Emerging Multinationals in the Global Economy: Trends and Issues

Emerging multinationals meeting Paris 27 March 2006 OECD

Andrea Goldstein (OECD-DEV) & Anne Miroux (UNCTAD-DITE)

1. Definitions matter• Emerging MNCs are those from

emerging economies ≠ from

– Third World (passé)– Southern (what about Russia etc.)– Born globals, pocket MNCs

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?

2. 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

Direction/geography

• Developing Asia dominates the scene • New source areas, such as Russia and Gulf

countries• At the country level, South Africa is also important

(more than India, close to mainland China)• South-South investment accounts for an increasing

share of IFDI in the South • Most developing countries are regional in their

OFDI patterns (with the exception of Africa, because of South Africa)

3. The importance of activities data

• FDI data relate to capital flows as reported in the balance of payments.

• In order to assess the actual impact of the investments by TNCs, it is important to look at so-called activities data.– production (sales, value-added)– Labour (employment, wages)– trade (exports, imports)– innovation activities (R&D) and– taxes.

• Unfortunately, even fewer countries provide this kind of data.

Enterprise data : to complement FDI data

Early 1990s Early 2000sTotal # of TNCs

37530 % Total # of TNCs 69727 %

Developed 9.14 Developed (excluding new EU members)

70.7

Developing 7.6 Developing 25.8Latin America 1.6 Latin America 4.2Asia 5.8 Asia & Oceania 21.2China 1.00 China 2.8HK 1.33 HK 1.9India 0.05 Korea 10.7Korea 2.8 India 3.4

Taiwan 0.9Transition economies 3.0

Parent corporations by regions/countries

Source: WIR 1994, table I.1 (p.4)

Source: WIR 2005, table

The internationalization of the largest TNCs from developing countries is catching

0

10

20

30

40

50

60

7019

93

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.

4. 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 equal importance – Electrical and electronic equipment is No 1 in the manufactruing sector

• UNCTAD list of the 50 largest (non-financial) TNCs from developing 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 related activities

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)

Share of Investment by Developed Investors by Sector

0%

25%

50%

75%

100%

1998 1999 2000 2001 2002 2003

Energy

Telecom

Transport

Water

Source: Public Private Infrastructure Advisory Facility (2005), Developing Country Investors and Operators in Infrastructure.

The Rise of South-South and Regional Investors in Telecoms I

• South-South FDI – From 2001 to 2003, over 36% of total inflows and close to 20% of

the total number of telecommunications projects– in 1990–9, 23% of total inflows and 11% of the total number of

telecommunications projects• Players in the 2002 top-30 list of telecoms MNCs

– Datatec (South Africa)– América Móvil (Mexico)– MTN Group (South Africa)– Telekom Malaysia

• OECD MNCs investing through regional affiliates – Vodacom of South Africa – Sonatel of Senegal

Intraregional South-South Telecommunications FDI, 1990–2003

Destination region

Region of investor East Africa & Pacific

Europe & Central Asia

Latin America & Caribbean

Middle East & North Africa

South Asia Sub-Saharan Africa

North-to-South 72 93 90 52 75 51

South-to-South 28 7 10 48 25 49

East Africa & Pacific 100

Europe & Central Asia 100

Latin America & Caribbean 100

Middle East & North Africa 100 36 5

South Asia 40

Sub-Saharan Africa 45

Note: Based on the largest 75 investors, accounting for 95% of total telecom-related FDI in developing countries.Source: Guislain, Pierre and Christine Zhen-Wei Qiang (2006), “Foreign Direct Investment in Telecommunications in Developing Countries”, in Information and Communications for Development 2006: Global Trends and Policies, The World Bank.

The Rise of South-South and Regional Investors in Telecoms II

• Characteristics – operators from large developing countries investing within their

own regions. – from countries that reformed early: privatization and competition

forced them to become more efficient. – their exposure to competition was limited as they were generally

protected from full market liberalization• Movers:

– withdrawal of some developed-country investors (but also Telekom Malaysia from SSA)

– increasing wealth and capital account liberalization in some emerging market economies

New, smaller players• SingTel (in Bangladesh, Indonesia, the Philippines, and

Thailand)• Shinawatra from Thailand (in Cambodia and the Lao

People’s Democratic Republic)• MTC/Celtel (in Burkina Faso, Chad, DRC, Congo, Gabon,

Kenya, Malawi, Niger, Sierra Leone, Sudan, Tanzania, Uganda, and Zambia.

• Orascom (in Algeria, Bangladesh, Iraq, Pakistan, and Tunisia)

• Isbank (Turkey) and Banco Opportunity, Banco Safra, and Techold (all from Brazil) are financial investors.

Major energy deals since 2004Target (location) Buyer Date Price1

OilSpinnaker (US) Norsk September 2005 29.1EnCana (US) Statoil April 2005 17.6Kerr-McGee (UK) Maersk August 2005 15.7Paladin (UK) Talisman November 2005 12.4Al Furat (Syria) CNPC & ONCG December 2005 12/13Pogo (Thailand) PTTEP-Mitsui June 2005 9.2Vintage (Argentina) Occidental October 2005 8.4Nelson (Kazakhstan) Lukoil September 2005 7.9PetroKazakhstan CNPC August 2005 7.3Unocal (global) Chevron August 2005 5.8EnCana (Ecuador) CNPC September 2005 5.2OML 130 (Nigeria) CNOOC January 2006 4.6

GasCaledonia (UK) E.ON September 2005 10.6Teikoku Inpex October 2005 8.9Columbia (US) Chesapeake Energy October 2005 5.1Northwest (Australia) CNOOC December 2004 1.98Tangguh (Indonesia) CNOOC May 2004 0.98

Source: Goldstein, Andrea (2006), Emerging Multinationals in the Global Economy.

5. Motives

• The traditional OLI framework is useful, but needs to be amended (the role of the “asset augmenting” objective)

• Defensive OFDI– Jump over tariffs and NTBs– Prevent accusation of job destruction (Indian BPO)– Counter eroding domestic margins (China electronics)– Reduce political risk at home (Russia)

South-South South-North

Horizontal Vertical Horizontal Vertical

Resource-seeking Hon Hai Amica Wronki Gram

PDVSA – Citgo

Efficiency-seeking BOE Technology Hynix

Tata Steel SingPower

Market-seeking LANTVS

E-valueserve

San Miguel AS Watson

6. EMNCs are homogeneous

• Many are SOEs or government-linked companies (Temasek in Singapore, … in Malaysia)

• Many are family-owned, 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

7. The impact of South-South FDI -- how much it differs from North-South FDI?

• potential benefits of greater South–South integration are supported by anecdotes, a few empirical studies, and deduction and inference from the history of North–South capital flows

• systematic research is difficult as data is lacking – including about the characteristics of EMNCs

– Is South-South FDI targeted towards low-income countries particularly where North-South FDI is limited.

– extent of spillovers from South–South FDI– Do MNCs adhere to international norms on the transparency of

their foreign operations, as well as the environmental and labor standards observed in those operations

8. 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.

9. What consequences for multilateral economic relations?

• The protectionist temptation• 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?