Multinationals from Emerging Economies Growing but Little Understood by ProQuest


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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
                                          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

                                          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-
                                                                                                                                                                                                                                                              murti points out that it took many years of
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