Transcript Structure of the system

Emerging FDI Trends
in
Developing Asia
Dilek Aykut
The World Bank
ICRIER Workshop
New Delhi, India
April 2007
Motivation: FDI flows to developing countries surged during the last
two decades
350
300
250
All Developing Countries
US billion
• Progress in technology in transport,
communications, information and data processing
• Progress in liberalization of FDI and trade
policies in developing countries
200
150
100
50
Developing Asia
0
1970
1975
1980
1985
1990
Note: United Nations’ developing country definition is used.
1995
2000
2005
Motivation: There have been considerable changes in FDI flows
350
US billion
All Developing Countries
300
• There has been a shift towards services
250
• The role of M&A as form of FDI increased
200
• The rise of multinationals from developing
countries as FDI investors, particularly in
other developing countries (South-South FDI)
150
100
Developing Asia
50
0
1990
How
1995
do these
apply for Asian
2000 trends
2005
developing countries ?
FDI in Services Sector has increased
since the 1990s…
Share in total FDI Stock in 2004
PRIMARY
MANUFACTURING
SERVICE
among developing countries
percent
80
70
60
50
40
30
20
10
0
Developed
Countries
Developing
Countries
LAC
AFRICA
ECA
ASIA
Source: Author’s calculation based on collected data from various resources
Note: Some are approximation based on flows data. The years might be different
depending on the region and country.
…there is a significant variation among developing Asia
Share in total FDI Stock in 2004
PRIMARY
80
MANUFACTURING
SERVICE
percent
70
60
50
40
30
20
10
0
NIEs
China
India
Other Asia
Source: Author’s calculation based on collected data from various resources
Note: Some are approximation based on flows data. The years might be different
depending on the region and country.
As conventionally defined, services
sector includes:
 Infrastructure (Electricity, Gas, Water, Transport,
Storage, and Communication)
 Finance and insurance
 Trade & Repairs
 Business Services
 Real Estate
 Others
Source: United Nations Statistics Division ISIC
Factors behind the increase in services-FDI
 Income growth
 Technological progress
 Changes in investment and trade policy
The sectoral composition of FDI mirrors
that of GDP in most countries
Services share in:
Asia
NIEs
FDI
GDP
69
65
China
31
41
India
55
52
Other Asian Countries
43
45
Europe and Central Asia
65
60
Latin America and the Caribbean
65
59
Africa
29
52
69
72
Memo item
High-Income OECD
Source: World Bank.
Factors behind the increase in services-FDI
 Income growth
 Technological progress
- Global production networks
- Increased tradability of services (outsourcing)
 Changes in investment and trade policy
Factors behind the increase in services-FDI
 Income growth
 Technological progress
 Changes in investment and trade policy
- Unilateral liberalization
- Bilateral and regional agreements
- Commitments under the WTO and General
Agreement on Trade in Services (GATS)
Service sector has been liberalized
much later than manufacturing
FDI restrictions over time in selected sectors
1981-1998 (OECD Average)
1
higher
restriction
1981
1991
1998
0.8
0.6
0.4
0.2
0
Telecom.
Source: Golub (2003)
Banking
Air transport
Manufacturing
FDI restrictions in services are higher in Asia
compared to other developing countries
FDI restrictions in developing countries by region, 2004
0.6
0.5
higher
restriction 0.4
0.3
0.2
0.1
0
West Asia
South
Asia
South- East Asia
East Asia
North
Africa
Other
Africa
Latin
American
Eastern
Europe
World
Source: Unctad (2006)
Note: The study uses two different weights for regional average GDP and FDI.
The graph shows the GDP weighted indices, but the results from FDI weights are very similar.
Some sectors are more restricted than others…
Indonesia
India
China
Korea
Electricity
1.00
0.15
0.55
1.00
Developing Asia
(GDP-Weighted)
0.67
Communication
0.65
0.45
0.55
0.51
0.50
Finance
0.57
0.58
0.48
0.24
0.38
Transport
0.59
0.47
0.61
0.49
0.37
Distribution
0.35
0.60
0.55
0.18
0.28
Business
1.00
0.60
0.23
0.18
0.23
Health
0.65
0.35
0.55
0.23
0.23
Tourism
0.75
0.13
0.15
0.20
0.22
Education
0.65
0.15
0.25
0.78
0.21
Construction
0.68
0.35
0.15
0.33
0.19
Environment
0.35
0.15
0.25
0.28
0.16
All Services
0.61
0.45
0.44
0.30
0.31
Source: Unctad (2006)
As bulk of services FDI came as privatization and mega M&A
transactions, the role of M&A as a form of FDI increased
 Global M&A rose more than five-fold between 1995 and 2000 to a peak of
$1.1 trillion in 2000, before dropping by some 45 percent in 2001 with the
decline in stock markets and the global economic slowdown.
 The bulk of the cross-border M&A transactions continue to be in service
sectors (more than half in finance, transport, storage, and
communications alone).
 Extensive privatization of state-owned assets in developing countries
during the late 1990s in Latin America and Eastern Europe.
 Reflecting the recent favorable economic conditions, global cross-border
M&As reached to yet another peak of $1.3 billion in 2006.
The ratio of cross-border M&A sales to FDI flows, 1990-2005
100
90
80
70
60
50
40
30
20
10
0
100
percent
90
80
70
60
50
40
30
20
10
0
Developing
Asia
1990-1994
Other
Developing
Countries
Developed
Countries
1995-1999
2000-2005
NIEs
1990-1994
China
India
1995-1999
Others
2000-2005
Services FDI is particularly sensitive to
changes in investment climate
 Relies mainly on domestic demand
 Generates local-currency earnings
 Subject to complex regulatory systems
 Nontradable products (location-bound), unlike primary
and manufacturing sectors that benefit from exporting
to international markets
Improved investment climate is
associated with higher FDI…
percent
7
6
5
FDI-GDP Ratio
4
3
2
1
0
High
Middle
Low
Policy Performance
… and with higher FDI in Services
percent
70
60
50
Services FDI 40
as a share of
30
total FDI
20
10
0
High Middle
Low
Policy Performance
Emerging multinationals from developing countries
The last two decades also witnessed the emergence of MNCs from developing
countries (EMNCs) as a result of increased globalization:
– Developing country firms are faced with growing competition in sales and in
access to resource and strategic assets
– Southern firms have amassed sufficient capital, knowledge and know-how to
invest abroad.
– Many developing country governments have eased their policies towards
capital outflows.
– Same drivers as the Northern multinationals:
 Access to new markets or defend the export markets
 Access to resources
 Access strategic assets
Internationalization of EMNCs
 Partly explained by Dunning’s Investment Development Path (IDP)
Inward FDI recipient => develop comparative advantage => outward FDI
– Major investors are mostly from FDI recipient middle-income economies
– Some invest abroad in earlier stages due to increased competition

Comparative advantage range from a patent, brand, production capacity or access to
certain markets or resources
– In services, EMNCs may have certain comparative advantages vis-à-vis Northern
MNCs Ex: America Movil, Orascom
– In primary sector, access to resources and scale of production. Ex: Petronas,Petrobras
– In manufacturing sector, special production techniques can lead to comparative
advantages. Ex: Marcopolo, Hikma
 Acquiring strategic assets through cross-border M&A
– In 2006, three mega purchases by EMNCs: Cemex’s Australia’s Rinker, CVRD’s
Canadian Inco, and Tata’s purchase of Dutch Corus, each more than $10 billion.
Region
Development policies
since the 1980s
Latin America and the
Caribbean
Washington consensus
Russia and the CIS
Big bang and transition
economies
New Europe
EU convergence
NIE
Export-oriented with strong
state
China
ASEAN
South Asia
Characteristics of
major MNCs
Competitive
advantages
Private firms, mostly focused
Know to play the poston core business (Gerdau → privatization regulatory game
steel; Tenaris → tubes;
and have become leaner and
Embraer → aircraft)
meaner as suppliers to
Western MNCs.
State-owned enterprises
Russian regional players in
(Gazprom) and privatized firms telecoms and global ones in
still dependent on Kremlin metals and natural resources.
support (Severstal)
Privatized firms, Turkish
Regional players in telecoms,
conglomerates (Koç, Sabanci)
electricity and gas, retail.
Conglomerates (chaebols,
Innovation capabilities
Temasek) and contract
manufacturers
FDI-driven with strong state
Public-private firms, mostly
Leverage of huge domestic
focused on core business
market
(Lenovo → PCs; Haier →
appliances; Huawei → telecom
equipment)
FDI-driven
Conglomerates (CP Group)
Management of mainland
China’s insertion into global
value chains, Guanxi
Gradual opening backed by Private conglomerates (Tata) Low psychic distance with the
diaspora linkages
and ICT firms (Infosys, Wipro)
US and Commonwealth,
engineering skills
Source: Aykut and Goldstein 2006
As a result, outward FDI stock from developing countries increased
Outward FDI stock by region, 2005
1600
$ billion
1400
1200
1000
800
Other Developing
Asia
Latin America and the Caribbean
Africa
600
400
200
0
1980
1990
2005
Geography of investments by EMNCs
 EMNCs tend to invest regionally and in other developing countries due to
familiarity through trade, ethnic and cultural ties.
 Supported by regional agreements and government incentives
 Intra-regional South-South FDI is significant for Asian economies
– Already part of regional production networks
– Internationalization of ‘ethnic Chinese” business in Asia
– India is major investor in neighboring countries but have begun to go the
West rather than the East. Major investor in United States, UK.
 Venturing beyond their immediate region
–
–
–
–
Brazilian investments in Angola, Nigeria, China and Turkey
Chinese investments in Latin America and Africa
Malaysian investments in South Africa
Indian investments in Africa
Policy Implications
 South-South FDI is significant in some low-income countries and represents an
opportunity for the others
– For example, investment from China and India in Nepal; recent Indian
investments in Bangladesh
 It has considerable development implications for both home and host countries
– Increased competitiveness for EMNCs
 Enlargement and diversification of the investor pool:
– Investment promotion
 Also poses some risks
– Operational and financial challenges may lead to unsuccessful projects
– Higher South-South integration may increase vulnerability for a possible
contagious effect in case of an economic crisis.
 FDI outflow from EMNCs is expected to continue its positive trend
– South-South is expected to increase as Southern MNCs are very active in the
recent wave of privatization in developing countries
Conclusion
 As a result of technological progress and policy reforms both in developed
and developing countries, FDI flows have evolved in terms of the sectors it
goes to, its mode, and in terms of who is investing over the years.
 Today, developed and many developing countries alike, services sector has
become the major sector attracting investment from foreign MNCs.
 And these MNCs are only from developed countries but also from
developing countries.
 Developing country MNCs are not necessarily inferior to their developed
country competitors in terms of technology; managerial skills and access to
capital, however. On the contrary in some of them are major global players
in their fields.
Thank you
For more information:
Aykut, Dilek, and Dilip Ratha, “South–South FDI flows: how big are they?,”
Transnational Corporations, Vol. 13, No.1, 2004.
Aykut, Dilek and Joseph Battat, "Southern Multinationals—A Growing
Phenomenon” A note prepared for the IFC/FT Conference 2005.
Aykut, Dilek and Andrea Goldstein, “Developing Country Multinationals: SouthSouth Investment comes of age” OECD Working Paper No.257. 2006