Southern
Transnationals:
The New Kids On The Block?
By Kavaljit Singh
01 May, 2007
Countercurrents.org
The mid-1990s witnessed the dramatic
emergence of transnational corporations from the developing world. Although
much of the investment by these corporations is concentrated in other
developing countries (South-South), they are increasingly investing
heavily in developed countries (South-North) as well. The South-South
and South-North FDI flows are growing much faster than the traditional
North-South FDI flows. However, 87 per cent of the total outward FDI
flows in 2004 originated from just 10 developing countries.
In terms of foreign assets,
the majority of top 50 Southern TNCs are headquartered in Asia (32),
followed by Latin America (11) and Africa (7, all of them in South Africa).
What is interesting to note is that the increase in FDI outflows is
concentrated in many of the same countries that receive the bulk of
FDI inflows to developing countries such as China, Brazil, India, South
Africa, and Mexico. Outward FDI from China increased from a meager $400
million in 1980 to $38 billion by the end of 2004. China is also the
second largest investor in Africa, after the US. In the case of India,
there were 136 outward investment deals valued at $4.3 billion in 2005.
The value of outward foreign investment by Indian firms almost nears
the level of inward foreign investment. With the lifting of international
sanctions and the relaxation of capital controls, South African TNCs
such as the Anglo American Corporation, De Beers, and SABMiller have
become dominant players in the African region. In the words of Graham
Mackay, CEO of SABMiller, “If there was any more of Africa, we
would be investing in it. The return on investments here (Africa) has
been fantastic.” [1]
The motivations behind cross-border
investments by Southern TNCs are not different from others. To a large
extent, competition pressures arising from globalization processes (such
as liberalization of imports and inward FDI) drive Southern corporations
to invest abroad. Like their Northern counterparts, the Southern TNCs
are investing abroad to gain access to natural resources, markets, skills,
and technology. In some recent cases, acquiring brand names (such as
the acquisition of IBM’s personal computer division by China’s
Lenovo) seems to be the prime motive.
To a large extent, the expansion
of South-South and South-North investment flows reflects the increasing
integration of developing countries into the world economy. A number
of important factors including regional integration through trade and
investment agreements, trade and financial liberalization, increasing
wealth as well as limited market size and resource base at home have
encouraged Southern TNCs to invest abroad.
Instead of investing in greenfield
projects, however, Southern transnationals are increasingly undertaking
investments through acquisitions. Recently announced buyout deals (such
as Beijing-based Lenovo’s purchase of IBM’s PC business
and the acquisition by Mexican company Cemex of the UK’s RMC)
suggest that Southern TNCs are more actively engaged in M&A deals.
The bulk of India’s outward FDI is in the form of mergers and
acquisitions, mainly in telecommunications, energy and pharmaceuticals.
Even though most of the buyouts by Southern TNCs may still be under
the billion dollar range, they portray an increasing outward orientation
of big business in the developing world.
According to Joseph Battat
and Dilek Aykut of the World Bank, South-South FDI increased from $15
billion in 1995 to $46 billion in 2003, accounting for some 35 per cent
of total FDI flows in developing countries [2]. Despite their small
size, South-South FDI flows are significant to many poor countries such
as Lesotho, Mongolia, and Nepal. As far as South-North FDI flows are
concerned, OECD countries received $16 billion of FDI in 2001, up from
a mere $1 billion in 1995.
The bulk of South-South FDI
flows are regional. For instance, nearly two-thirds of FDI into China
originates in Hong Kong, Singapore, and Taiwan. Similarly, transnational
corporations from Chile, Brazil, and Argentina operate largely in the
Latin American region. Russian investments abroad have primarily been
in the countries of the former Soviet Union while South African investments
are almost completely located in Southern Africa.
In addition, the majority
of South-South FDI flows are concentrated in the infrastructure and
extractive sectors such as oil and gas. It is mainly state-owned corporations
that dominate investments in these sectors. State-owned oil companies
from China and India are rapidly acquiring oil and gas fields in Sub-Saharan
Africa, Central Asia, and Latin America. For instance, almost half of
China’s outward FDI went to acquire natural resource projects
in Latin America in 2004. Similarly, India’s state-owned firm,
Oil and Natural Gas Corporation, invested heavily in oil and gas fields
in the Russian Federation and Angola.
Given that state-owned corporations
are a significant source of South-South FDI flows (particularly in extractive
industries and infrastructure), such investments may be driven not only
by economic but also by political, strategic and diplomatic factors.
The billions of dollars worth of investment by China in Africa is a
case in point. The Chinese companies are involved in the building of
oil refineries, dams, roads, and big infrastructure projects in several
African countries including Sudan, Liberia, Angola, Chad, and Central
African Republic. However, China’s investments in Africa are not
purely driven by economic factors. To some extent, such big investments
also help China in earning international goodwill and securing political
support for its own agenda, particularly to isolate Taiwan diplomatically
(out of total 26 countries that have full diplomatic relations with
Taiwan, seven belong to Africa).
It is interesting to note
that outward investments by Southern TNCs are also supported by their
respective governments through removal of capital controls, fiscal incentives,
and investment protection measures. China, Malaysia, Thailand, and Singapore
have created special mechanisms to provide preferential treatment and
insurance against risks through credit guarantees schemes. For instance,
the Chinese government adopted a policy (“Go Global”) in
2000 to encourage its firms to invest abroad. China’s Export-Import
Bank provides loans to firms for outward investments in resource development
and infrastructure. If the investment is undertaken in an aid-recipient
country, Chinese firms also receive preferential loans. Fiscal incentives
are also provided to firms which bring machinery, plant, and equipment
to their overseas ventures.
Some regional arrangements,
such as the Southern African Development Community (SADC) and the Association
of Southeast Asian Nations (ASEAN), also provide various incentives
(including lower tax and tariff rates) for outward investment within
the regions. Apart from fiscal and financial support, bilateral investment
treaties and double taxation treaties between developing countries are
growing.
To secure access to strategic
assets, some Southern TNCs have also invested in developed countries
such as Australia and Canada. In addition to the extractive and infrastructure
sectors, there are also a few cases of large-scale South-North investments
involving M&As. In particular, Chinese corporations have been active
in acquiring several well-known consumer brand names, such as Thompson,
RCA, and IBM.
Interestingly, tax havens
are favorite destinations for many Southern TNCs as they are for Northern
TNCs. The Cayman Islands, Bermuda, and Cyprus are the main destinations
for Brazilian, Indian, and Russian outward FDI. Hong Kong plays an important
role for the overseas expansion of Chinese corporations.
However, it needs to be emphasized
here that some South-North investment deals have been subjected to intense
political backlash in Northern countries. Several recent cross-border
investment bids by Southern TNCs (for instance, the proposal by a Chinese
company, China National Offshore Oil Corporation (CNOOC) to take over
US oil company, Unocal) reflect growing unease among policy makers in
the North.
Given the fact that most
developing countries are usually capital importers, the rise of Southern
TNCs poses new policy dilemmas. The policy makers in the developing
world are increasingly finding it difficult to strike a balance between
the country’s interest as a host country and its newly-found interests
as a home country.
How should the new and growing
phenomenon of outward FDI from the South be assessed? Are South-South
FDI flows favorable to the host economy? Are the strategies and behaviors
of Southern TNCs different from their Northern counterparts? Do Southern
TNCs maintain better transparency, environmental, and labor standards
than their Northern counterparts? What are the developmental impacts
of investments by Southern TNCs? Who benefits from South-South investments?
Who loses? Should South-South investment be promoted as an alternative
to North-South investment flows? Unfortunately, the answers to such
pertinent questions are hampered by the lack of in-depth studies and
reliable data on South-South and South-North FDI flows. Despite such
information gaps, one thing is certain: this new and growing phenomenon
is going to play an important role in the global economy in the coming
years.
Notes:
1. Remarks made by Graham Mackay at Africa Economic Summit 2005, Cape
Town, June 1-3, 2005.
2. Joseph Battat and Dilek
Aykut, “Southern Multinationals: A Growing Phenomenon,”
note prepared for the conference, Southern Multinationals: A Rising
Force in the World Economy, Mumbai, November 9-10, 2005.
Kavaljit Singh is Director, Public Interest Research
Centre, New Delhi. He can be reached at [email protected].
The above article is based on his latest report, Why
Investment Matters: The Political Economy of International Investments
(FERN, The Corner House, CRBM and Madhyam Books, 2007). The full report
could be downloaded from: http://www.thecornerhouse.org.uk/
pdf/document/Investment.pdf
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