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6 Global Players from Emerging Markets: Strengthening Enterprise Competitiveness through Outward Investment enterprises, including efficiency gains from control of supply chains and access to natural resources. Table 1. OFDI: Some possible benefits and costs Benefits Costs � Increased profitability, revenues and assets � Market expansion and greater market reach � Securing contract overseas and strengthening trade channels � Better control of supply chains � Access to knowledge, management skills and technology � Acquisition of brand names � Improved enterprise competitiveness � Improved corporate image � Increased international experience and exposure � Access to natural resources Source: Country case studies prepared for this publication. OFDI has helped Indian enterprises, particularly SMEs, increase their export competitiveness and R&D intensity, and strengthened their trade support and marketing channels, including contribution to skills upgrading. Indonesian firms investing abroad have improved their performance dramatically in terms of management expertise, exports, quality and assets relative to their past performance and to the performance of firms in the sample that did not make such investments (Lecraw 1993). As developing country firms become more competitive through OFDI, they can contribute to the competitiveness of their home countries by increasing national productive capacity and productivity. Investing abroad may be necessary in order to market a product or service a host country and to sell it more effectively there. While this applies to many “non-tradable” services, it may also be relevant for manufactured goods that need adapting to local conditions (UNCTAD 2005d, pp. 9-10). In this regard, OFDI is likely to complement home country production. Securing access to natural resources could have complementary effects on home country operations and increasing productive capacity. Access to new technologies can increase the productivity, knowledge transfer and management skills of the investing company in its home country. OFDI by SMEs has the potential to increase the international competitiveness of the SME sector of both home and host countries. Greater flexibility, better capacity to serve small communities, relatively labour-intensive technologies and greater adaptability � Losses and loss of capital � Risk of business failure and closure � Risk of being taken over as a result of expanding market networks � Resources spread too thin, which may undermine overall business operations to local economic conditions can in some cases make SMEs better suited to conditions in other developing countries than large TNCs (Dhungana 2003). For example, the length of time required for Asian SMEs to establish initial international activity is 0.7 years, compared with 3.9 years for large firms (UNCTAD 1998). OFDI from SMEs is more likely to lead to multiplier effects in terms of technology and knowledge transfer and productivity increases through linkages to local industry. Furthermore, it can strengthen the entrepreneurial base in the host country by providing local entrepreneurs with management skills and new experiences. It can also help fill the “missing middle” by promoting the growth of medium-sized enterprises. OFDI can be risky and requires well-thoughtout strategies and management skills. Not all attempts to internationalize will succeed. Companies that try to seize all investment opportunities that come along may not achieve synergies or improve their chances of meeting overall corporate objectives. Some OFDI leads to losses instead of profits, especially if the assets acquired are overpriced or not in the acquirer’s core area of business. When internationalizing, enterprises should not spread their resources too thin, generating excessive operational and financial risks and burdening the overall business operations. E. Policy measures that support OFDI The policy environment that supports OFDI in general has improved. More countries have removed barriers and simplified regulations for OFDI. A few developing country Governments, mainly in Asia,
have introduced specific promotion policies on OFDI. Other countries have made specific policy statements encouraging their enterprises to internationalize through OFDI. A brief description follows: �� Policy statement. The Government of Singapore announced 2004 as the year of internationalization, the Government of China established a policy of “go global” in 2000, President Luiz Inácio Lula da Silva urged Brazilian entrepreneurs to “abandon their fear of becoming multinational business persons” in 2003, 7 the Government of India has specifically encouraged Indian enterprises to go global, 8 and South Africa’s Government has encouraged enterprises to invest abroad. In the 2001 budget, the country’s Finance Minister wrote, “The global expansion of South African firms holds significant benefits for the economy – expanded market access, increased exports and improved competitiveness.” 9 �� Regulatory framework. Improvements in the regulatory framework played an important role in supporting the increased internationalization of developing country firms. Some developing countries such as China, India, South Africa and Turkey have liberalized their regulatory framework and relaxed exchange controls for OFDI (see respective country cases in this publication). Other supportive measures include the streamlining OFDI approval procedures, and raising the investment permit ceiling and the conditions governing equity ownership of affiliates abroad (China and India). �� Institutional support. Some developing countries have gone beyond liberalization to active promotion – for example, providing institutional support to help their firms internationalize, and organizing OFDI missions to target host countries (Malaysia, Thailand). For instance, President Lula led an investment mission of 500 Brazilian business entrepreneurs to China in May 2004. Countries such as Singapore and the Republic of Korea have supported the creation of foreign enclaves such as industrial parks in host countries. Some even provide incentives and market intelligence information to encourage internationalization of their firms (Singapore). Some countries have private-sector cooperation and networking to promote South-South investment (Malaysia) and investment in other countries (Singapore). 7President Lula’s address to the Portuguese Industrial Association, Lisbon, 11 July 2003. 8Speech given by Prime Minister Manmohan Singh at “The Indian CEO: Competencies for Success Summit”, 22 January 2005. 9 Budget Speech, Trevor A. Manuel, Minister of Finance, South Africa, 21 February 2001. CHAPTER I 7 Based on the case studies conducted, a number of measures can be considered in supporting enterprise internationalization. They include the following: (a) Capacity building. There is room for developing country enterprises, including SMEs, to improve their understanding of the benefits, risks and challenges of OFDI. Increased knowledge of cross-cultural matters and international management issues can mitigate the risk of failure. Networks, clusters, business schools and business associations can help transmit the necessary information and enhance the capacity of developing country enterprises to internationalize: �� Linking with TNCs can help businesses, particularly SMEs, to upgrade their activities, access know-how and technology, and get direct or indirect exposure to the international business community. This process will strengthen their ability to undertake OFDI. �� Working in a cluster supports the deepening and broadening of knowledge, provides quality control and information related to markets and marketing, and helps establish appropriate linkages to a wider set of technology inputs and actors. Such an environment gives companies the information and capability they need to set up foreign affiliates. �� Networking with key business schools in the country could help strengthen managerial skills and build capacity in investing and managing international enterprises. �� Strengthening business associations can support the learning process of firms, providing contacts and a forum for sharing experiences. Capacity building programmes such as the making of “global players” offered by business schools (Brazil, Singapore) can help developing country firms strengthened their managerial capacity, increase knowledge of cross-cultural and internationalization issues. (b) Market intelligence. Home-country Governments could provide market intelligence and information on investment opportunities in target host countries, including consultancy services to help their firms grow through OFDI. A dedicated OFDI department or an institution in charge of coordinating initiatives could be envisaged. Such institutions could provide direct assistance to developing country firms, particularly SMEs, by improving their market intelligence and overcoming some of their fears and obstacles
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