Why innovation is the secret weapon of the world’s biggest companies

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In the 30 years since we launched the Fortune Global 500, our annual ranking of the world’s largest companies by revenue, two very clear themes have emerged.

The first—which Fortune’s incomparable director of infographics, Nicolas Rapp, has captured artfully on the cover of this issue—is the sheer gravity-defying rise of China as a leader of global business. There were precisely zero Global 500 companies based in mainland China in 1990 when we began our survey. Today there are more giant for-profit enterprises there than anywhere else on earth.

The second—and equally dramatic—narrative is the steep rise of global trade in general, which has been just as inexorable, it seems, as China’s ascent. In the first running of the Global 500, world trade represented less than 39% of global GDP, according to the World Bank; in 2018 (the latest year available), such trade accounted for more than 59% of our planet’s economic output.

It should go without saying (but, unfortunately, too often goes unsaid) that cross-border trade is precisely what made America the first economic superpower—long before it made China one. American companies exported $2.5 trillion worth of goods and services in 2019, up from $487 billion three decades earlier—a greater than fivefold increase in nominal dollars. Even adjusting for inflation, the growth rate is 152%. (For those who believe imports have increased at a substantially faster rate over the past three decades, prepare to be shocked: In inflation-adjusted terms, imports have grown 160%, barely more than exports.)

Market-based economies, naturally, need markets. And in order to thrive, businesses in those market-based economies need to either expand existing markets or find new ones. America’s free-spending, high-living, 328-million-strong population makes for a pretty robust cohort of consumers—but outside its borders are nearly 7.5 billion more who might be turned into possible customers one day. Starbucks, which makes its Global 500 debut this year (at No. 478) figured this out early, and now gets 30% of its $26.5 billion in revenue outside the U.S. (see chart). With a compound annual growth rate of over 22% since 1999, Starbucks’ international sales are growing about a third faster than domestic sales. Nike (No. 322), the pride of Beaverton, Ore., now gets 59% of its sales outside America; Archer Daniels Midland (No. 168), purveyor of the American breadbasket, gets 57%.

Which brings us back to the Global 500. The ability to export—to open up and thrive in a new market—is a key attribute of the world’s most successful firms. That ability, moreover, is often self-reinforcing. “The opportunity to export more incentivizes companies to innovate more on their products and to sell better products in the market,” says Fabian Trottner, an assistant professor of economics at the University of California, San Diego, who has written about the connection between exporting and innovation. Launching into a new market also helps a firm tap foreign knowledge, from process efficiencies to product design. “You open up a new market for ideas,” says Trottner, who has studied these effects on 6,000 German manufacturing firms. “You get to dip into an entire new world of knowledge and innovation activity that has been closed to you before.”

Indeed, you’ll see that same narrative thread winding through the great mass of feature stories in this year’s Global 500 edition. Please read on and let us know what you think.

Source : https://fortune.com/2020/08/10/global-500-companies-china-business-cross-border-trade/

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