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Firms find foreign markets friendly to stock sales.
Firms are reaching across national borders by the dozens to list on Nasdaq. That underscores not only the globalization of finance but, far more important for entrepreneurs, points to an unprecedented chance to raise money and grow their companies, says Raffi Amit, a Wharton School management professor and co- director of the Wharton Entrepreneurial Programs.
In decades past,
companies typically listed on their home country's stock
exchange, Amit points out in a chapter he co-wrote with Professor Christoph
Zott of INSEAD a new book on globalization published by Wharton and
INSEAD business
school in France, The
INSEAD-Wharton Alliance on Globalizing: Strategies for Building Successful
Global Businesses (Cambridge University Press, 2004). As
a result, firms in places such as the United States and Germany had an advantage.
After all, those two nations have two of the world's richest capital
markets. A company with a good product or service and a potentially hefty pool
of customers
was likely to get funded.
In contrast, firms in entrepreneurially energetic places with smaller stock markets such as Israel and India operated at a disadvantage. Simply put, there was less money to go around.
But in recent years, firms in Israel, India and a host of other countries have begun to jump national borders to do stock offerings in both the United States and Germany. From 1998 through 2001, for example, 405 non-U.S. firms listed on Nasdaq, raising an average of $125.5 million each. Even a firm from Iceland went public on the electronic stock exchange.
"Entrepreneurs overseas should know that they have access to capital markets beyond the geographic boundaries of their countries," Amit says in an interview. "This is important because one of the biggest constraints to growth is access to capital. So in examining their alternatives, they should think about other markets."
That's what Infosys Technologies in India and Check Point Software Technologies in Israel did. Both listed on Nasdaq. In mid-October, Infosys' market capitalization was $16.3 billion, while Check Point's was $4.5 billion. Over the five years that ended Oct. 15, Infosys' stock had returned nearly 59 percent, while Check Point's had returned nearly 30 percent. Both beat the Dow Jones Total Stock Market Index during that period.
Check Point's home country of Israel, while far smaller than the United States, does have a healthy stock market. In fact, Amit and his co-author, INSEAD's Christoph Zott, found that three countries with robust markets — Israel, Canada and the United Kingdom — accounted for more than half of the foreign listings on Nasdaq. Israel alone provided 86 of the Nasdaq listings during the period they studied.
That suggests that companies have reasons besides just raising money for listing abroad. In a survey, Amit and Zott did uncover other motives, though fundraising predominated. Every firm they surveyed listed money as a motive. But about two-thirds also wanted to increase their international visibility, and a third wanted to broaden the geographic distribution of their shareholders.
Companies that list abroad also make useful foreign contacts and improve their familiarity with foreign consumers and competitors, Amit and Zott point out. That, in turn, can help them boost their foreign sales and market share. That's especially important for, say, an Israeli firm listing on Nasdaq because Israel's economy is dwarfed by the United States'.
A listing in a big, established market also sends an important signal, Amit and Zott write. The challenge for an entrepreneurial firm is overcoming its smallness and newness. The firm often hasn't existed long enough to develop a strong, positive image abroad. A listing on Nasdaq lets it draw the attention of Americans to its "trustworthiness, quality and commitment to establish a long-term presence in the market," Amit and Zott say.
Executives at Austria-based AT&S, for example, said they decided to list in 1999 on Germany's Neuer Markt, which has since merged with Deutsche Borse, because doing so enhanced the company's international visibility, which helped in recruiting foreign talent.
Like most benefits in business, listing abroad comes with costs — some of them steep. It likely costs more than listing at home, Amit and Zott say. Executives must travel abroad to conduct "road shows" for potential investors. What's more, executives from some countries may not speak the language of the country in which they would like to list, which could create communication problems.
Firms also may face tax penalties if they list abroad. Employees of Canadian companies enjoy a tax windfall if their companies list at home. The first CA$500,000 of their capital gains on the employer's stock is tax free.
Despite the barriers, listing abroad is a "viable alternative for some entrepreneurial companies," Amit and Zott say. Sure, firms must weight the costs and benefits, as they'd do with any important decision. But for some, going global with their listing represents an opportunity to raise both money and their international profile.
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