Today's turbulence in emerging-market equity markets has triggered a wave of obituaries for their growth miracles of recent decades. But confusing short-term wobbles with terminal decline is a gross misreading of what is happening. The wave of industrialization and urbanization that is boosting the incomes of millions of people in emerging economies has not run its course.
Indeed, emerging-market bears are missing an important new driver of continued growth in these countries: their increasingly powerful and dynamic companies. Emerging economies today are much more than a collection of new consumer markets and plentiful (and increasingly skilled) labor. They are also home to thousands of new companies, many of which are quickly becoming large, global leaders in their fields.
Twenty years ago, who would have guessed that Mumbai's Tata Group would be the largest private-sector industrial employer in the United Kingdom; or that Mexican companies Cemex and Bimbo would become the United States' market leaders in cement production and bread-making, respectively; or that Beijing-based Lenovo would be on a par with Hewlett-Packard as the world's largest seller of personal computers? Moreover, the transformation in the world's business landscape is in its early stages and should bolster growth in emerging markets for years to come.
The MGI CompanyScope, a new database of all companies with revenues of $1 billion or more, reveals that there are about 8,000 large companies worldwide. Three-quarters of them are still based in developed regions.
By 2025, however, there are likely to be an additional 7,000 large companies, with seven out of ten based in emerging regions. The share of global consolidated revenue generated by these emerging-market corporate giants is set to increase from 24% today to 46% in 2025.
The composition of the Fortune Global 500 is a case in point. From 1980 to 2000, the share of companies on the list that were based in the emerging world remained relatively flat, at 5%. By 2013, this share had soared to 26%, and, even on the most pessimistic assumptions for emerging-market growth, we expect it to rise to 39% by 2025 and to as high as 50% on more bullish assumptions.
In fact, the shift in the business landscape thus far has lagged behind the shift in the weight of global GDP toward emerging markets. Between now and 2025, the GDP of emerging markets could increase by a factor of 2.5 - but the number of large companies based in these regions could more than triple. By 2025, some of the leading global names in many industries could be companies we have not yet heard of - and some will likely be based in cities that few today could point to on a map.
We have mapped the MGI CompanyScope to Cityscope, our database of the world's cities, giving us a detailed picture of where large companies locate their head offices and foreign subsidiaries.
Headquarters are extraordinarily concentrated. The top 20 host cities are home to around one-third of all large companies' headquarters and account for almost half of these companies' combined revenue. Just five of these top 20 cities are in emerging regions today.
But this, too, is changing fast. The number of large-company headquarters in São Paolo, for example, is expected to rise more than three-fold by 2025, while Beijing and Istanbul could have 2.5 times as many head offices as they do today. We estimate that about 280 cities - among the candidates are Campinas (Brazil), Daqing (China), and Izmir (Turkey) - could host large companies for the first time.
More than 150 of these up-and-coming business cities are likely to be in China. If we look at telecoms companies, for example, Bandung (Indonesia) and Hanoi (Vietnam) already host large firms' headquarters - despite the fact that their GDP is relatively small, at $6 billion and $12 billion, respectively.
Fast-growing home markets have been the launchpad for globally competitive emerging-market companies partly because these firms have learned to compete at very different income levels. Moreover, they know how to work around inadequate infrastructure. McKinsey research suggests that these companies are growing more than twice as quickly as their counterparts in developed economies.
Richard Cooper (L) and Jaana Remes (R)Emerging-market large companies' growing global clout is reflected in flows of foreign direct investment. As recently as 2001, only 5% of outward FDI came from non-OECD countries; by 2011, that share had soared to 21%. China's outward FDI rose by almost 50% per year from 2004 to 2010; Brazil, Singapore, and Hong Kong have been major investors in Europe.
Those who have been writing obituaries for the emerging-market boom should give serious consideration to these trends. The new breed of emerging-market multinational is diversifying its revenue around the world. If growth in these companies' home markets slows, they will diversify even more aggressively. The global economy is now their platform.
Richard Cooper is Professor of International Economics at Harvard University. Jaana Remes is a partner at the McKinsey Global Institute, based in San Francisco.