Andrea Goldstein OECD Development Centre

OECD Development Centre 1

A new geography of international investments?

Multinationals from Brazil, India, and other emerging economies

Andrea GoldsteinOECD Development Centre

DIIS, København, 8 May 2006

OECD Development Centre2

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


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?


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)


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)


Nationality: reality

1. companies controlled by non-resident entrepreneurs? Lakshmi Mittal and Simon Patiño

2. companies that move their primary listing to an advanced country’s financial market and yet maintain a strong association with their countries of origin?

3. companies incorporated in developing countries that are in turn subsidiaries of OECD MNCs?

4. companies from developing countries that are owned by financial investors based in OECD countries?

5. companies established in offshore financial centres?


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)


OFDI data• General problem with the quality of FDI data. • even more serious with OFDI from emerging

economies.1. definition issues

2. 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


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


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


FDI outflows from Developing Countries

FDI outflows from developing economies, and South-East Europe, and CIS, by group of economies, 1984-2004

(Billions of dollars)

Source: UNCTAD, FDI/TNC database (www.unctad.org/fdistatistics).


Where do EMNCs invest?

Same region

EU 15 & EFTA

Japan & Oceania

Canada & USA

Rest of the

World

BRA 10.42 10.09 0.13 4.49 74.87

CHI 20.69 .. 8.00 20.78 50.53

HUN

IND 25.43 32.72 1.41 23.26 17.18

KOR 40.30 20.70 1.90 32.00 5.00

MAL

MEX

RUS 37.02 24.74 .. 23.11 15.12

SIN

SAF 7.02 75.11 5.64 11.32 0.91

THA 58.75 6.74 1.78 15.17 17.56

TUR


FDI inflows in some EMsAR AZ BW CR EC KZ LK MO MT NP PE UZ

ARG 2

BRA 3

CHL 1 1 5

CHI 6 4 38 11 2

HKG 3 10 2

IND 7 36

KOR 1 12 12 8 4 3

MAL 1 3 6 26

MUR 1

MEX 2 8 3

RUS 5 3

SIN 2 17 1 9

SAF 49 14

THA 1

TUR 13 4


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.


Enterprise data : to complement FDI data

Early 1990s Early 2000s

Total # of TNCs

37530 % Total # of TNCs 69727 %

Developed 9.14 Developed (excluding new EU members)

70.7

Developing 7.6 Developing 25.8

Latin America 1.6 Latin America 4.2

Asia 5.8 Asia & Oceania 21.2

China 1.00 China 2.8

HK 1.33 HK 1.9

India 0.05 Korea 10.7

Korea 2.8 India 3.4

Taiwan 0.9

Transition economies 3.0

Parent corporations by regions/countries

Source: WIR 1994, table I.1 (p.4)

Source: WIR 2005, table


The internationalization of the largest TNCs from developing countries is catching up

0

10

20

30

40

50

60

701

993

199

4

199

5

199

6

199

7

199

8

199

9

200

0

200

1

200

2

200

3

Top 100 Top 50

Source: UNCTAD/Erasmus University database. * TNI : transnationality index

Average TNI of the 100 largest TNCs in the world and the 50 largest TNCs from developing countries, 1993-2003.


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


1990 % 2003 %

Sector/industryDeveloping economies

Developing economies

Primary 867 4. 7 3 178 . 5

Mining, quarrying and petroleum 582 3. 2 2 481

Manufacturing 6 109 33. 3 103 414 15. 5

Food, beverages and tobacco 420 2. 3 2 060 . 3

Textiles, clothing and leather 187 1. 2 712 . 4

Chemicals and chemical products 762 4. 2 4 351 . 7

Metal and metal products 85 . 5 2 618 . 4

Electrical and electronic equipment 1 018 5. 6 15 854 2. 4

Motor vehicles and other transport equipment 10 . 1 1 512 . 2

Unspecified secondary 3 231 17. 6 69 742 10. 4Services 11 350 61. 9 562 409 84. 1

Trade 1 836 10. 65 342 9. 8

Transport, storage and communications 501 2. 7 41 093 6. 1

Finance 7 027 38. 3 153 304 22. 9

Business activities 1 283 7. 271 469 40. 6

Other services 526 2. 9 13 258 2.

Unspecified tertiary - ? 2 421 . 4Unspecified 240 1. 3 51 870 7. 8TOTAL 18 326 100. 669 001 100.

Source: UNCTAD.

Developing economies - Estimated world outward FDI stock, 1990 & 2003

(Millions of dollars and percentage)


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


Intraregional South-South Telecommunications FDI, 1990–2003

Destination region

Region of investor East Africa & Pacific

Europe & Central Asia

Latin America & Caribbean

Middle East & North Africa

South Asia Sub-Saharan Africa

North-to-South 72 93 90 52 75 51

South-to-South 28 7 10 48 25 49

East Africa & Pacific 100

Europe & Central Asia 100

Latin America & Caribbean 100

Middle East & North Africa 100 36 5

South Asia 40

Sub-Saharan Africa 45

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.


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


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.


Major energy deals since 2004Target (location) Buyer Date Price1

Oil

Spinnaker (US) Norsk September 2005 29.1

EnCana (US) Statoil April 2005 17.6

Kerr-McGee (UK) Maersk August 2005 15.7

Paladin (UK) Talisman November 2005 12.4

Al Furat (Syria) CNPC & ONCG December 2005 12/13

Pogo (Thailand) PTTEP-Mitsui June 2005 9.2

Vintage (Argentina) Occidental October 2005 8.4

Nelson (Kazakhstan) Lukoil September 2005 7.9

PetroKazakhstan CNPC August 2005 7.3

Unocal (global) Chevron August 2005 5.8

EnCana (Ecuador) CNPC September 2005 5.2

OML 130 (Nigeria) CNOOC January 2006 4.6

Gas

Caledonia (UK) E.ON September 2005 10.6

Teikoku Inpex October 2005 8.9

Columbia (US) Chesapeake Energy October 2005 5.1

Northwest (Australia) CNOOC December 2004 1.98

Tangguh (Indonesia) CNOOC May 2004 0.98

Source: Goldstein, Andrea (2006), Emerging Multinationals in the Global Economy.


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)


South-South South-North

Horizontal Vertical Horizontal Vertical

Resource-seeking Hon Hai Sinopec Amica Wronki Gram

PDVSA – Citgo

Efficiency-seeking BOE Technology Hynix

Tata Steel SingPower Wipro NewLogic

Market-seeking LANTVS

E-valueserve San Miguel AS Watson

A typology of OFDI from emerging economies


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


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.


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


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


The role of diasporas in homeland FDI

• Ethiopia Mohammed International Development Research & Organization Companies (MIRDOC)

• Argentina/Italy Rocca, Gallo, Bulgheroni

• Antigua• NRIs are different


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


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?


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.


What consequences for multilateral economic relations?

• The protectionist temptation– Daewoo-Thomson in 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?)


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


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


Tak!!

Documents

Andrea Goldstein OECD Development Centre