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G l o b a l E c o n o m y Multinationals from Emerging Economies Growing but Little Understood By Silvio Contessi and Hoda El-Ghazaly China’s Haier opened this appliance factory 10 years ago in Camden, s.C. photo © gregg segal M ultinational companies from the emerging world are a relatively new phenomenon. A decade ago, 20 companies language ties (so-called South-South FDI). This trend seems to be changing, however, as firms from emerging economies gain promi- Still a Black Box These explanations of multinational activ- ity apply in the case of multinationals from on the Fortune Global 500 list were based nence: Not only has the share of FDI from advanced economies, but are less likely to in emerging economies; three years ago, 70 the emerging world grown over time, but so explain the recent trend of multinationals were. In all, emerging economies are home has the amount of FDI from the emerging from emerging countries. The 2006 World to an estimated 21,500 multinationals. world that is directed into advanced coun- Investment Report by the UNCTAD shows Emerging Markets Multinationals (EM- tries (so-called South-North FDI). Figure 2 that firms from emerging countries are MNCs) have become important in almost illustrates the change in the amount of FDI very heterogeneous in terms of their origin, every industry. India’s Infosys and TCS invested in the United States from emerg- maturity, position in the value chain and have become two of the world’s leading ing economies and advanced economies. In strategy. This suggests a variety of drivers information technology companies. China’s 1989, FDI from emerging economies made for internationalization. Such huge hetero- Haier is the fourth-largest maker of home up 7.2 percent of the total amount of FDI geneity makes it difficult to generalize about appliances in the world, and its ZTE is on invested in the United States. By 2007, that how EM-MNCs are similar or dissimilar its way to becoming one of the world’s top share had grown to 12.1 percent.3 to more traditional multinationals. In fact, five manufacturers of telecommunications there are essentially no theories; the little equipment and systems. Why Become Multinational? empirical research available consists mostly According to the United Nations Confer- The traditional explanation for multina- of case studies. ence on Trade and Development (UNCTAD), tional activity is a version of a theory called EM-MNCs do not usually possess strong multinationals in emerging economies “the O.L.I. paradigm.” Multinationals global brands or cutting-edge technologies accounted for only 0.4 percent of world out- exploit three sets of advantages: (1) Owner- that place them close to the technology ward foreign direct investment (FDI) in 1970. ship advantages encompass the development frontier.4 Rather, they often acquire estab- That share grew to 15.8 percent by 2008. Fig- and ownership of proprietary technology or lished brands to become well-known—such ure 1 illustrates the growth in outward FDI widely recognized brands that other competi- as the Tata Group of India, which acquired from emerging economies. Alone, emerging tors cannot use. Empirical analysis shows the automobile manufacturers Jaguar and nations in Asia and Oceania accounted for that multinationals are often technological Land Rover—or acquire firms that already 11.9 percent of world outward FDI in 2008; leaders that invest heavily in developing new developed proprietary technology. among these nations, China has seen the products, processes and brands, which are However, this does not mean that they most dramatic and continuous growth.1 then kept confidential and are protected by do not possess ownership advantages. One Economists are studying these firms in intellectual property rights. (2) Localization view is that EM-MNCs expand to other order to understand the business philoso- advantages refer to the benefits that come countries in order to obtain new advantages phies that could have led to such growth from locating near the final buyers or closer to serve as a further springboard for inter- trajectories and the possible impact their to more abundant and cheaper production nationalization. One of these advantages presence will have on the international factors, such as expert engineering or raw is the ability to adapt products developed economy.2 materials (important to agrifood multina- elsewhere to domestic markets, gaining tionals, for example). (3) Finally, multina- greater production efficiency by using inputs How Multinationals Start tionals internalize the benefits from owning more efficiently or by using more labor and Firms tend to locate where barriers are a particular technology, brand, expertise or less capital, or by reducing overhead costs. easier to overcome. For firms in emerging patent that they find too risky or unprofitable Some EM-MNCs have advantageous access countries, this initially meant locating in to rent or license to other firms due to the dif- to resources and markets, and also have nearby countries with regional, cultural or ficulties of enforcing international contracts. “adversity advantages,” that is, the ability to 16 The Regional Economist | July 2010 Figure 1 EndnotEs Emerging Economies’ Share of Global Foreign Direct Investment Outflows 1 The reader should be careful when con- 18 sidering outward FDI statistics of certain countries. According to UNCTAD, emerging 16 All Emerging Economies market statistics on FDI may be biased due to 14 an issue of “round-tripping,” which can inflate Just Africa 12 FDI flows. Round-tripping is caused by dif- Just Latin America and the Caribbean ferential treatment of foreign and domestic PERCENT 10 Just Asia and Oceania investors, which could lead to double count- 8 ing of funds by allowing a country to both 6 channel funds out of and into the country 4 through FDI. 2 International business scholar Ravi Rama- 2 murti points out that it took many years of 0
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