Outward foreign direct investment from BRIC countries: Comparing strategies of Brazilian, Russian, Indian and Chinese multinational companies.

AuthorAndreff, Wladimir
PositionP. 105-131 - Report
  1. Industrial distribution of BRICs' outward foreign direct investment

    Since the industrial classifications used by central banks for publishing OFDI data are not identical at a disaggregated level across the BRICs (14), a comparison of industrial distribution of their OFDI can only be conducted in rather broad terms.

    Industrial distribution of Russian OFDI is specific when compared to other BRICs' OFDI. Not only it is concentrated on a few industries, like in other BRICs, but Russian MNCs are overrepresented in natural resource exploitation, mining and metallurgical industries, then in traditional manufacturing industries, all inherited from the top pecking order of heavy industries in the former Soviet system. Cases in point are Gazprom, Lukoil, Itera, Tatneft, Novatek in the hydrocarbons industry; Severstal, Evraz, Norilsk Nickel, Alrosa, Basic Element (which owns Rusal), NMLK, Mechel, TMK, Koks, Metalloinvest, MMK, and Novolipetsk Steel in the metallurgical industry; Inter RAO UES in electricity production; Renova, OMZ and Borodino in machinery; AvtoVAZ, GAZ, UAZ and KAMAZ in the automotive industry; and in various industries, Investlesprom (paper-wood), Eurocement and LSR Group (building materials), Eurochem (chemical fertilizers), Acron (agro-chemistry), WimmBillDann, Russian Solod, SGI Group, Alterwest and Russian Wine Trust (agro-food industry).

    However, Russian OFDI started booming in the 2000s in more modernised parts of the manufacturing industry with Sistema group (which owns MTS) in telephone production, Sitronics in telecom equipment, Vimpelcom, Altimo, Megafon and Alfa Group in telecom, Korolev Rocket and Space Corporation Energia in aeronautics, RTI Systems in aerospace and missile production, NPO Mashinostroyenia in military equipment. Big Russian insurance and financial companies and big banks have developed and internationalised in the formerly underdeveloped (Soviet) services industry such as Sberbank, VTB, Gazprombank, Alfa-bank and Bank of Moscow. Such MNCs exemplify a more recent industrial diversification of Russian OFDI which spreads over high tech and services industries resulting from a partial modernisation of the Russian industry which was launched at the dawn of the post-Soviet transition and became more deeply rooted after 1999.

    The most striking feature in the industrial structure of Chinese OFDI is the high share of services. If one adds banking and trade to other services, the share of the tertiary sector is up to about 60% of overall OFDI (Table 13), which resembles the industrial distribution of OFDI from developed countries. Investing abroad in the tertiary sector is typical of the global strategy conducted by major Western MNCs (Andreff, 2003b). Chinese MNCs are about to stick to such strategy and likely to be ahead of Russian MNCs in this respect, none of the latter being known as a leader in the global services industry so far. A resource seeking strategy of Chinese MNCs is at work in mining. However, it is far from the overwhelming share of mining, oil and gas in Russian OFDI. With a noticeable difference: while Russian MNCs invest abroad looking for both new supply sources and new markets (oil and gas stations), Chinese strategy is almost exclusively geared towards securing a supply of raw materials for the domestic economy. Chinese MNCs look for securing their supply in natural resources all around the world: in Australia, Russia and Canada, but increasingly in Latin America, Central Asia, and Africa. Chinese OFDI in the manufacturing industry is less significant than in mining and its share has decreased in total from 2004 to 2010.

    Brazilian MNCs primarily expanded abroad in the tertiary sector--over 88% of all OFDI until 2007, which compares with Chinese OFDI concentration in the services industry. Crisis has affected this industrial distribution: the share of the tertiary sector fell down to 59% while the share of the primary sector grew from 2-3% up to 31%. Above-listed trans-border M&As were many in the primary sector for securing natural resource supply in times of crisis. The manufacturing industry still remains minor in Brazilian OFDI which explains that efficiency seeking relocation of production in view of lowering unit labour costs has not emerged yet. A significant share of OFDI in resource-based industries and quite few manufacturing investments abroad reveal comparative advantages of a home country well-endowed in natural resources that Brazil shares to some extent with Russia (Andreff, 2015).

    Overall, industrial distribution of Indian OFDI reflects a change from essentially market seeking to more asset seeking strategy (Kumar, 2007). Until 1990, Indian OFDI concentrated in the manufacturing industry, in particular pharmaceuticals and chemicals. There was a first shift from manufacturing to services in the 1980s. Inefficiencies and low productivity due to inward looking policies led to a slowdown in OFDI from Indian manufacturing industry while the faster growing services sector in the national economy increased its share in OFDI. In the pre-1991 period market seeking OFDI developed on the basis of Indian firms' intermediate technology in relatively low tech industries such as light engineering (Lall, 1986). The main technological advantage that Indian MNCs achieved through absorbing, assimilating, adapting and reverse engineering of foreign technologies offered limited scope for exploitation in developed countries. Those modified foreign technologies to suit local demand and factor conditions rather provided Indian MNCs certain competitive advantages in other developing countries having similar economic conditions to India's.

    Since 1991, about 60% of Indian OFDI concentrated in IT, communication, software and media, trade, banking and finance. Within the manufacturing industry, power generation, electronic equipment, telecom, chemicals, pharmaceuticals and software development were among the predominant investors abroad. Knowledge-based industries--software and IT, depository institutions, professional, technical and scientific services--have heavily invested abroad since 2000. This maturing technological strength of large-sized Indian MNCs is now allowing them to exploit their competitive advantages even in developed countries. Consequently, in the 2000s, manufacturing has displaced services as the principal OFDI industry, and the primary sector's share is now growing quickly. While pharmaceuticals, consumer electronics and automotive accounted for the bulk of manufacturing OFDI in the first half of the decade, the second half has seen a concentration in metals, energy and natural resource investments, and increasing activity by consumer goods and food and beverage MNCs. In the aftermath of global economic crisis, Indian FDI outflows (15) shifted again toward services since 2010. While IT initially dominated services OFDI, investment in other services industries, such as financial and insurance services, entertainment and broadcasting, construction, and telecom, is now mounting.

  2. The determinants of BRICs' outward foreign direct investment

    Economic determinants of a country's OFDI are usually studied relying on econometric testing of their statistical significance as in Andreff (2003a). In this section is collected a sample of recent econometric studies (none of my own) that attempt to specify which variables are explanatory of OFDI respectively from Brazil, Russia, India and China. However, the surveyed econometric studies are classified here in an analytical framework that distinguishes FDI pull factors from push factors (Andreff, 2015). Pull factors are much in tune with IDP model (Dunning, 1981); they attract and drive inward FDI into a given country, otherwise coined host country's factors of attractiveness to FDI (Andreff, 1999a). They differentiate host countries. Thus, when analysing OFDI, the explanatory power of pull factors is basically to point out which host countries do attract foreign investment flowing from any home country. Pull factors definitely are determinants of the geographical distribution between host countries of OFDI from (a given set of) home countries. They determine an outward investor's trade-off between host countries, therefore a MNC choice to invest in one host country rather than another one on the basis of their attractiveness variables (Michalet 1997; Andreff 1999b).

    Push factors usually are referred to as home country-specific. They are drivers for a home country substituting investment abroad to domestic investment; they explain why investment is pushed outwards domestic borders. They are embedded in the home country's economy, in particular all factors that may depend on domestic industries and markets a company is involved in. Therefore, push factors are related to domestic industrial structure and are drivers of OFDI industrial distribution abroad. Push factors such as domestic market size (population as a proxy), economic development (GDP per capita), technological level, industrial distribution of value added across different industries have been successfully tested (Andreff, 2003a) as underlying the IDP model, at least in initial stages of OFDI development.

    Starting with Brazil, it is the only BRIC for which recent econometric testing has retained push factors as explanatory variables of OFDI (Carvalho, 2009). However Ellstrom and Engblad (2009) have found that though the shape of Brazilian IDP correlates with the conceptual IDP model, the underlying factors causing the shifts in net outward investment are not due to development of the country's OLI-advantages (16). OFDI was initially caused by economic reforms and later by global business cycles as in many late outward investor countries such as Brazil: IDP theory explains the development of Brazil's OFDI only to a limited extent. Indeed, in a further maturing stage of IDP model, pull factors have been tested as major explanatory variables...

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