Local Anchor Business Growth
© Matt Kenyon

Jeff Immelt has some advice for the next generation of corporate leaders: “I agree with the first five minutes of a Bernie Sanders speech.” That’s a statement that you don’t expect to hear from the head of a multinational corporation, but it’s one that I heard last week during a conversation with Mr Immelt, chief executive of General Electric. It could be that Mr Immelt, who has only a few more weeks at the helm before he hands the reins of the 123-year-old industrial group to his successor, John Flannery, is more comfortable speaking his mind in advance of what he claims will be his “retirement” (don’t bet on it).

But I suspect he’s just saying aloud what any smart corporate leader today must realise. The financial crisis of 2008, its continued economic aftermath, and the political populism that followed has changed the paradigm for global business in profound ways. On that front, Mr Immelt’s experience at GE over the past several years offers a kind of post-populist playbook for global capitalists.

What are the lessons? First, as he puts it, “you need more than just consumption” to drive forward the economy of rich nations such as the US or those in Europe. That’s the part of the populist message that Mr Sanders’ supporters (not to mention plenty of Trump voters) and Mr Immelt can agree on.

The US’s economic model over the past 40 years has been predicated on a kind of globalisation that encourages low wages and outsourcing. The idea was that cheaper stuff would offset the loss of jobs and lower wages. But in an economy made up of 70 per cent consumer spending in which wages haven’t risen for most of the population since the 1990s, that maths stops working. “Globalisation can’t be just about outsourcing and low wages,” says Mr Immelt (there’s an increasing body of research showing that low wages are a cause, rather than just a symptom, of the problems of globalisation).

The best way to share the benefits of globalisation, according to Mr Immelt, is to copy the Germans, and in particular the “Mittelstand” companies’ model of vertically integrated manufacturing ecosystems, often anchored by a large group and surrounded by smaller ones that support it. In this model, highly skilled (and highly paid) workers create high-value goods for export.

Large exporters typically create eight supply chain jobs for every single employee, which is one reason that any number of communities in the US are eager to lure them — for every dollar of economic value they create, the community itself earns another $1.50. That’s why even though technology has decreased the overall number of manufacturing jobs in the US, the positions that exist may still end up supporting a large amount of high-quality economic activity.

GE’s jet engine operations, for example, have spawned entirely new service businesses that analyse the data coming from the thousands of sensors on each engine, and consult about how to use it.

Often, the courtship for the big anchor firms that create those jobs involves a race to the bottom, via tax incentives, corporate subsidies and the like. Yet Mr Immelt says that the most important thing for GE in deciding where to locate its operations is the talent pool, which tends to be a function of the quality of the local educational system.

Consider the most recent GE factory, built in Lafayette, Indiana, near Purdue University, a renowned engineering school. While the several hundred workers who will eventually put together jet engines at that facility won’t necessarily have four-year degrees in electrical or industrial engineering, they benefit from the ecosystem surrounding it. “College towns tend to have stronger secondary educational systems and vocational training programs and that creates a better labour force,” says Mr Immelt (indeed, West Lafayette, 30 minutes from where I grew up, has the number-one-ranked high school in Indiana).

The lesson here is that public goods matter. Business doesn’t operate in a laissez-faire vacuum. Policy choices have an impact, and economic value flows to communities (or countries) that invest in things such as education and training.

Mr Immelt’s final, and perhaps most valuable, advice for future corporate leaders is to spend more time in factories and less in Davos. As he has put it, “somehow, ‘global thinkers’ have grown increasingly distant from the needs at ground level. We made globalisation its own political party. The ‘party’ saw globalisation as theory, rather than understanding the impact on normal people, or the critical investments needed to build competitiveness. We rationalised outsourcing as merely good business,” ignoring the larger economic impact on communities, and “hid behind” trade deals that were better for companies than workers, something he admits GE has been part of (these days, Mr Immelt supports the renegotiation of Nafta).

While he’s not calling for CEOs to join the Occupy movement (he has the usual corporate lines on the need for less regulation and business-friendly tax reform), he warns that too many business leaders have become out of touch with how they are perceived by real people. It’s something that carries measurable corporate risk — witness the rise and fall of Uber’s Travis Kalanick. It’s also something that Mr Sanders would undoubtedly agree with.

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rana.foroohar@ft.com

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