Q: How important are firms from emerging markets in driving global flows of foreign direct investment (FDI)?
As recently at 1990, multinational corporations (MNCs) from developed countries dominated global flows of foreign direct investment. These countries accounted for nearly 95% of outward FDI flows, and almost 85% of those flows went to other developed countries. In other words, emerging economies were not important as sources or destinations of FDI. They were peripheral to the global economy.
Fast forward to 2015 and the situation is very different. Today, emerging economies account for 40% of the world’s outward FDI and 55% of its inward FDI. In 2014, they invested over $500 billion abroad. This is surprising, because poor countries are supposed to import capital from rich countries, not export it.
Emerging markets are attracting more FDI than ever before, because their economies have high growth potential. At the same time, as firms in these countries gained international competitiveness they have aspired to become global like their rich-country counterparts.
Q: Does this mean emerging-market firms are overtaking Western MNCs in importance in the global economy?
Far from it. Despite economic slowdown, last year firms from developed countries invested overseas 50% more than firms from emerging markets. Moreover, 90% of the outward investment from emerging economies comes from just a dozen countries, including the Asian Tigers (i.e. Hong Kong, Singapore, South Korea, and Taiwan) and the four largest emerging economies, i.e. Brazil, Russia, India, and China.
Some people would argue that the Asian Tigers should no longer be considered “emerging,” and that Hong Kong’s role as a way station for investment into and out of China results in exaggerating the role of emerging markets in FDI flows. So official statistics must be taken with a pinch of salt, but, there is no question that the near-monopoly of Western and Japanese MNCs in global FDI flows is a thing of the past.
Q: How did the 2008 financial crisis affect outward FDI by emerging economies?
Outward FDI by the Asian Tigers has held up reasonably well but it has been scaled down sharply in countries like Brazil and Russia, whose firms are wrestling with a collapse of commodity prices, domestic recession, a plunging currency, and internal or external political crises. Indian firms also scaled back drastically their foreign investments after cheap funding dried up following the 2008 crisis, although there were signs of a revival in 2015 as the country’s growth rate picked up.
China is the one emerging economy whose firms have been investing abroad at breakneck speed, financial crisis notwithstanding. They may even have viewed the crisis as offering a buying opportunity. The Chinese government has used some of its vast foreign exchange reserves to help state-owned and private firms expand abroad. Last year, Chinese firms invested $115 billion abroad, including$15 billion in the US, while inbound FDI was comparable at $129 billion. Some years back China set itself a goal of getting 50 Chinese firms on to the Fortune Global 500 list but today it has more than double that number.
Q: What strategies do these firms use to internationalize?
As the new kids on the block, emerging market firms lack the technological and marketing strengths of their Western counterparts. Therefore, their internationalization strategies avoid head-on confrontation with established MNCs.
One strategy they have used is to join forces with Western incumbents by becoming part of their global value chain and then looking for ways to move up the value curve to become independent players with strong global brands and distribution. Examples include Acer of Taiwan in computers, Hisense of China in appliances, and Infosys and TCS of India in IT services.
Another tactic has been to leverage the emerging market firm’s innovations for the home market in other developing countries. Examples include Bharti Airtel in wireless telephony, Huawei of China in telecom equipment, Natura of Brazil in cosmetics, and Massmart of South Africa in retailing.
A third tactic has been to globally consolidate industries that have matured in developed countries but have been booming in emerging economies. The increasing scale, market share, and cash flows generated in the home market have allowed these firms to purchase rivals in developed countries that have been in a downward spiral, because of declining sales, vintage technology, sub-scale plants, and costly labor contracts. Examples include Tata Steel of India, Cemex of Mexico in cement, JBS Friboi of Brazil in meat packing, Geely of China in automotive, Lenovo of China in PCs, and AB InBev of Brazil in beer.
Finally, emerging market firms are also acquiring Western firms to gain control over key technologies they lack. Such deals often get close regulatory scrutiny, especially when the buyer is a Chinese state-owned firm. Many emerging market firms have also set up greenfield R&D labs in the US and Europe. Last week, as part of our EMBA program’s concluding study trip, we visited three Chinese MNCs—Mindray in medical devices, Lenovo in computers, and Tencent in gaming—and each of them has one or more major R&D centers across the US.
Q: What role has the Center for Emerging Markets (CEM) played in researching the new multinationals from emerging economies?
CEM is recognized as a thought leader in this area. It has organized six international research conferences on this topic since 2007, resulting in four books and two special issues of top-ranked international business journals. The Center continues to add to its contributions in this area.
For more information, read “Future FDIs to be dominated by emerging market MNCs” in the Gulf News.