-listed their shares. Yet this strategy no longer appears to make Boeing and BP, have recently withdrawn sense—perhaps because capital markets their listings. have become more liquid and integrated and investors more global, or perhaps Whatever benefits companies might once because the benefits of cross-listing were have derived from cross-listing, our analysis overstated from the start. From May shows that in general it brings few gains 2007 to May 2008, 35 large European com- but significant costs, at least for most companies, including household names such panies in the developed markets of as Ahold, Air France, Bayer, British Airways, Australia, Europe, and Japan. Danone, and Fiat, terminated their crossLimited benefits—or none listings on stock exchanges in New York as Previous research2 attributes several the requirements for deregistering from 1 These US markets became less stringent. categories of benefits to cross-listing. We moves represent the acceleration of an investigated each of them to see if it existing trend: over the past five years, the still applies now that capital markets have number of cross-listings by companies become more global. based in the developed world has been Improved liquidity steadily declining in key capital markets Although liquidity is difficult to measure, both in New York and London (Exhibit 1). the trading volumes of the cross-listed shares On the Tokyo Stock Exchange, too, (American Depositary Receipts, or ADRs) some well-known companies, such as

1 Since March 2007, foreign companies have

been allowed to deregister with the US Securities and Exchange Commission if less than 5 percent of global trading in their shares takes place on US stock exchanges. 2 For example, see Craig Doidge, Andrew Karolyi, and René M. Stulz, “Why are foreign firms that list in the U.S. worth more?” Journal of Financial Economics, 2004, Volume 71, Number 2, pp. 205–38.

MoF 2008 Cross-listings Exhibit 1 of 4 Glance: The number of cross-listings from companies based in developed markets is decreasing. Exhibit title: Different directions


Exhibit 1

Foreign listings on NYSE Sarbanes–Oxley 550 500 450 400 350 Developed markets1 300 250 200 150 Emerging markets 100 50 0 1998 1999 2000

Different directions
Number of foreign listings The number of cross-listings from companies based in developed markets is decreasing.








Foreign listings on the London International Main Market (IMM) 800 Number of foreign listings 700 600 500 400 300 200 100 0 1998 Emerging markets 1999 2000 2001 2002 2003 2004 2005 2006 2007 Developed markets1

Developed markets: Australia, Canada, Japan, New Zealand, United States, Western Europe. Source: Datastream;; ( – )

of European companies in the United States typically account for less than 3 percent of these companies’ total trading volumes. For Australian and Japanese companies, the percentage is even lower. We did not analyze the trading pattern for UK or Japanese secondary listings, but the US finding hardly suggests that they do much to improve liquidity.
More analyst coverage Academic research indicates that companies get better or more analyst coverage when they cross-list in the United States—and that potential investors therefore get better information. It is indeed true that cross-

listed companies receive more coverage from analysts, but the reason, in part, is that cross-listed companies are on average larger. After correcting for the impact of size, we found that cross-listed European companies are covered by only about 2 more analysts than those that are not cross-listed—a very modest difference, since the average number of analysts covering the 300 largest European companies is 20 (Exhibit 2). Such a small increase is unlikely to have any economic significance.
Broader shareholder base In an age when electronic trading provides easy access to foreign markets, the argument


McKinsey on Finance

Autumn 2008

that foreign listings can give companies a broader shareholder base no longer holds. Furthermore, a foreign listing is not even a condition, let alone a guarantee, for attracting foreign shareholders. It may improve access to private investors, but as capital markets become increasingly global, institutional investors typically invest in stocks they find attractive, no matter where those stocks are listed. One large US investor—CalPERS—has an international equity portfolio of around 2,400 companies, for example, but less than 10 percent of them have a US cross-listing. In fact, because of better trading liquidity in the home market, institutional investors often prefer to buy a stock there rather than the crosslisted security.

the world. Those higher standards lent credence to the argument that companies applying for cross-listings in the United Kingdom or the United States would inevitably disclose more and better information, give shareholders greater influence, and protect minority shareholders more fully— thereby improving these companies’ ability to create value for shareholders. However, other developed economies, such as the continental member states of the European Union, have radically improved their own corporate-governance requirements. As a result, the governance advantages once derived from a second listing in the United Kingdom or the United States hardly exist today for companies based in developed countries.

MoF 2008 Better corporate governance Access to capital Cross-listings UK and US capital markets may once have When companies can’t easily attract large Exhibit 2 of corporate-governance standards had higher 4 amounts of new equity in their home Glance: In the FTSEurofirst in Index, US cross-listed companies get makes sense to issue new equity than their counterparts 300other parts of markets, it only slightly higher coverage by analysts. Exhibit title: Comparable coverage
FTSEurofirst 300 Index, Dec 2005

Exhibit 2

Cross-listed companies Regression line, crosslisted companies

Noncross-listed companies Regression line, noncross-listed companies

Comparable coverage
In the FTSEurofirst 300 Index, US crosslisted companies get only slightly higher coverage by analysts. 50 45 40 Coverage, number of analysts 35 30 25 20 15 10 5 0 1.0 3.0 10.0 30.0



Company market capitalization, € billion

Why cross-listing shares doesn’t create value


3 This figure is based on 420 depositary

receipt issues on the NYSE , NASDAQ , and AMEX from January 1970 to May 2008 ( 4 Pasi Tolmunen and Sami Torstila, “Crosslistings and M&A activity: Transatlantic evidence,” Financial Management, 2005, Volume 34, Number 1, pp. 123–42.

in foreign ones through a cross-listing. As cross-listing their shares in the United investors increasingly come to trade around States doubled, on average, their US acquisition activity over the first five years after the world, however, local stock markets the cross-listing.4 There may thus be a real have provided a sufficient supply of equity benefit from US cross-listings for companies capital to companies in the developed economies of the European Union and Japan. planning US share transactions. A UK or US cross-listing therefore does Significant costs—and few gains— not appear to confer a compelling benefit. Besides, three-quarters of the US crossfor valuations listings of companies from the developed Maintaining an additional listing generates economies (through ADRs) have actually extra service costs—for example, fees for never involved the raising of any capital in the stock exchanges—and additional reportMoFUnited States.3 What they did was to the 2008 ing requirements, such as 20-F statements Cross-listings companies with acquisition provide foreign for ADRs. Although these service costs tend Exhibit 3 of 4 US share transactions. As to be minor compared with the cost of currency for Glance: On average, companies don’t suffer negative share price movements after the announcement academic research has shown, companies compliance (particularly with US regulations of a delisting. Exhibit title: Investors don’t care
Average cumulative returns to shareholders before/after delistings1 announced from Dec 31, 2002, to Dec 31, 2007, %
Total returns to shareholders (TRS) Excess TRS relative to MSCI World Index

Exhibit 3

Investors don’t care
On average, companies don’t suffer negative share price movements after the announcement of a delisting.

Involuntary delistings2 5 4 3 2 1 0 –1 –2 –25 –20 –15 –10 –5

Delistings 5 4 3 2 1 0 –1 –2 –25 –20 –15 –10 –5



10 15 20 25

Days before/after announcement (announcement date = 0) Voluntary delistings 0 5 10 15 20 25 5 4 3 2 1 0 –1 –2 –25 –20 –15 –10 –5

Days before/after announcement (announcement date = 0)



10 15 20 25

Days before/after announcement (announcement date = 0)

Sample: delistings by foreign companies in developed markets from London International Main Market, NASDAQ, or NYSE, of which were voluntary and involuntary. For example, delistings occurring as result of bankruptcy, mergers, or takeovers. Source: Bloomberg; Datastream; London Stock Exchange; NYSE; Reuters


MoF 2008 Cross-listings Exhibit 4 of 4 McKinsey on Finance Autumn 2008 Glance: Companies from developed markets do not appear to benefit from US cross-listing.1 Exhibit title: No impact on valuation
Developed-market companies
US-listed companies Non-US-listed companies

Exhibit 4

No impact on valuation
Companies from developed markets do not appear to benefit from US cross-listing.1

4.5 4.0 3.5 2.5 2.0 1.5 1.0 0.5 0.0 0 20 40 60 goodwill,3 % 80 EV/EBITDA2 Tobin’s Q1 3.0

30 25 20 15 10 5 0 0 20 40 60 goodwill,3 % 80

ROIC, exclusive of

ROIC, exclusive of

Tobin’s Q is de ned as the market value of a company divided by the book value of its assets: (total assets – book value of equity + market value of equity) ÷ total assets at year-end. EV (enterprise value) at year-end divided by EBITDA (earnings before interest, taxes, depreciation, and amortization). Average ROIC (return on invested capital) from to . Source: Bloomberg; Datastream; NASDAQ; NYSE; McKinsey analysis

such as Sarbanes–Oxley), they have grown enormously over the last few years. British Airways and Air France, which both recently announced their delisting from US exchanges, estimate that they will save around $20 million each in annual service and compliance costs. This sum probably doesn’t include the time executives spend monitoring compliance and disclosure for the US market. As for the creation of value, we haven’t found that cross-listings promote it in any material way. Our analysis of stock market reactions to 229 delistings since 2002 on UK and US stock exchanges (Exhibit 3) found no negative share price response from the announcement of a voluntary delisting.5 Our comparative analysis of the 2006 valuation levels of some 200 cross-listed companies, on the one hand, and more than 1,500 comparable companies without foreign listings, on the other, confirmed

that the key drivers of valuation are growth and return on invested capital (ROIC), together with sector and region. A crosslisting has no impact (Exhibit 4).6
The skinny on emerging markets

5 Involuntary delistings occur, for example, as a 6 Using multiple regression, we estimated to

result of bankruptcies, mergers, and takeovers. what extent a cross-listing influenced a company’s valuation level as measured by the ratio between enterprise value and invested capital (Tobin’s Q) and the ratio between enterprise value and earnings before
interest, taxes, depreciation, and amortization (EBITDA). Of course, we took into account the company’s return on invested capital (ROIC),

We are still analyzing the benefits and costs of dual listings for companies in emerging markets, where the advantages and disadvantages vary more from country to country than they do in the developed world. Our analysis so far has uncovered no clear evidence of material value creation for the shareholders of these companies. We found neither anything to suggest that cross-listing has a significant impact on their valuations nor any systematically positive share price reaction to their crosslisting announcements.7 Nonetheless, we did uncover some findings specific to companies from the emerging world. Cross-listed shares represent as much

consensus growth projections, industry sector, and geographic region. 7 This finding might be explained by the much smaller size of the sample of companies from the emerging world and the much higher average volatility of their equity returns.

Why cross-listing shares doesn’t create value


8 See Roberto Newell and Gregory Wilson, “A

premium for good governance,” The McKinsey Quarterly, 2002 Number 3, pp. 20–3.

as a third of their total trading volume, for example. Furthermore, some of these companies have succeeded in issuing large amounts of new equity through crosslistings in UK or US equity markets— something that might have been impossible at home. Last but not least, compliance with the more stringent UK or US corporategovernance requirements and stock market regulations rather than local ones could generate real benefits for shareholders.8

Companies from developed economies with well-functioning, globalized capital markets have little to gain from cross-listings and should reconsider them. Companies from emerging markets may derive some benefit, but the evidence isn’t conclusive. MoF

The authors wish to thank Martijn Olthof and Stefan Roos for their contributions to the research underlying this article, as well as Professor Tim Jenkinson, of Oxford University’s Saïd Business School, for his advice on methodology. Richard Dobbs ( is a partner in McKinsey’s Seoul office, and Marc Goedhart ( is a consultant in the Amsterdam office. Copyright © 2008 McKinsey & Company. All rights reserved.



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