Outward Foreign Direct Investment from Emerging Economies: Importance, Drivers and Policies

1. 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.

2. 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

3. 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.

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

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

7. 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

8. 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.

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

11. 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.

12. 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.