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.
1 Introduction
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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$5billion
increased from 6 in 1990 to 27 in 2005.
The technological capabilities and market share of some of the TNCs from the
emerging economies has risen sharply.
Shifting the focus from simply examining macroeconomic variables such as inflation,
interest rates, exchange rates, GDP growth, labour supply and wages, political and
social security, transactions costs etc to dynamic variables related to actual drivers.
IMF definition of FDI – 10 percent or more of share ownership as foreign.
Thus, this paper examines the importance, drivers and home government policies of
OFDI from the emerging economies. I start from the vantage point that drivers shape
responses from TNCs, and home and host governments. Excluded from analysis in
this paper are cross-border relationships between local firms and multinationals
through licensing, outsourcing and trade links. The rest of the paper is organized as
follows.
Section two discusses the significance of OFDI from the emerging economies.
Section three discusses the theoretical guide used to screen OFDI flows from the
developed economies.
Section four examines the drivers of OFDI from the emerging economies.
Section five analyzes the policy implications for home countries. Section six presents
the conclusions
2. Importance of OFDI from the
Emerging Economies
• Shares in overall OFDI has expanded
strongly.
• Asia (particularly East Asia) has expanded
strongly share in total OFDI from emerging
economies.
• M&As a major source of OFDI from
emerging economies.
Table 1: Emerging Economy TNCs among top 100 non-financial TNCs, 2006
FA
a
20
55
63
82
87
92
98
TN
Ib
F
A
c
Firm
11
1
7
Hutchison
Whampoa
HK
Diver
61.6
80.0
98
5
3
Petronas
Mal
Petrol
26.4
36.0
3
Cemex Sab De
LV
Mex
NMM
21.8
82.4
36
4
Singapore
Telecommunica
tions
Sing
Tel
18.0
86.8
81
1
9
Samsung
Electronics
15
75
11
LG Corp
33
2
1
Jardine
Matheson
Nation
Korea
Korea
HK
Indus
E&E
E&E
Diver
A(US$
bn)
17.5
16.6
15.8
For
23.4
32.8
85.5
Sal(U
S$bn
)
%
For
Emp
%
For
Affi
%
For
79.5
1655
90
24.7
82.8
75
90.4
13.0
29.3
4016
11.8
167
71.4
12.1
80.8
3963
0
75.2
535
96.6
55.6
70.3
8832
45.3
99
95.2
78.6
2766
4
34.3
76
88.4
63.2
4068
9
51.5
42
91.3
70.6
5789
5
52.6
91
85.8
62.1
38.4
84.2
Table 2: Outward FDI, Top 20 Emerging Economies, 1980-2006 (US$Millions)
Home Country
1980
1990
2000
2006
Rank(2006)
South Africa
5 541
15 004
32 333
43 499
9
Argentina
5 970
6 057
19 276
24 047
14
Brazil
38 545
41 044
51 946
87 049
6
Chile
885
1 149
11 154
26 787
13
Colombia
136
402
2 989
9 960
20
Venezuela
23
1 221
7 676
11 559
19
Mexico
1 632
2 672
8 273
35 144
11
Panama
730
3 876
10 507
21 176
15
British Virgin Islands
..
875
67 132
123 512
3
Cayman Islands
72
648
20 788
40 395
10
- 2
14
1 938
11 830
18
China
..
4 455
27 768
73 330
7
Hong Kong
148
11 920
388 380
688 974
1
Korea
127
2 301
26 833
46 760
8
Taiwan
13 009
30 356
66 655
113 910
5
India
78
124
1 859
12 964
17
Indonesia
6
86
6 940
17 350
16
Malaysia
305
753
15 878
27 830
12
Singapore
623
7 808
56 766
117 580
4
-
-
20 141
156 824
2
United Arab Emirates
Russia
Africa
Latin America
Asia
Year
Eastern Europe and Central Asia
20
06
20
05
20
04
20
03
20
02
20
01
20
00
19
99
19
98
19
97
19
96
19
95
19
94
19
93
19
92
19
91
19
90
19
89
19
88
19
87
19
86
19
85
19
84
19
83
19
82
19
81
19
80
Share in Global Stock (%)
Figure 1: Outward FDI from Emerging Economies, 1980-2006
14
12
10
8
6
4
2
0
3. Analytic Framework
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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 crossborder movement of asset ownership:
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Market
Natural resource
Agricultural commodity
Labor
Incentives and grants
Technology
Striking bargains
4. Drivers of OFDI from Emerging
Economies
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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.
Figure 2: Outward M&A's from Emerging Economies, 1987-2006
14
12
Share in the World (Percent)
10
8
6
4
2
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Year
Africa
Latin America and the Caribbean
Asia
South-East Europe and the CIS (Transition economies)
Table 3: Acquisitions by Indian Parmaceutical Firms in Europe, 2006
Acquirer
Target Firm
Host-Country
Ranbaxy Laboratories
Terapia
Romania
Ethimed
Belgium
Allen
Italy
Dr Reddy’s Laboratories
Betapharm
Germany
Aurobindo Pharma
Milpharm
UK
Shasun Chemicals
Rhodia Pharma’s Solutions Unit
France
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.
6. Conclusions
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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.