Andrea Goldstein OECD Development Centre

1. A new geography of international investments? Multinationals from Brazil, India, and other emerging economies Andrea Goldstein OECD Development Centre DIIS, København, 8 May 2006

2. Motivations for the study • The rise of “Third World” MNCs is not a recent phenomenon and it has been documented by a number of authors • international Third World firms operated in a wide range of industries and were by no means confined to either labor-intensive or mining sectors • the general belief was that companies from non-industrial economies could hardly ever rise to become formidable global competitors

3. What is new? • Globalization and trade liberalization, including regionalism • Privatization and regulatory reform • New technologies, shorter lead time, launching a new product has become much more expensive • The age of alliance capitalism • A global creative class?

4. What does it mean? • “Before the West knows it, Chinese and Indian companies that are now making goods or doing service work for Western brands will become global players. The moment we feel them, it will be too late” (Time, 17 May 2004) • “Les capitalistes de l’hémisphère Sud à l’assaut du Nord” (Les Echos, 6 December 2004) • “Rescuing Rover – A joint venture with Shanghai Auto could be a clever move” (Financial Times, 29 November 2004) • “China’s Big Deals – Should We Worry?” (Business Week, 20 December 2004) • “Paranoia is one way to describe their behavior. I would call it an acute awareness of their vulnerability. The new kids on the block who lack faith in the rule of law because they don’t have it themselves, they don’t see the international system as being in their favor, and engage in a constant quest for vertical integration in their business dealings, wanting to control every aspect of whatever it is they need. The basic reality, though, is that they don’t have the ability to compete internationally yet.” (New York Times, 12 December 2004)

5. Nationality: definitions and principles • Existing criteria to define nationality: • The principle of control • The principle of incorporation (UK, US) • The principle of the company HQ (FR, DE)

6. Nationality: reality • companies controlled by non-resident entrepreneurs? Lakshmi Mittal and Simon Patiño • companies that move their primary listing to an advanced country’s financial market and yet maintain a strong association with their countries of origin? • companies incorporated in developing countries that are in turn subsidiaries of OECD MNCs? • companies from developing countries that are owned by financial investors based in OECD countries? • companies established in offshore financial centres?

7. EMNCs are homogeneous • Many are SOEs or government-linked companies (Temasek in Singapore, Khazanah in Malaysia) • Many are family-owned/controlled, affiliated to diversified conglomerates (Tata, Santo Domingo, Koç, CP Group, Anglo-American) • Some are “pure players” (Arcor, Sabó) • Some are “born-global” (Acer) • Few are SMEs (www.lolita.com.uy)

8. OFDI data • General problem with the quality of FDI data. • even more serious with OFDI from emerging economies. • definition issues • deficient data collection • Flows vs. stock approach • The round-tripping issue • Hong Kong ( 40 % of the total OFDI stock of developing countries) • Russia • data need to be interpreted carefully

9. Additional problems • differences in the way data are collected, defined and reported help to explain some of the oddities in global data compilations • while inward and outward FDI should in principle balance, they rarely do. In 2004, global FDI outflows stood at $730 billion, whereas the inflows were $648 billion • Bilateral comparisons  outflows reported by the investing economies seldom resemble the data provided by the recipient country

10. Nevertheless … • clear upward trend • OFDI stock from emerging economies multiplied by 11 since 1985 • year-on-year variance • South-South FDI flows rose from an estimated $14 billion in 1995 to $47 billion in 2003 and have to an important extent compensated developing countries for the decline in FDI flows from high-income countries from $130 billion in 1999 to $82 billion in 2003 (GDF 2006) • still a minor share of global FDI stock • 11% in 2004 • 7% in 1990

11. FDI outflows from Developing Countries

12. Where do EMNCs invest?

13. FDI inflows in some EMs

14. The importance of activities data • FDI data relate to capital flows as reported in the balance of payments. • In order to assess the actual impact of the investments by TNCs, it is important to look at so-called activities data. • production (sales, value-added) • labour (employment, wages) • trade (exports, imports) • innovation activities (R&D) and • taxes. • Unfortunately, even fewer countries provide this kind of data.

15. Enterprise data : to complement FDI data Parent corporations by regions/countries Source: WIR 1994, table I.1 (p.4) Source: WIR 2005, table

16. Average TNI of the 100 largest TNCs in the world and the 50 largest TNCs from developing countries, 1993-2003. The internationalization of the largest TNCs from developing countries is catching up Source: UNCTAD/Erasmus University database. * TNI : transnationality index

17. Industry composition Investment by developing country firms span all sectors Availability and quality of data constrain industry analysis. Services dominate OFDI stock of developing countries within manufacturing a number of industries are of relatively equal importance Electrical and electronic equipment is No 1 in the manufactruing sector UNCTAD list of the 50 largest (non-financial) TNCs from developing countries 8 are in electrical and electronic equipement 5 in petroleum exploration, refining and distribution 4 in food 3 each in telecommunications, transport and computer and related activities

18. Developing economies - Estimated world outward FDI stock, 1990 & 2003 (Millions of dollars and percentage) Source: UNCTAD.

19. The Rise of South-South and Regional Investors in Telecoms I • South-South FDI • From 2001 to 2003, over 36% of total inflows and close to 20% of the total number of telecommunications projects • in 1990–9, 23% of total inflows and 11% of the total number of telecommunications projects • Players in the 2002 top-30 list of telecoms MNCs • Datatec (South Africa) • América Móvil (Mexico) • MTN Group (South Africa) • Telekom Malaysia • OECD MNCs investing through regional affiliates • Vodacom of South Africa • Sonatel of Senegal

20. Intraregional South-South Telecommunications FDI, 1990–2003 Note: Based on the largest 75 investors, accounting for 95% of total telecom-related FDI in developing countries. Source: Guislain, Pierre and Christine Zhen-Wei Qiang (2006), “Foreign Direct Investment in Telecommunications in Developing Countries”, in Information and Communications for Development 2006: Global Trends and Policies, The World Bank.

21. The Rise of South-South and Regional Investors in Telecoms II • Characteristics • operators from large developing countries investing within their own regions. • from countries that reformed early: privatization and competition forced them to become more efficient. • their exposure to competition was limited as they were generally protected from full market liberalization • Movers: • withdrawal of some developed-country investors (but also Telekom Malaysia from SSA) • increasing wealth and capital account liberalization in some emerging market economies

22. New, smaller players • SingTel (in Bangladesh, Indonesia, the Philippines, and Thailand) • Shinawatra from Thailand (in Cambodia and the Lao People’s Democratic Republic) • MTC/Celtel (in Burkina Faso, Chad, DRC, Congo, Gabon, Kenya, Malawi, Niger, Sierra Leone, Sudan, Tanzania, Uganda, and Zambia. • Orascom (in Algeria, Bangladesh, Iraq, Pakistan, and Tunisia) • Isbank (Turkey) and Banco Opportunity, Banco Safra, and Techold (all from Brazil) are financial investors.

23. Major energy deals since 2004 Source: Goldstein, Andrea (2006), Emerging Multinationals in the Global Economy.

24. Motives • The traditional OLI framework is useful, but needs to be amended (the role of the “asset augmenting” objective) • Defensive OFDI • Jump over tariffs and NTBs • Prevent accusation of job destruction (Indian BPO) • Counter eroding domestic margins (China electronics) • Reduce political risk at home (Russia)

25. A typology of OFDI from emerging economies

26. The role of governments – policies • in EMs government actions play a key role on compensating the lack of ownership and internalization advantages of indigenous firms • ad hoc interventions

27. The case of China • State Council in 1979  Fifteen Measures of Economic Reform  permitting outward FDI • until 1985 reserved only to trading companies and selected provincial and municipal economic and technological institutions • pressure of domestic overproduction & rising international reserves on the fixed currency regime  “Go Out” policy of encouraging overseas investment • April 2003: State Asset Supervision and Administration Commission (SASAC) set up to turn top SOEs into 50 global multinational corporations. • Although every company that wants to invest overseas must get regulatory approval, in 2003 the Ministry of Commerce (MOFCOM) and the State Administration of Foreign Exchange (SAFE) introduced a program that allowed OFDI of less than US$3 million to be approved at the local government level • October 2004: government will no longer judge the feasibility of overseas investments, leaving such judgments to the companies involved. • submissions on fewer topics • accepted via the internet • number of investment destinations requiring approval by the ministry cut from 30 to 7 • investments in other destinations can be approved by local authorities.

28. The role of governments – politics • 1970s – South-South “solidarity” • extraction industries (PRC oil majors, Gazprom, PDVSA, Minmetals) • host governments find firms from small economies, which do not enjoy the luxury of a large captive markets, less threatening than competitors coming from a larger country • Southern investors are not immune from the dangers that are almost synonymous to emerging markets

29. The role of diasporas in homeland FDI • Southern companies often enter foreign markets at an early stage in their life-cycle, possibly before they have accumulated improved and internally-derived technological capabilities • internationalization process is not incremental but is rather is driven by networking capabilities — the ability to draw from complementary resources of different partners and to turn them to the firm’s benefits • ties with financial sources • links with foreign technology partners • political connections

30. The role of diasporas in homeland FDI • Ethiopia  Mohammed International Development Research & Organization Companies (MIRDOC) • Argentina/Italy  Rocca, Gallo, Bulgheroni • Antigua • NRIs are different

31. The impact of South-South FDI – how much it differs from North-South FDI? • potential benefits of greater South–South integration are supported by anecdotes, a few empirical studies, and deduction and inference from the history of North–South capital flows • Positive evidence • Hyundai Motors in Tamil Nadu • Mixed evidence • SA supermarkets in Zambia, Mozambique, Angola • Negative evidence • ILO reports on Asian investors in the clothing industry in Cambodia, Lesotho, Namibia

32. The impact of South-South FDI – how much it differs from North-South FDI? • H: EMNNc could be better than OECD peers • better appreciation of host economies’ conditions • culturally closer • use “intermediate technologies” • systematic research is difficult as data is lacking – including about the characteristics of EMNCs • Is South-South FDI targeted towards low-income countries under stress (particularly where North-South FDI is limited)? • What is the extent of spillovers from South–South FDI? • Do MNCs adhere to international norms on the transparency of their foreign operations, as well as the environmental and labor standards observed in those operations?

33. What consequences for OECD countries? • More competition in developing countries (e.g., resources in Africa) : Southern FDI as an alternative to MNCs from the North ? • A subtle game: OECD MNCs maintain complex and multi-level relations (e.g. Chevron-CNOOC, competing for Unocal, cooperating elsewhere) • FDI promotion: pro-active policies to attract FDI from emerging economies • As in the case of developing countries, issues related to impact have to be considered.

34. What consequences for multilateral economic relations? • The protectionist temptation • Daewoo-Thomsonin November 1995 • Mahindra & Mahindra-Valtra in 2003 • Bluestar-Ssangyong in 2004 • CNOOC-Unocal (and Haier-Mayag) in 2005 • DP World-P&O in 2006 • Engage in dialogue (e.g., OECD Guidelines and Anti-Bribery Convention; other CSR issues) • Broader consensus to include new issues in the agenda (e.g., what is the value for a Chinese firm to buy a Western brand if counterfeiting remains rife?)

35. Conclusions – the long way ahead • While not a completely new phenomenon, it grew in size in the 1990s and is seemingly exploding right now • Motivations appear to be completely different • Markets have changed • Firms are more efficient • Competition is much stiffer • Policy implications are huge • OECD governments and firms • South-South economic relations

36. Conclusions – the long way ahead • Knowledge base is still small  new research to bridge the gap between the existing literature on Southern business – that often portrays corporations as rent-seekers that flourish thanks to privileged access to political, financial, and transactional resources – and the increasing attention that scholars devote to resources as the basis for corporate success • Understanding requires drawing on different theories, indeed social sciences

37. Tak!!