DEVELOPING COUNTRY MULTINATIONALS: A NEW GEOGRAPHY … · DEVELOPING COUNTRY MULTINATIONALS: A NEW GEOGRAPHY OF WORLD BUSINESS? ... * TNI : transnationality index Average TNI of …

OECD Development Centre 1

DEVELOPING COUNTRY MULTINATIONALS: A NEW GEOGRAPHY OF WORLD BUSINESS?

Andrea GoldsteinOECD Development Centre

Japan–UK Forum, London, 2 March 2007

OECD Development Centre2

11 Multinationals from emerging marketsMultinationals from emerging markets

The case of ChinaThe case of China22

The case of IndiaThe case of India33

Conclusions: Issues & ChallengesConclusions: Issues & Challenges

OutlineOutline


What is new?• Globalization and trade liberalization,

including regionalism• Capital account liberalization in many

developing countries• Privatization and regulatory reform• New technologies, shorter lead time, launching

a new product has become much more expensive

• Growing competition in sales and in access to resource and strategic assets

• 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?


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


Where do EMNCs invest?

TUR

17.5615.171.786.7458.75THA

0.9111.325.6475.117.02SAF

SIN

15.1223.11..24.7437.02RUS

MEX

MAL

5.0032.001.9020.7040.30KOR

17.1823.261.4132.7225.43IND

HUN

50.5320.788.00..20.69CHI

74.874.490.1310.0910.42BRA

Rest of the World

Canada & USA

Japan & Oceania

EU 15 & EFTA

Same region


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– India: 26% of the projects in manufacturing, 41 % in software – Poland and Estonia (70%), Czech Republic and Hungary (30%)


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

010

20

3040

50

6070

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

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 equalimportance – Electrical and electronic equipment is No 1 in the manufactruing sector

• UNCTAD list of the 50 largest (non-financial) TNCs fromdeveloping 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 relatedactivities


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. 5Food, beverages and tobacco 420 2. 3 2 060 . 3Textiles, clothing and leather 187 1. 2 712 . 4Chemicals and chemical products 762 4. 2 4 351 . 7Metal and metal products 85 . 5 2 618 . 4Electrical and electronic equipment 1 018 5. 6 15 854 2. 4Motor vehicles and other transport equipment 10 . 1 1 512 . 2Unspecified secondary 3 231 17. 6 69 742 10. 4

Services 11 350 61. 9 562 409 84. 1Trade 1 836 10. 65 342 9. 8Transport, storage and communications 501 2. 7 41 093 6. 1Finance 7 027 38. 3 153 304 22. 9Business activities 1 283 7. 271 469 40. 6Other services 526 2. 9 13 258 2. Unspecified tertiary - ? 2 421 . 4

Unspecified 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)


Extractive sector• High-growth economies with limited resource supply, such as China and

India, have been notably successful in acquiring oil & gas assets or licenses

• Even countries that are large oil & gas producers such as Saudi Arabia and Venezuela invest in other developing countries as they integrate their downstream operations such as refining, distribution and retailing.

• Developing country companies are also investing in several exploration projects. – Petrobras (Brazil) in deep-water exploration projects

• South-South FDI in non-oil mining sector is also increasing.– South Africa in Africa – China in Africa and Latin America.

• Increased cooperation among developing countries






OutlineOutline


Policy environment• 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.


China’s OFDI - Top 10 countries 2004

OFDI flows*$ million %

Hong Kong 2,629 47,8Cayman Islands 1,286 23,4Virgin Islands 386 7,0Sudan 147 2,7Australia 125 2,3USA 120 2,2Russia 77 1,4Indonesia 62 1,1Singapore 48 0,87Nigeria 46 0,84

OFDI stock$ million

Hong Kong 30,393 85%Cayman Islands 6,660Virgin Islands 1,089USA 670Macau 625South Korea 562Australia 495Singapore 241Bermuda 185Thailand 182

Source: Department of Commerce, China



China’s FDI stock in Europe (US$ million), 1997

94.77

93.21

67.52

52.89

41.17

29.86

18.41

16.21

3.49

2.36

2.00

France

Germany

United Kingdom

Netherlands

Spain

Italy

Sweden

Belgium

Denmark

Finland

Luxembourg

0.00 20.00 40.00 60.00 80.00 100.00 120.00


China’s FDI stock in Europe (US$ million), 2004

129.21

127.67

108.46

67.00

21.68

20.84

8.97

6.44

1.86

1.64

1.66

Germany

Spain

UK

Denmark

France

Italy

Netherlands

Sweden

Switzerland

Belgium

Other Western Europe

0.00 20.00 40.00 60.00 80.00 100.00 120.00 140.00 160.00


Chinese capital invested in Europe (Q1, 2003)


China’s FDI in Western Europe

• UK (181 companies, 2005)– Foreign trade, banking and insurance (e.g. China Bank)– European HQ (China Telecom, Huawei, Founder group)– R&D centers (e.g. Midea)

• Spain– Petrochemicals (take over of 6% of CLH: €60 million)– Fishing

• Germany (500-600 companies)– Foreign trade (about 200 in Hamburg) and transportation


Chinese M&A in Germany

Source: Margot Schüller and Anke Turner (2005), “Global Ambitions: Chinese Companies Spread Their Wings”.


Chinese companies in Belgium (€ million, 2004)

BrusselsChina Coal (Branch Office)

UnknownCNOOC Belgium BVBA

n.a.0.410.020.20Sint-Niklaas2000Torin Jacks NV

n.a.0.100.02Antwerp2000Beijing Gongmei Europe

10.070.020.10Antwerp1994Shantai

20.760.06Antwerp1994Tianjin International Corp

40.830.11Mechelen2002BBCA Belgium NV

10.670.15Vilvoorde1986SINOBELTRANS NV

293.191.993.60Antwerp1999China Shipping Agency

337.482.273.47Antwerp1980Cosco Belgium NV

No. of employee

sTotal assetsNet added

valueSalesLocationYear of

establishmentName

Source: Danny van den Bulcke






OutlineOutline


India: OFDI stock, 1976-2004


Overseas M&As by Indian enterprises, 2000-2003


Tata is big in the UK …• Tata Tea acquired Tetley in February 2000

for £271m. • Tata Consultancy Services (TCS) since 1975

– TCS has over 5000 consultants engaged on UK client work

– In 2005 took over existing business processes of Pearl Group Limited

– In 2005, was awarded the Business in the Community Per Cent Standard

• Tata Steel acquired Corus in February 2007 for $12.2b.


… and in South Africa• Tata Africa Holdings in Johannesburg acts as the headquarters for all Tata

operations in Africa “success in SA is a benchmark for the African continent, if a product sells here, it will sell in the rest of Africa“ (Raman Dhawan, MD).

• Tata Motors' medium commercial vehicle range is #2 in SA and the Indica, introduced in December 2004, has already set a record for being the most successful car launched in SA.

• Tata Group has acquired a controlling stake in the Second National Operator (SNO), which started providing fixed-line national and international voice, data and other value added services.

• IT services and solutions, through Consilience Technologies, set up in 2000 as a joint venture between Tata Africa Holdings and J&J.

• construction of the R 670 million Ferrochrome Plant of Tata Steel KZN commenced at Richards Bay on August 21, 2006.


BharatBharat ForgeForge & Carl Dan & Carl Dan PeddinghausPeddinghaus

©© Prof. Dr. Guido Reger- Chair for Innovation Management and Entrepreneurship

Bharat Forge is the main group company of the Pune-based Kalyani group

Employees (Kalyani Group): 7.500 employees

Ownership: Stock market listed/ Founded and controlled by Kalyan family

Annual Sales 2004 (Bharat Forge): ca. 160 mn. €Annual Sales 2004 (Kalyani Group): ca. 980 mn. €Annual Profit 2004 (Bharat Forge): ca. 36 mn. €

Additional Business: 'Full Service Supplier' of engine & chassis components.

Employees (2005): 790 employees, based in Ennepetal/Nürnberg

Business: Mainly producing chassis for BMW, Volkswagen, Audi, Daimler Chrysler, and Volvo.

OECD Development Centre33©© Prof. Dr. Guido Reger- Chair for Innovation Management and Entrepreneurship

BharatBharat ForgeForge & Carl Dan & Carl Dan PeddinghausPeddinghaus

ProfileManufacturing facilities spread over 8 locations and 5 countries - two in India,

three in Germany, one in Sweden, one in Scotland and one in North ….

Company manufactures a wide range of safety and critical components for passenger cars, commercial vehicles and diesel engines

The company also manufactures specialized components for the railway, construction equipment, oil & gas and other industries. It is capable of producing large volume parts in both steel and aluminum

OutlookHas built up a strong capability in design and engineering, including a full fledged

product testing and validation facility

A Full Service Supply Capability - from product conceptualization to designing to manufacturing and product testing & validation

Source: http://www.bharatforge.com/


Motives for acquisition


1. Additional products to the portfolio of Bharat Forge

2. Supporting multinational growth path


BharatBharat ForgeForge & Carl Dan & Carl Dan PeddinghausPeddinghaus and CDP Aluminiumtechnikand CDP Aluminiumtechnik

Mr. B. Kalyani announces: “The acquisition marks the entry of the company in aluminum-forged components. The acquisition will strengthen the company's position in the global passenger car and chassis component business, and is a step towards attaining global leadership.“

Source: The Economic Times, 16 December 2004

Right after buying CDP, Bharat Forge buysaluminium auto component sector Carl Dan Peddingahus Aluminiumtechnik (CDP AT) for €6.3m.


Baba Kalyani, Chairman and Managing Director of Kalyani Group






OutlineOutline


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


��For more information:

• Aykut, Dilek and Andrea Goldstein (2006), Developing Country Multinationals: South-South Investment Comes of Age, http://www.oecd.org/dataoecd/4/48/38031753.pdf

• Battat, Joseph and Dilek Aykut (2005), “Southern Multinationals—A Growing Phenomenon”, http://rru.worldbank.org/Documents/paperslinks/southernmncs.pdf.

• Goldstein, Andrea (2007), “Who’s Afraid of Emerging Multinationals?”, presented at Columbia University, October.

• Goldstein, Andrea (2007), Emerging Multinationals in the Global Economy: Trends, Policy Issues, and Questions, Palgrave.