The Emergence of Southern Multinationals

This chapter serves to describe the content of this edited volume on the emergence of Southern Multinationals and their impact on Europe. The volume is divided into seven parts, including this introductory section and a concluding section. The five intervening parts contain contributions that address the following aspects: Part Two on the quantification of Southern Multinationals consists of two contributions that appear as Chapters 2 and 3.

Transnational corporations (TNCs) from developing and transition economies (‘Emerging TNCs’) are rapidly strengthening their business links worldwide and contributing to the evolving global economic landscape. The core concepts and issues related to their emergence will be covered in this chapter. First, a large share of foreign direct investment (FDI) by developing country TNCs is directed to neighbouring and developing economies. Second, these companies have recently embarked on their internationalization paths, and the motivations, strategies, and characteristics are yet to be clearly identified. In particular, emerging TNCs have implications in terms of the competitive landscapes in developed and developing host economies. In the context of other developing host economies, some questions arise as to whether such competition will be beneficial. Third, in a regional context, as much FDI from Emerging TNCs is directed towards nearby countries, both national and regional institutional frameworks must be analysed to understand whether these TNCs’ internationalization should be encouraged, how regional economies benefit, and the extent to which regional policies can be designed to support such regional cross-investments in view of enhancing the mutual beneficial impact on countries’ development.

The impact of Southern Multinational Enterprises (MNEs) on Europe is of pressing interest in the wake of the rapid internationalization of multinationals from the BRIC(S) countries (Brazil, Russia, India, China and South Africa) and other countries of the ‘South’. It is of compelling interest to know the impact that Southern MNEs have on Europe and to examine if (and how) this impact differs from traditional inward investors such as the USA and Japan. However, this chapter shows that such efforts are severely constrained by the lack of reliable and consistent data. The chapter assembles the extant data and suggests that significant outcomes of inward foreign direct investment from the South are already occurring.

The increasing presence of firms from emerging countries, especially from the BRIC group (Brazil, Russia, India, and China), in the world scenario, is a remarkable characteristic of the ‘third wave’ of internationalization. The two first ones were generated by the expansion of North American and European firms (in the 1950s and 1960s) and by Japanese firms (in the 1980s). Currently, the so-called emerging country multinationals are taking a stand in the global economy (Goldstein, 2007; Sauvant, Mendoza, and Irmak, 2008; Ramamurti and Singh, 2009).

The forces of globalization in the last three decades have greatly reshaped the landscape of the world economy. In that process, an increasing number of firms from emerging markets have undergone fundamental transformation and experienced a rapid growth. Some of them have started looking for investment opportunities across the national borders. Many of these kinds of investments go to countries with institutional environments that are similar to their home base, but a few also invest in developed economies. This South—North type of foreign direct investment is a new phenomenon that has caught the attentions of business scholars as well as policy makers. Although the stories of Southern Multinationals’ expansion have been widely reported as the headlines in business news in recent times, systematic studies on this important phenomenon are scarce. Therefore it is worthwhile examining this new kind of multinational enterprise in order to gain a better understanding of its distinctive characteristics (UNCTAD, 2006).

In terms of its size, Hungary has been a relatively open economy. This is indicated by high exports/GDP ratios that have prevailed since the 1970s. However, until the 1990s both inward and outward foreign direct investments (FDI) were negligible. The decade of the 1990s can be characterized by inward FDI, and in the 2000s fast-growing outward FDI can be observed. The impacts of inward FDI on Hungary and transition economies are widely dis-cussed in both comparative economics and international business literature. Outward FDI has attracted lesser attention, especially in Central and Eastern Europe so far. The political and economic situation of some countries in the region has been changed by EU membership. This chapter provides an overview on the inward and outward FDI of selected Central and Eastern European countries and focuses on Hungary. In the 1990s Hungary was a success story in attracting FDI. The description of the source countries and recipient branches will show that the inward FDI is concentrated. Emerging Hungarian outward FDI put Hungary ahead in the region in the 2000s. However, the values are small and volatile. Time series data is used to depict these trends. Recipient countries and source branches will be analysed. The shaping patterns will be described and evaluated in the light of international business and Hungarian literature on MNEs.

The expansion of multinationals from emerging markets in the 2000s has become a somewhat fashionable topic in the last few years. The appearance of Russian multinationals, in particular, has attracted a very intense interest not only from the business, policymaking, and academic communities, but also from the media and even the general public in many countries. At the same time, until very recently, quantitative data has been essentially limited to aggregate quarterly foreign direct investment (FDI) figures. Beyond that, even the basic breakdowns — such as by country or by industry — while available from the official statistics body Rosstat, are widely seen as reflecting off-shoring, ‘tax optimization’ and similar practices at least as much as actual FDI (Aris, 2006; Nessmann and Orlova, 2008). It is to partially fill this void that the Moscow School of Management, SKOLKOVO, in cooperation with the Vale Columbia Center for Sustainable International Investment, has started the research project that has provided the data for this chapter.

Creation of multinational enterprises (MNEs) seems an inevitable phenomenon of development, and their existence speeds up changes. Also emerging and many transition economies have increasingly invested abroad. New MNEs have emerged. Since communist and socialist regimes frequently hampered MNEs (interpreting the creation of domestic MNEs as an adverse export of capital needed at home and foreign MNEs as a synonym for the large exploiting enterprises from Western industrialized countries), many found the process of internationalization in these economies as surprisingly quick. Yet the case of Slovenia shows that escaping from the system may itself serve as a strong incentive for direct investment abroad (Svetlicic, Rojec, and Lebar, 1994; Jaklic and Svetlicic, 2003). Firm-level, bottom-up initiatives were taken after the change of the system, slowly accompanied by economic policy and also influenced by changes in the global environment. The speed of emergence in some economies has thus challenged traditional theories and patterns of internationalization as well as existing knowledge on changes and developments brought about by their existence (Dunning et al., 2008; Rugman, 2008).

Since the beginning of the millennium, companies from fast-growing emerging economies — that is, Brazil, China, India or Russia — have grown more confident on the global stage. By securing bold acquisitions and delivering the innovative products that strengthen their market positions, they have turned themselves into formidable competitors to the incumbent multinational companies. Moreover, as ‘latecomers’, they are fully cognizant of the changing world environment.

Foreign direct investment (FDI) stock from developing countries has surged in recent decades, with a six-fold increase in the period 1990–2000, and a threefold increase between 2001 and 2008 (UNCTAD, 2006, 2009). Developing country FDI flows have increased from a level around US$ 30 billion in 1990–5 (annual average) to a level around $90 billion in 2000–5; and as a share of global FDI, FDI from these countries has doubled since the 1990s so that they by 2009 account for more than 20 per cent of global FDI (UNCTAD, 2010). The developing country investors are not merely small firms: 99 of the Fortune 500 companies are by 2009 from developing countries. The surge in developing country FDI is mainly derived from investment from Asian developing countries; in the early stages, Hong Kong, Singapore, Taiwan, and South Korea were leading, but more recently, India and China have become the leading Asian outward investors. This chapter will focus on the rise of Chinese and Indian investments.

The foreign ventures of Chinese enterprises such as Haier, Lenovo, CNOOC (China National Offshore Oil Corporation), and SAIC (Shanghai Automotive Industry Corporation) during the beginning of the twenty-first century drew so much media attention that even the general public has become aware of the expansion of multinational firms from emerging economies, especially from China. In Belgium more recently the significance of Chinese investors was underlined by the role played by the insurance firm Ping An as a minority shareholder in the saga about the nationalization and subsequent sale of the Fortis Bank to the French financial group BNP Paribas and the rejected bid by the Chinese auto producer Beijing Automotive Industry Corporation (BAIC) to take over General Motors’ European Opel operations, including the plant in Antwerp, Belgium.

Much of the controversy around foreign direct investment (FDI) in European policy-making circles in the recent period has crystallized around the notion of incoming FDI (IFDI) as a potential threat to ‘strategic industries’. Definitions of what constitutes a ‘strategic industry’ vary by country (Schulz, 2008) and even by government ministry, since those responsible for finance or competition will not necessarily share the same vision as those working in defence, employment, innovation, environment, transport or energy. In the recent period, debates and usage of ‘strategic industry’ to question and even block IFDI have come to the forefront in the European Union (EU). Probably the most controversial case of a Southern Multinational in the EU is Russia’s state-owned Gazprom. Many policy-makers suspect that Gazprom has geopolitical, rather than commercial, interests in EU gas markets (Clifton, Diaz-Fuentes and Revuelta, 2010; Clifton and Diaz-Fuentes, 2010b). There have, however, been less high-profile instances where potential investors from the South have been unsuccessful in entering the EU, such as Mexican billionaire Carlos Slim’s frustrated attempt to enter the Italian telecommunications market. Identifying and quantifying EU protectionism vis-à-vis Southern Multinationals in methodological terms is a challenge, however. Firstly, this is because details of why mergers & acquisitions (M&A) are blocked are usually quite opaque.

In the current highly volatile international financial system, sovereign wealth funds (SWFs) have emerged as significant global financial players. The emergence of these funds has drawn considerable attention from policy-makers, market players and scholars. There are two main reasons for this. First, SWF have been acknowledged to be the largest concentration of capital that the world has ever known. In 2008, SWFs exceeded the amount of US$ 5 trillion (UNCTAD, 2008). It is estimated that by 2015 they will reach the amount of US$ 12 trillion (Redicker and Crebo-Redicker, 2007). Secondly, the management of these funds has raised concern about the lack of transparency in the administration and investment strategies of these colossal funds. Strong sentiments of protectionism have been particularly expressed by some European countries. Much of these strong sentiments can be attributed to the unprecedented phenomenon that results from the accrual of large current accounts surpluses of some emerging and developing nations, who are keen to invest in the developed world. This remarkable shift of capital flows suggests the establishment of a new economic order. This chapter considers the emergence of SWFs as global financial players, the new regulations placed to lessen concerns around this phenomenon, the European approach towards SWFs and their impact on the global economy.

This chapter explores the investment patterns of emerging country multinationals (EC-MNCs) to understand whether these differ from the traditional approaches used by firms from developed countries. Specifically we analysed investments in operations in production activities, but equally of interest were those investments that would constitute upstream (R&D, design, supply-side) or downstream investments (distribution/route to market, after-sales services). This ‘value chain perspective’ was of interest as it may provide particular insights into different internationalization patterns of EC-MNCs.

Chinese outward investment is making headlines: little-known Geely Automotive bids for Sweden’s carmaker and European middle-class insignia Volvo (BBC, 2009), a completely unknown company from Sichuan for American icon Hummer (Stall, Terlap and King, 2009). State-owned energy companies invest in African oil, and the government of EU member state Greece turns to China to avoid bankruptcy (Reuters, 2010a). Three decades after the leadership of the People’s Republic of China (PRC) initiated deep economic and social reforms, China joined other transition economies to emerge ‘as significant outward investors’ (UNCTAD, 2006: xxiii).

Outward FDI flows from emerging economies have increased with an astonishing rate during the last several decades (Figure 16.1). While annual outward FDI flows originating from these economies were slightly less than US$ 12 billion in 1990, this figure increased by almost twenty-fold and reached US$ 253 billion in 2007 (UNCTAD, 2008). Concomitant with the mounting importance and prevalence of multinational firms from emerging economies, practitioners and academicians alike are becoming more interested than ever in understanding idiosyncratic strategies of these emerging multinationals (EMNEs). This interest reveals itself in special reports in practitioner outlets (for example, The Economist, 2008; BCG, 2009) along with focused issues in reputable academic journals such as the Journal of International Business Studies (Luo and Tung, 2007) and the Journal of International Management (Aulakh, 2007).

Although the current financial crisis is having rather harsh repercussions on Asian economies, most observers still expect the importance of Southern economies to rise significantly over coming decades (Figure 17.1). The role of Southern Multinationals will be crucial during this process.

Emerging market multinational corporations (EMNCs) have made their way to the global business stage. They can increasingly be found in some of the most prestigious company rankings worldwide: for example, the Forbes Global 2000 list of 2009 includes 197 companies originating from BRIC countries (Forbes, 2009a), up from 79 in 2004 (Forbes, 2004). Some of these companies are even ranked among the Forbes Global High Performers (Forbes, 2009b). EMNCs have attracted considerable attention when announcing spectacular deals such as the acquisition of Jaguar and Land Rover by India’s Tata Motors ( ft.​com, 2008), but not all of the headlines have been positive — for example, see Satyam — the ‘Indian Enron’ (The Economist, 2009a).

The relations between host state (HS) and multinational corporations (MNCs) have been subjected to extensive research in the International Business (IB) literature. Previous research on entry bargaining has focused on the terms of the investment deal (that is, outcome), which was regarded as the function of the relative bargaining strengths of HS and MNC. It has been noted that the MNC’s actual entry conditions (or the bargaining context) are shaped by economic resources that are of interest to the other actor, the relative stakes that the two actors have in a given bargaining situation, and the similarity of interests between the two sides (Kobrin, 1987; Behrman and Grosse, 1990; Behrman and Grosse, 1992). This has been two-actor model of the MNC-centric view of entry bargaining (Vernon, 1971, 1977; Kobrin, 1987; Eden, Lenway and Schuler, 2005).

The various contributors to this volume have sought to examine the emergence of Southern Multinationals and their impact on Europe. In this concluding chapter, the salient findings are summarised under a number of headings concerning the following issues: