Measuring Tech
By Michael Carty, Herb Blank

Since the late 1990s, the trend of glob-alization has made the concept of the multinational company a hot topic in the global investment arena. Companies derive revenue and profits from an increasing number of countries outside their home mar-kets; customers and operations are spread around the globe; capital and information flow across borders. As a result, the tradi-tional use of the 'country of domicile' to char-acterize a company or to calculate a portfo-lio's country/region allocation is becoming less and less accurate and meaningful.

Determining how to measure a company's global characteristics correctly and precisely is a challenge not only to portfolio managers, but also to global index providers because it has a significant impact on the definition, construction and maintenance of global indexes. As the trend continues to develop,the question will only increase in significance.

From Home Country To Multinational

The globalization trend makes the accurate and detailed measurement of revenue sources increasingly important, as there are fewer and fewer companies with a single economic domicile. For example, Nestle and Nokia are headquartered in Switzerland and Finland respectively, but they generate only 1.56% and
1.63% of their total revenue from their home countries. This phenomenon can also be seen in the Dow Jones Global Titans 50 Index (DJGT), an index of the 50 largest companies from around the world that represents a core portfolio of global blue chip stocks.

As shown in Appendix 1, all but two of the component companies derive revenue from more than one country or region. The excep-tions are a number of telecommunication and utility companies subject to very strict
regulatory restrictions. Moreover, on average nearly 20% of the revenue of the 50 DJGT component companies is generated outside their home regions, and almost 41% outside their home countries.

The concept of multinationality has become increasingly important to global investment and global indexes for two primary reasons. First, when a company derives a significant amount of its revenue overseas, economic factors in its home country, such as GDP growth, interest rates and the unemployment rate may play only a
partial, or even very limited role in the company's earnings growth and stockprice performance. In other words, a company's geo-graphic headquarters may have increasingly less influence on its activities and perform-ance. The global economic environment and investment climate may be an even bigger determinant of earnings growth and stock-price movement to a multinational company.

A typical example is the Asian financial crisis in 1997, when faltering economies in that region hurt the earnings growth of U.S. companies with Asian exposure. The impact from falling earnings, combined with growing con-cern over the still slumping economies in Asia, caused high volatility in the stock prices
of multinational companies. The Dow Jones Industrial Average (the Dow), while consist-ing entirely of U.S. based companies, was significantly affected.

To do the analysis, the world is divided into three major regions, the countries of which fall into similar time zones: Asia/Pacific, Europe and the Americas. Showing a revenue breakdown of the 50 DJGT component stocks by geographic region, Appendix 1 demonstrates the concept of multinational companies: Not only do
they derive revenue from beyond their home countries and regions, but that outside rev-enue also may be a significant portion of total revenue. Summarizing the data from Appendix 1, Chart 1 illustrates the average
and highest percentage of revenue derived from outside companies' home regions.

These figures suggest that moving from a traditional home country definition to a multinational concept of company characteristics is correct and generally necessary. The fol-lowing graph also provides fresh evidence
supporting the concept of multinationality. Country effects have been falling since the late 1980s, whereas sector effects relative to country correlation have been on the rise for the past four years.

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