Outward Foreign Direct Investment from Emerging Economies:

Importance, Drivers and Policies

Rajah Rasiah

Professor of Technology and Innovation

University of Malaya

Paper prepared for conference on “Emerging Multinationals: Outward Foreign Direct Investment from Emerging and Developing Economies”, 9-10

October 2008, Copenhagen Business School.

1 Introduction• Outward foreign direct investment (OFDI) from the emerging economies rose from

US$335billion in 1995 to US$1.4trillion in 2005 (UNCTAD, 2006: 103-104). • The number of emerging economies with OFDI stocks exceeding US$5billion

increased from 6 in 1990 to 27 in 2005. • The technological capabilities and market share of some of the TNCs from the

emerging economies has risen sharply.• Shifting the focus from simply examining macroeconomic variables such as inflation,

interest rates, exchange rates, GDP growth, labour supply and wages, political and social security, transactions costs etc to dynamic variables related to actual drivers.

• IMF definition of FDI – 10 percent or more of share ownership as foreign.• Thus, this paper examines the importance, drivers and home government policies of

OFDI from the emerging economies. I start from the vantage point that drivers shape responses from TNCs, and home and host governments. Excluded from analysis in this paper are cross-border relationships between local firms and multinationals through licensing, outsourcing and trade links. The rest of the paper is organized as follows.

• Section two discusses the significance of OFDI from the emerging economies. • Section three discusses the theoretical guide used to screen OFDI flows from the

developed economies. • Section four examines the drivers of OFDI from the emerging economies. • Section five analyzes the policy implications for home countries. Section six presents

the conclusions

2. Importance of OFDI from the Emerging Economies

• Shares in overall OFDI has expanded strongly.

• Asia (particularly East Asia) has expanded strongly share in total OFDI from emerging economies.

• M&As a major source of OFDI from emerging economies.

FAa

TNIb

FAc Firm Nation Indus

A(US$bn) For

Sal(US$bn

)%

For Emp% For Affi

% For

20 11 17Hutchison Whampoa HK Diver 61.6 80.0 24.7 79.5

165590 82.8 75 90.4

55 98 53 Petronas Mal Petrol 26.4 36.0 13.0 29.3 4016 11.8 167 71.4

63 15 3Cemex Sab De LV Mex NMM 21.8 82.4 12.1 80.8

39630 75.2 535 96.6

82 36 4

Singapore Telecommunications Sing Tel 18.0 86.8 55.6 70.3 8832 45.3 99 95.2

87 81 19Samsung Electronics Korea E&E 17.5 23.4 62.1 78.6

27664 34.3 76 88.4

92 75 11 LG Corp Korea E&E 16.6 32.8 38.4 63.24068

9 51.5 42 91.3

98 33 21Jardine Matheson HK Diver 15.8 85.5 84.2 70.6

57895 52.6 91 85.8

Table 1: Emerging Economy TNCs among top 100 non-financial TNCs, 2006

Table 2: Outward FDI, Top 20 Emerging Economies, 1980-2006 (US$Millions)

Home Country 1980 1990 2000 2006 Rank(2006)

South Africa 5 541 15 004 32 333 43 499 9

Argentina 5 970 6 057 19 276 24 047 14

Brazil 38 545 41 044 51 946 87 049 6

Chile 885 1 149 11 154 26 787 13

Colombia 136 402 2 989 9 960 20

Venezuela 23 1 221 7 676 11 559 19

Mexico 1 632 2 672 8 273 35 144 11

Panama 730 3 876 10 507 21 176 15

British Virgin Islands .. 875 67 132 123 512 3

Cayman Islands 72 648 20 788 40 395 10

United Arab Emirates - 2 14 1 938 11 830 18

China .. 4 455 27 768 73 330 7

Hong Kong 148 11 920 388 380 688 974 1

Korea 127 2 301 26 833 46 760 8

Taiwan 13 009 30 356 66 655 113 910 5

India 78 124 1 859 12 964 17

Indonesia 6 86 6 940 17 350 16

Malaysia 305 753 15 878 27 830 12

Singapore 623 7 808 56 766 117 580 4

Russia - - 20 141 156 824 2

Figure 1: Outward FDI from Emerging Economies, 1980-2006

0

2

4

6

8

10

12

14

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

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1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

Sh

are

in G

lob

al S

tock

(%

)

Africa Latin America Asia Eastern Europe and Central Asia

3. Analytic Framework• Drivers have a key bearing on the conduct of TNCs, as well as, the

strategies of home and host-governments. Motives of firms and governments differ significantly. Drivers of OFDI adapted from eclectic TNC theory expounded by Dunning - OLI - explaining the rationale for the cross-border movement of asset ownership:

• Market• Natural resource• Agricultural commodity• Labor• Incentives and grants• Technology• Striking bargains

4. Drivers of OFDI from Emerging Economies

• From scale and scope, and macroeconomic factors to drivers• Markets (malls, banks, automobile manufacturers from Korea (circumvent

tariffs), GSPs from Malaysia such as LKT and Eng Technology and Taiwan such as Tatung)

• Natural resource (Chinese and Indian firms aggressive on oil and gas); Brazil’s CRVD into Mozambique to mine metal ores

• Agricultural goods – land seeking for cultivation to product seeking to control adequate and quality supply of agricultural materials. Expansion of Sime Darby into Indonesia in oil palm and malls seeking quality fruits from Vietnam and China.

• Labour – relocation out of VC segments that are labour-intensive. Egs include • Incentives and grants (Special incentives drove Taiwan’s UMC and Germany’s

Qimonda to Singapore instead of to Malaysia)• Technology (Human capital main reason why Samsung relocated fabrication

plant in India and not Malaysia)• Acquisitions or relocations to harness technological benefits from superior

innovation systems (see Table 3). For Malaysia Malaysian firms acquired palm oil refineries in Rotterdam and Silterra has established strong linkages with R&D labs in Europe.

Figure 2: Outward M&A's from Emerging Economies, 1987-2006

0

2

4

6

8

10

12

14

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Year

Sh

are

in t

he

Wo

rld

(P

erce

nt)

Africa Latin America and the Caribbean Asia South-East Europe and the CIS (Transition economies)

Table 3: Acquisitions by Indian Parmaceutical Firms in Europe, 2006

Acquirer Target Firm Host-Country

Ranbaxy Laboratories Terapia Romania

Ethimed Belgium

Allen Italy

Dr Reddy’s Laboratories Betapharm Germany

Aurobindo Pharma Milpharm UK

Shasun Chemicals Rhodia Pharma’s Solutions Unit France

5. Implications for Policy• As argued earlier drivers impact considerably on the conduct of

OFDI and on host and home government policies. • Promotional strategies

– Mix of home- and host-government policies that influence conduct of TNCs – light export-oriented and heavy inward oriented industries in China and Malaysia (e.g. national support from Indian government in the Mittal-Arcelor merger in 2005.)

• Investment coordination• Collaboration – India and China cooperate sometimes (e.g.

purchase of 50% equity from American owned Chevron) but also compete other times (e.g. China beat India to win Kazakhstan’s oil contracts)

• Leveraging (Singapore government)• Corporate Social Responsibility (Petronas problems in Chad)• A careful scrutiny of these policies will be pivotal in assisting OFDI

relocating abroad.

6. Conclusions• Dunning’s eclectic framework of OLI still critical to understand the drivers of OFDI from the

emerging economies, which conditions strongly both home and host government policies• Markets and natural resources have been the key drivers of OFDI from the emerging

economies, but all others have remained important.• The standard government response to OFDI from the emerging economies has been to

regulate better those flows. Even in the developed economies several acquisition attempts from the emerging economies were prevented by host-governments. Oil and pharmaceutical sectors have faced strong barriers in the United States. National interest and attempts to avoid retrenchment have been cited as the key reasons behind such government interventions.

• Given the growing significance of OFDI from the emerging economies it well help if the home and host governments involved establish common and specific collaboration platforms to raise information flows as well as coordinate better the negotiations and execution of investment projects.

• Being members of the South group and as latecomers having viewed the experience of OFDI flows from developed economies both home and host governments could discuss these issues with less asymmetric problems.

• A loose multilateral investment framework among these economies (but with room for flexibility) could be better achieved among the South economies than the previously failed efforts at the global front.

• While investor interest will remain the key driver, any common agreement should incorporate elements of corporate social responsibility and national interests. Instead of reinventing the wheel the codes of conduct adopted originally by the United Nations should be the starting point of such deliberations.