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4 Global Players from Emerging Markets: Strengthening Enterprise Competitiveness through Outward Investment regional economic environment. In all regions, geo-cultural proximity and affinity, and regional economic integration were important influencing factors. The need to follow customers, to offset competitors’ strengths, to access low-cost labour and to take advantage of business opportunities (such as in real estate, infrastructure or services projects and privatization) were specific motives. The drivers of OFDI from developing countries fall into the following broad groups: 1. Home-country environment. It includes economic and policy factors, home market growth constraints, currency appreciation, improvements in the home country OFDI regulatory framework, capital account liberalization (relaxed exchange controls), signing of trade, investment agreements and double taxation treaties, and incentives (e.g. tax rebates and investment insurance for OFDI) by Governments in the country of origin. 2. Host-country environment. It covers pull factors associated with host country attractiveness or opportunities for investment such as growth prospects and privatization, lower production costs, availability of natural resources, host Government incentives and regional development. 3. Corporate-specific influences. These include: • Push factors (e.g. rising costs in the home market, following competitors and suppliers, corporate internationalization strategy). • Management factors (e.g. availability of skills and knowledge needed to internationalize successfully). • Chance factors (e.g. being invited to supply a customer abroad). The motives of enterprise internationalization by developing country firms can generally be clustered under four key areas. 1. Market-seeking. This relates to securing markets abroad, supporting trade channels and establishing new markets. For instance, South African companies have been actively investing in the rest of Africa to gain access to and secure markets in sectors such as food and beverages, other light manufacturing and services. Indian information technology (IT) and pharmaceutical companies have been investing abroad for market-related reasons as have Mexican, Russian, Turkish and Slovenian companies in neighbouring countries. To gain access to industrialized country markets, some garment manufacturing companies from China, for example, have invested in least developed countries (LDCs) that enjoy preferential trade privileges in the United States and European markets. 6 Russian oil companies have invested abroad to strengthen their distribution networks and to secure greater influence over their supply chains. For instance, they acquired petrol stations abroad for better control of value chain in retail distribution of their petroleum products. 2. Efficiency-seeking. By extending their production value chains into low-cost locations, developing country firms are investing in other lower-cost developing countries (e.g. Korean and Singaporean manufacturing companies investing in Indonesia, Thailand and Viet Nam, or textiles and clothing companies extending their activities to Cambodia and parts of Africa to take advantage of low-cost production). 3. Strategic-assets-seeking. Strategic-assets-seeking FDI is an investment to increase or enhance the existing competitive advantages of a firm by acquiring or accessing new competitive advantages (Dunning and McKaig-Berliner 2002, p. 7). Developing country enterprises invest abroad to acquire brand names and strategic production facilities. For instance, Tata Tea’s (India) acquisition of Tetley Tea (United Kingdom) and the acquisition of Daewoo Commercial Vehicle Company (Republic of Korea) by Tata Motors Ltd. (India). Ranbaxy (Indian pharmaceutical company) OFDI motives include acquiring brand names and technologies. Lenovo’s (China) acquisition of IBM’s personal computer division (United States) and the merger of the television and DVD operations of TCL (China) with Thomson (France) are further examples of strategic-asset-seeking OFDI for acquiring brand names, production facilities and technologies. The Shanghai Automotive Industry Corp. has significant investment overseas, including in a GM-Daewoo project and a joint venture with Volkswagen. These investments were made primarily to gain access to production facilities and brand names. Another important reason for FDI by developing country firms has been to access technologies and knowledge. A number of software development firms from Malaysia, the Republic of Korea, Singapore and Thailand have set up research and development (R&D) activities in India for this reason. Indian companies such as I-Flex and Wipro had invested abroad to access technologies and knowledge. 6 See “China: An emerging FDI outward investor”, E-brief, 4 December 2003 (http://www.unctad.org/sections/dite_fdistat/ docs/china_ebrief_en.pdf).
Other Indian companies such as Infosys, Aditya Birla and HCL Technologies have invested in the United States and elsewhere in IT-related activities. Superhouse Ltd., an Indian footwear enterprise, has development and design centres in Italy and the United Kingdom. Firms from other developing countries acquired companies abroad to gain access to technology. Bionova (Mexico) acquired DNA Plant Technology (United States), and Cordlife (Singapore) acquired Cytomatrix (United States). Access to technologies also involves setting up R&D centres in key locations. Chinese firms Huawei Technologies, ZTE Corporation, Haier (whitegoods producer) and UTStarcom (IT) have established R&D centres abroad. 4. Resource-seeking. A main force driving OFDI has been the desire to secure long-term supplies of natural resources (particularly oil and natural gas, iron ore and other minerals). An Indian state-owned company, Oil and Natural Gas Commission, invested in an oil field in Sudan and in the Sakhalin oil and gas field in the Russian Federation. Chinese companies such as Sinopec, Petrochina, CNPC and China National Offshore Oil Corporation have invested in oil, gas and mining activities in Asia, the Middle East and Africa. Russian TNCs such as RusAl and Lukoil have been investing abroad to access to natural resources and export markets. The various UNCTAD country studies suggest that the motivations behind OFDI, while in general are similar, do differ across industries (mining vs. services), host locations (geographical proximity, historical ties, cultural affinity), enterprise size (large companies vs. SMEs), orientation (Asset and resource- seeking, market-seeking, efficiency-seeking), market entry strategy (mergers and acquisitions (M&As), greenfield investment) and types of institutions (private enterprises vs. state-owned enterprises). The motives were largely similar across regions and were dependent on the types of OFDI (market-seeking, efficiency-seeking, resources-seeking, strategic assets acquisition). The reasons for investing abroad are largely the same for SMEs as for large firms, but the relative importance of the different factors may vary. In particular, while SMEs can be found in all types of OFDI, they tend to cluster in market-seeking and efficiency-seeking activities. SMEs are more inclined to invest abroad for supporting trade channels and operating closer to home, often in neighbouring countries. SMEs that invest abroad are usually more export-oriented and already have some international experience. The exception is high-technology SMEs, CHAPTER I 5 which more often start investing abroad despite a lack of international experience (UNCTAD 2005c). Because of their size and limited financial resources, SMEs are less inclined to pursue an M&A strategy in entering foreign markets than larger enterprises. Some SMEs follow their main customers in going abroad. The factors driving OFDI are not significantly different between developed and developing country firms, but the latter are less driven by production cost considerations, which is a prime motive for firms from advanced industrialized countries (UNCTAD 2005a). Building brand names and access to technologies and R&D facilities are more notable features of the current wave of OFDI from emerging economies. D. OFDI and implications for enterprise competitiveness There are important implications of OFDI for enterprise competitiveness (table 1). They include knowledge and technology acquisition, market expansion, increased profitability, improved corporate image and international experience. The country case studies presented have indicated that OFDI has helped enterprises increase their revenues, assets, profitability, market reach and exports. In Singapore, some two thirds of the 204 companies surveyed agreed that OFDI had increased their enterprise competitiveness by improving market access, strengthening market position, increasing the company’s international image, and the familiarity with and experience in conducting international business. In South Africa, companies such as Illovo Sugar and MTN Group saw profits increase as a result of OFDI. In the case of Malaysia, a number of company cases showed that OFDI had enabled them to grow, expand their businesses and stayed competitive through securing contracts overseas and strengthening trade channels. Company cases in Turkey, Slovenia, Republic of Korea and South Africa suggested that enterprise internationalization for some is not just to increase competitiveness but to ensure survival. The Argentinean company cases suggest that OFDI has contributed to the expansion of companies’ resources, strengthening of sales and exports, better management of risk through geographical diversification of assets, increased efficiency in suppliers, improvement in productivity and quality standards driven by demands of global customers, and facilitated technology transfer owing to mobility of human resources. These benefits can increase the overall value of a business. Similarly, OFDI has increased the strategic assets and revenues and strengthened the market position of Russian
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