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8 Global Players from Emerging Markets: Strengthening Enterprise Competitiveness through Outward Investment in venturing overseas. Other services that home Governments could provide include OFDI risk insurance and awareness, and capacity building. Promoting a greater awareness of existing BITs and bilateral and regional free trade agreements that contain OFDI provisions could be helpful. Regular seminars on internationalization issues could include exchanges of experiences among companies that have been successful in internationalizing and have overcome challenges in venturing abroad. Financial institutions such as export-import banks of home-country could play an important role in providing insurance coverage, financial facilities and market intelligence information to support OFDI (e.g. India, Malaysia, Thailand and Turkey). (c) International Investment Agreements. Developing country Governments have also increased the number of concluded bilateral investment treaties (BITs) and double taxation agreements and, more recently, bilateral and regional free trade and investment agreements (e.g. the ASEAN Investment Area Agreement and the South Asia Free Trade Area.) To the extent that these agreements protect investment and open up industries for FDI, they facilitate FDI among the contracting parties. Questions that need to be addressed in this context are how to adequately reflect the development dimension in IIAs that involve developing country partners that are themselves home to TNCs, and how to devise provisions supporting OFDI from these countries. Examples of the latter could include provisions aimed at enterprise development, OFDI promotion programmes and outbound investment missions in conjunction with investment promotion authorities. (d) International forum and network. The international community can play an important role in supporting OFDI from developing countries. It can help with policy analysis, identifying best practices, networking, and raising awareness at the international level regarding the benefits, challenges, impact and steps to take to minimize the risks of going abroad by developing country firms. Investment promotion agencies for inward FDI and OFDI, both in developing and developed countries, could coordinate their efforts. For example, international organizations such as the World Association of Investment Promotion Agencies (WAIPA) could coordinate such cooperation. Other policy options were suggested at an UNCTAD meeting on enterprise internationalization in December 2005 (box 1). (e) Incentives. Financial and fiscal incentives including for example loans and support for feasibility studies could encourage SMEs to invest abroad. (f) Availability of statistics. The lack of statistics has hampered analysis of the internationalization strategies of developing country enterprises, particularly SMEs. Such statistical limitations restrict analysis on areas such as the potential benefits of OFDI, where developing country firms invest and in which industries, and which policies have worked or not worked. Developing country Governments could consider improving their statistical systems to ensure provision of such data. F. Conclusion More firms from more developing countries are internationalizing and their Governments are encouraging them to do so, adding to an increasing pool of internationalized enterprises – and for some, achieving the status of global players. OFDI contributes to the changing geography of international trade and investment flows. Increasing competition, saturated markets, the need to secure natural resources and declining competitiveness of industries at home drive enterprises from developing countries to go abroad to overcome these problems, improve competitiveness, increase efficiency and to survive. The desire to be global players or key players in global industries also drives OFDI from developing countries. SMEs from developing countries have started the internationalization process, which has in turn facilitated their growth to a critical size. Unlike in the past, firms do not need to grow to a certain size before they internationalize; they now internationalize to grow and investing abroad could facilitate this process. The prospect of enterprise internationalization from developing countries is promising, given the increasing capacities of these firms to invest abroad. There is also an increasing interest by developing country firms, home and host Governments, and the international community to support such enterprise internationalization. There is now awareness that enterprise internationalization is a means to increase the productive capacity of developing countries and a growing source of business linkages with TNCs. The liberalization of OFDI policies and relaxation of exchange controls have also increased these opportunities. OFDI provides a channel for developing country enterprises to improve their competitiveness. Its impact on competitiveness includes: increased profitability; expansion of markets; access to natural resources; better control of value chain; increased overseas contracts; and access to brand names,
technologies and R&D, and production facilities. Other implications on enterprise competitiveness relate to the increase in the value of firms because of international exposure, improved image and experience in sophisticated markets. However, the impact on competitiveness is difficult to assess because of the lack of information. The analysis is based on limited case studies, which often do not include SMEs. It would be worth deepening research and analysis in this area. There are undesirable effects or risks of internationalization. They include business failures, the loss of capital or closure and the takeover by foreign firms. The lack of knowledge and misperception about foreign regulatory framework including legal issues, unfamiliar business environment, languages and customs contribute to augment such risks. Given existing risks, a prudent and gradual approach to CHAPTER I 9 Box 1. Enterprise internationalization through OFDI: Selected policy recommendations To the extent that OFDI contributes to improving enterprise competitiveness, developing countries should support the internationalization of their enterprises and adopt appropriate policies. Various policy suggestions were made at the Expert Group Meeting on “Enhancing the Productive Capacity of Developing Country Firms through Internationalization”. They include the following: �� Ensure coherent and targeted government policies to support the long-term vision for internationalization of firms and to move to higher value added, knowledge-based activities and expand a pool of competitive and efficient local enterprises. �� Build institutional support to facilitate and encourage OFDI, including improved access to finance. Market entry can also be facilitated through matching of joint venture partners and provision of industrial parks. �� Consideration should be given to the different levels of economic development of home countries and a need for a differentiated approach to different types of SMEs (active vs. passive investors). �� Establish effective public-private sector dialogue to exchange information and facilitate policy discussion. �� International organizations such as UNCTAD could help address the issue of data limitation and data collection, framing the arguments of what is meant by OFDI, and assisting in institutional support, policy advice and capacity building. �� Develop a “Global or Regional Players Programme” to allow firms and countries to share experiences on enterprise internationalization. �� Provide training courses on internationalization for policymakers and managers of developing country enterprises, including events that would help raise awareness of the benefits of enterprise internationalization. This could help countries to understand that OFDI is a micro instrument, which helps firms to increase competitiveness and to be integrated in the global economy, rather than as an unpatriotic development. �� Mitigate risks of internationalization by ensuring that developing country enterprises are better prepared for the challenges. Source: Report of the Expert Meeting on “Enhancing the Productive Capacity of Developing Country Firms through Internationalization”, Geneva, 5-7 December 2005 (TD/B/COM.3/EM.26/3). internationalization would be wise. Companies should have strong economic fundamentals before attempting expansion abroad and develop a sound business model and strategy. The use of risk assessments, the exchange of experiences, and provision of policy and institutional support are important to cushion any negative impact. Home country Governments should tailor OFDI policies to the needs of their firms, with special support measures for SMEs. The private sector could also provide support, facilitating the exchange of experience and carrying out capacity building activities through industry clubs and business associations. OFDI has desirable and undesirable effects Governments wishing to promote enterprise competitiveness through OFDI should weigh its potential costs against its benefits to their economies and enterprises, and should then determine appropriate
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