Outward foreign direct investment (OFDI) from emerging markets (essentially all non-OECD countries) has risen considerably during the past decade, reaching $133 billion in 2005, for a stock of some $1.4 trillion. As in the case of developed countries, the bulk of this investment is accounted for by a limited number of economies, with ten of them responsible for 83% in 2005. An increasing number of emerging market firms are joining the rank of multinational enterprises (MNEs), i.e. firms controlling assets abroad. This development raises at least two policy-oriented questions: 1. How should the policy regime for OFDI from emerging markets look like to support the competitiveness of the firms involved and the performance of their home countries? 2. How to manage the public reaction in emerging markets to their OFDI and in host countries to inward FDI from emerging markets

Sauvant, Karl P.

English

Columbia University Academic Commons

OUTWARD FDI FROM EMERGINGMARKETS: SOME POLICY ISSUESKarl SauvantOutward foreign direct investment (OFDI) from emerging markets(essentially all non-OECD countries) has risen considerably during the pastdecade, reaching $133 billion in 2005, for a stock of some $1.4 trillion. As inthe case of developed countries, the bulk of this investment is accounted forby a limited number of economies, with ten of them responsible for 83% in2005. An increasing number of emerging market firms are joining the rankof multinational enterprises (MNEs), i.e. firms controlling assets abroad.This development raises at least two policy-oriented questions:11. How should the policy regime for OFDI from emerging markets look liketo support the competitiveness of the firms involved and the performanceof their home countries?2. How to manage the public reaction in emerging markets to their OFDIand in host countries to inward FDI from emerging markets?1. THE POLICY REGIME FOR OFDI FROMEMERGING MARKETSGovernments of emerging markets seeking to establish a policy regime forOFDI face a dilemma. They may recognize that OFDI is important for the13579111315171921232527293133353739Foreign Direct Investment, Location and CompetitivenessProgress in International Business Research, Volume 2, 279–284Copyright r 2008 by Elsevier Ltd.All rights of reproduction in any form reservedISSN: 1745-8862/doi:10.1016/S1745-8862(07)00012-X279competitiveness of their firms. The reason is that a portfolio of locationalassets is increasingly important as a source of the international competi-tiveness of firms as it provides access not only to markets but also to therange of resources that are needed for the production process. This isparticularly important in a world economy that is open and in whichcompetition is everywhere, because of the liberalization of the trade, FDIand technology regimes – in other words, foreign firms can compete withemerging market firms on the latter’s home turf through imports, inwardFDI and technology-transfer agreements.If emerging market firms cannot do the same – and, in the context of FDI,if they cannot improve their competitiveness through OFDI – they arehandicapped: they are deprived of one source of competitiveness, namely aportfolio of locational assets. This applies not only to production OFDI butalso to trade – supporting FDI.Hence one side of the dilemma is that OFDI, as a source of thecompetitiveness of emerging market firms, should be an option available tothese firms if and when they are required to take advantage of it. This is amicro-level consideration related to OFDI from emerging markets.The other side of the dilemma concerns the macro-level. More specifically,most emerging markets perceive themselves as (and in most cases are)importers of capital, not exporters of capital. This is so by virtue of being anemerging market and, hence, typically facing a balance-of-paymentconstraint. In any event, the priority for them is to build domesticproductive capacity and increase domestic employment; to do so abroadappears, at a minimum, counter-intuitive and, at worst, unpatriotic.Permitting OFDI – let alone encouraging it – is therefore not a natural orlogical thing to do. Most emerging markets, therefore, and not surprisingly,have followed a restrictive policy towards ODFI.How to resolve this dilemma between the micro-level competitivenessrequirements of firms and the macro-level development constraints ofgovernments?2 One answer for many countries is to liberalize the OFDIregime gradually, e.g. by permitting OFDI up to a certain ceiling (which canbe raised), allowing it in certain sectors that are priority for the hostcountry, or on meeting certain criteria (e.g. impact on employment, thebalance of payments).But even phased liberalization raises a number of questions. For example,how does a country protect itself against capital flight and round-tripping?(A good part of Russian FDI in Cyprus, Chinese FDI in Hong Kong andBrazilian FDI in taxhavens, for example, may well be of this nature.) Whatare the risks when liberalizing OFDI in certain sectors and not others – for13579111315171921232527293133353739KARL SAUVANT280the country (has it picked the right sectors?) and the companies involved (isthe competitiveness of companies in non-liberalized sectors compromised?)?Should a country aim for a neutral OFDI regime or, like virtually all OECDcountries do, go all the way and protect and even facilitate OFDI?3 (Somedeveloping countries have moved in this direction, too).In other words, there are a number of questions with which emergingmarkets grapple – and we have no convincing answers, let alone solid policyadvice. This is a wide field for urgent policy-oriented research.2. HOW TO MANAGE THE PUBLIC REACTION TOOFDI FOR EMERGING MARKETS?To begin with, OFDI is not yet an issue in emerging markets – with theemphasis being on ‘‘yet’’. In the great majority of countries, little attention isbeing paid to it, both by the public and the government. In fact, only a fewcountries have a well thought-through policy in this area. These includeSingapore which seeks to develop, through OFDI, an ‘‘external wing’’ of itseconomy, and China, with its ‘‘Go Global’’ policy.4 But most countries haveno coherent framework. Even in a country like Brazil, where the Presidentnot long ago proclaimed that he would like to see a dozen well-knownBrazilian MNEs, there was no follow-up on the policy side.This may change with the growth of OFDI from emerging markets, as themagnitudes reached for individual countries can no longer be ignored.Moreover, successful take-overs of firms in developed countries are almostcelebrated as national victories – witness, for example, the successful bid ofTata (India) for Corus (Netherlands/UK) – which brings the issue to theattention of the public.The question is, of course, how long national pride in such ‘‘victories’’ cantrump the macro-economic side of the dilemma. For the public (andespecially trade unions), emerging markets are, after all, primarily capitalimporting economies; consideration of corporate competitiveness may notcount much for it. Sooner or later, therefore, it is quite likely that thequestion of how good OFDI is for emerging markets as home countries willbecome a political issue in a number of these countries. (We are quitefamiliar with this development as, at the end of the 1960s, and driven bytrade unions, there was a wide-ranging debate in the United States about themerits of OFDI; a more recent example is the reaction, especially in the US,to the offshoring of services.)13579111315171921232527293133353739Outward FDI from Emerging Markets: Some Policy Issues 281What this calls for is an informed debate in emerging markets that arebecoming home countries about the importance of OFDI and the role itplays in national development. We will need to undertake much moresystematic research to be fully prepared for this debate.There is also a host country side to OFDI from emerging marketsthat needs to be managed. Interestingly enough, the host countries that sofar have reacted most to such investment are developed countries –‘‘interestingly’’ because it is these countries that, traditionally, have been atthe forefront of promoting a liberal FDI regime. Yet, there is a distinctmove towards a kind of FDI protectionism in these countries, focusedlargely on cross-border mergers and acquisitions (M&As), especially (butnot only) by firms from emerging markets. This reaction is amplified whenstrategic sectors or national champions are involved, and, in particular,when the acquirer is a state-owned company.5 The state-owned aspect(as regards emerging market firms) has acquired a particularly sharp edgewith the growth of Sovereign Investment Agencies which have considerableresources at their disposal and, increasingly, seek to invest them in firmsabroad. In the United States, this has already led to an expansion of themandate of the Committee on Foreign Investment in the United States(CFIUS). It is quite conceivable that a number of countries in Europe (if notthe European Union itself) may establish CFIUS-type screening mechan-isms. While, in principle, they would screen cross-border M&As from allcountries, chances are that the principal targets are those involving parentfirms headquartered in emerging markets, and especially state-ownedenterprises among them.The reasons are manifold. Partly, there is a concern that emerging marketMNEs may have imperfect corporate governance standards or pay lessattention than their Northern competitors to social, environmental andhuman rights issues. In the case of state-owned enterprises, there isfurthermore the concern that these may have easier access to finance andhence be in a better position to prevail in M&A bidding contests. More basicis the fear that state-owned enterprises may not work according to the logicof the market but rather manage their foreign affiliates in the interest of thepolicy objectives of their home country governments. And, most basic,perhaps, emerging market MNEs are ‘‘the new kids on the block’’. Sincethey are here to stay – and, in fact, bound to become more important asemerging markets develop successfully – the challenge is to integrate themsmoothly into the world FDI market. And, as we know from other contexts(especially relations among states), integrating emerging powers in anestablished order is not easy, as it implies that the importance of other13579111315171921232527293133353739KARL SAUVANT282players will be diminished, if they do not disappear altogether (e.g. throughM&As).To manage the reaction in home and host countries to OFDI fromemerging markets presents therefore a set of challenges for which we need toprepare ourselves. This is all the more important as OFDI is an additional –and important – channel through which emerging markets are integratedinto the world economy. But it is also important because the rise ofemerging market MNEs, if not properly managed, could contribute to ageneral backlash against FDI and the open regulatory framework thatgoverns it to a large extent.These are two policy areas – the appropriate policy regime for OFDI fromemerging markets and the challenge of managing the public reaction to suchinvestment – that I think are among the key policy issues that need to beaddressed. They open a wide field for urgent policy-oriented research.UNCITED REFERENCESSauvant (2005); Sauvant (2006); Sauvant (2007); Sauvant (forthcoming).NOTES1. For a discussion of the range of issues related to the rise of emerging marketMNEs, see Karl P. Sauvant, ed., The Rise of Transnational Corporations fromEmerging Markets: Threat or Opportunity? (London: Edward Elgar) (forthcoming),as well as UNCTAD (2006), World Investment Report 2006: FDI from Developingand Transition Economies. Implications for Development (Geneva: UNCTAD).2. Besides, there is the question: is what is good for, say Infosys, also good forIndia? After all, Infosys seeks to maximize its profits, and takes its decisionsaccordingly. And, the more transnationalized Infosys becomes, the less likely it isthat its decisions will pay special attention to the requirements of India. As a globalplayer, its interests are global, not national.3. This is examined by Theodore H. Moran, ‘‘What Policies Should DevelopingCountry Governments Adopt Toward Outward FDI? Lessons from the Experienceof Developed Countries’’, in Karl P. Sauvant, ed., The Rise of TransnationalCorporations from Emerging Markets: Threat or Opportunity? (London: EdwardElgar) (forthcoming).4. See Karl P. Sauvant, ‘‘New sources of FDI: the BRICs. Outward FDI fromBrazil, Russia, India and China,’’ in the Journal of World Investment & Trade, vol. 6(October 2005), pp. 639709, available at http://www.cpii.columbia.edu/5. This is part of a broader reaction to FDI, possibly even a backlash. See Karl P.Sauvant, ‘‘A backlash against foreign direct investment?,’’ in Laza Kekic and13579111315171921232527293133353739Outward FDI from Emerging Markets: Some Policy Issues 283Karl P. Sauvant, eds., World Investment Prospects to 2010: Boom or Backlash?(London, UK: The Economist Intelligence Unit Ltd., 2006), pp 7177, available athttp://www.cpii.columbia.edu/. Also see Karl P. Sauvant, ‘‘Will a backlash trumpthe driving forces of FDI?,’’ in Laza Kekic and Karl P. Sauvant, eds., WorldInvestment Prospects to 2011 (London, UK: The Economist Intelligence Unit Ltd.,2007) (forthcoming).REFERENCESSauvant, K. P. (2005). New sources of FDI: The BRICs. Outward FDI from Brazil, Russia,India and China. Journal of World Investment & Trade, 6(October 2005), 639–709,available at http://www.cpii.columbia.edu/Sauvant, K. P. (2006). A backlash against foreign direct investment? In: K. Laza &K. P. Sauvant (Eds), World Investment Prospects to 2010: Boom or Backlash?(pp. 71–77). London, UK: The Economist Intelligence Unit Ltd., available athttp://www.cpii.columbia.edu/Sauvant, K. P. (2007). Will a backlash trump the driving forces of FDI? In: K. Laza &K. P. Sauvant (Eds), World Investment Prospects to 2011. London, UK: The EconomistIntelligence Unit Ltd. (forthcoming).Sauvant, K. P. (Ed.), The Rise of Transnational Corporations from Emerging Markets: Threator Opportunity? London: Edward Elgar (forthcoming).UNCTAD. (2006). World Investment Report 2006: FDI from Developing and TransitionEconomies. Implications for Development. Geneva: UNCTAD.13579111315171921232527293133353739KARL SAUVANT284

Outward FDI From Emerging Markets: Some Policy Issues

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Outward FDI From Emerging Markets: Some Policy Issues

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