Emerging FDI Trends in Developing Asia Dilek Aykut The World Bank ICRIER Workshop New Delhi, India April 2007

1. Emerging FDI Trends in Developing AsiaDilek AykutThe World BankICRIER WorkshopNew Delhi, IndiaApril 2007

2. Motivation: FDI flows to developing countries surged during the last two decades All Developing Countries US billion • Progress in technology in transport, communications, information and data processing • Progress in liberalization of FDI and trade policies in developing countries Developing Asia Note: United Nations’ developing country definition is used.

3. US billion All Developing Countries Developing Asia Motivation: There have been considerable changes in FDI flows • There has been a shift towards services • The role of M&A as form of FDI increased • The rise of multinationals from developing • countries as FDI investors, particularly in other developing countries (South-South FDI) How do these trends apply for Asian developing countries ?

4. FDI in Services Sector has increased since the 1990s… Share in total FDI Stock in 2004 among developing countries percent Source: Author’s calculation based on collected data from various resources Note: Some are approximation based on flows data. The years might be different depending on the region and country.

5. …there is a significant variation among developing Asia Share in total FDI Stock in 2004 percent Source: Author’s calculation based on collected data from various resources Note: Some are approximation based on flows data. The years might be different depending on the region and country.

6. As conventionally defined, services sector includes: • Infrastructure (Electricity, Gas, Water, Transport, Storage, and Communication) • Finance and insurance • Trade & Repairs • Business Services • Real Estate • Others Source: United Nations Statistics Division ISIC

7. Factors behind the increase in services-FDI • Income growth • Technological progress • Changes in investment and trade policy

8. The sectoral composition of FDI mirrors that of GDP in most countries Source: World Bank.

9. Factors behind the increase in services-FDI • Income growth • Technological progress • Global production networks • Increased tradability of services (outsourcing) • Changes in investment and trade policy

10. Factors behind the increase in services-FDI • Income growth • Technological progress • Changes in investment and trade policy • Unilateral liberalization • Bilateral and regional agreements • Commitments under the WTO and General Agreement on Trade in Services (GATS)

11. Service sector has been liberalized much later than manufacturing FDI restrictions over time in selected sectors 1981-1998 (OECD Average) higher restriction Source: Golub (2003)

12. FDI restrictions in services are higher in Asia compared to other developing countries FDI restrictions in developing countries by region, 2004 higher restriction Source: Unctad (2006) Note: The study uses two different weights for regional average GDP and FDI. The graph shows the GDP weighted indices, but the results from FDI weights are very similar.

13. Some sectors are more restricted than others… Source: Unctad (2006)

14. As bulk of services FDI came as privatization and mega M&A transactions, the role of M&A as a form of FDI increased • Global M&A rose more than five-fold between 1995 and 2000 to a peak of $1.1 trillion in 2000, before dropping by some 45 percent in 2001 with the decline in stock markets and the global economic slowdown. • The bulk of the cross-border M&A transactions continue to be in service sectors (more than half in finance, transport, storage, and communications alone). • Extensive privatization of state-owned assets in developing countries during the late 1990s in Latin America and Eastern Europe. • Reflecting the recent favorable economic conditions, global cross-border M&As reached to yet another peak of $1.3 billion in 2006.

15. The ratio of cross-border M&A sales to FDI flows, 1990-2005 percent

16. Services FDI is particularly sensitive to changes in investment climate • Relies mainly on domestic demand • Generates local-currency earnings • Subject to complex regulatory systems • Nontradable products (location-bound), unlike primary and manufacturing sectors that benefit from exporting to international markets

17. Improved investment climate is associated with higher FDI… percent FDI-GDP Ratio High Middle Low Policy Performance

18. … and with higher FDI in Services percent Services FDI as a share of total FDI High Middle Low Policy Performance

19. Emerging multinationals from developing countries The last two decades also witnessed the emergence of MNCs from developing countries (EMNCs) as a result of increased globalization: • Developing country firms are faced with growing competition in sales and in access to resource and strategic assets • Southern firms have amassed sufficient capital, knowledge and know-how to invest abroad. • Many developing country governments have eased their policies towards capital outflows. • Same drivers as the Northern multinationals: • Access to new markets or defend the export markets • Access to resources • Access strategic assets

20. Internationalization of EMNCs • Partly explained by Dunning’s Investment Development Path (IDP) • Major investors are mostly from FDI recipient middle-income economies • Some invest abroad in earlier stages due to increased competition • Comparative advantage range from a patent, brand, production capacity or access to certain markets or resources • In services, EMNCs may have certain comparative advantages vis-à-vis Northern MNCs Ex: America Movil, Orascom • In primary sector, access to resources and scale of production. Ex: Petronas,Petrobras • In manufacturing sector, special production techniques can lead to comparative advantages. Ex: Marcopolo, Hikma • Acquiring strategic assets through cross-border M&A • In 2006, three mega purchases by EMNCs: Cemex’s Australia’s Rinker, CVRD’s Canadian Inco, and Tata’s purchase of Dutch Corus, each more than $10 billion. • Inward FDI recipient => develop comparative advantage => outward FDI

21. Source: Aykut and Goldstein 2006

22. As a result, outward FDI stock from developing countries increased Outward FDI stock by region, 2005 $ billion

23. Geography of investments by EMNCs • EMNCs tend to invest regionally and in other developing countries due to familiarity through trade, ethnic and cultural ties. • Supported by regional agreements and government incentives • Intra-regional South-South FDI is significant for Asian economies • Already part of regional production networks • Internationalization of ‘ethnic Chinese” business in Asia • India is major investor in neighboring countries but have begun to go the West rather than the East. Major investor in United States, UK. • Venturing beyond their immediate region • Brazilian investments in Angola, Nigeria, China and Turkey • Chinese investments in Latin America and Africa • Malaysian investments in South Africa • Indian investments in Africa

24. Policy Implications • South-South FDI is significant in some low-income countries and represents an opportunity for the others • For example, investment from China and India in Nepal; recent Indian investments in Bangladesh • It has considerable development implications for both home and host countries • Increased competitiveness for EMNCs • Enlargement and diversification of the investor pool: • Investment promotion • Also poses some risks • Operational and financial challenges may lead to unsuccessful projects • Higher South-South integration may increase vulnerability for a possible contagious effect in case of an economic crisis. • FDI outflow from EMNCs is expected to continue its positive trend • South-South is expected to increase as Southern MNCs are very active in the recent wave of privatization in developing countries

25. Conclusion • As a result of technological progress and policy reforms both in developed and developing countries, FDI flows have evolved in terms of the sectors it goes to, its mode, and in terms of who is investing over the years. • Today, developed and many developing countries alike, services sector has become the major sector attracting investment from foreign MNCs. • And these MNCs are only from developed countries but also from developing countries. • Developing country MNCs are not necessarily inferior to their developed country competitors in terms of technology; managerial skills and access to capital, however. On the contrary in some of them are major global players in their fields.

26. Thank you For more information: Aykut, Dilek, and Dilip Ratha, “South–South FDI flows: how big are they?,” Transnational Corporations, Vol. 13, No.1, 2004. Aykut, Dilek and Joseph Battat, "Southern Multinationals—A Growing Phenomenon” A note prepared for the IFC/FT Conference 2005. Aykut, Dilek and Andrea Goldstein, “Developing Country Multinationals: South-South Investment comes of age” OECD Working Paper No.257. 2006