Emerging Economies’ Multinationals: General Features and Specificities of the Brazilian and

Chinese Cases

Andrea Goldstein (OECD, Paris)

Fazia Pusterla (IADB, Washington)

‘Emerging Multinationals’ ConferenceCopenhagen Business School

9-10 October 2008

Top 15 developing and transition economies in terms of stocks of outward FDI, 1990, 2005

Rank Economy 1990 Economy 2005

1 Brazil 27.56 Hong Kong, China 33.61

2 Taiwan Province of China 20.39 British Virgin Islands 8.80

3 South Africa 10.08 Russian Federation 8.60

4 Hong Kong, China 8.00 Singapore 7.92

5 Singapore 5.24 Taiwan Province of China 6.95

6 Argentina 4.07 Brazil 5.11

7 China 2.99 China 3.31

8 Panama 2.81 Malaysia 3.18

9 Kuwait 2.46 South Africa 2.75

10 Mexico 1.79 Korea, Republic of 2.61

11 Malaysia 1.79 Cayman Islands 2.41

12 Korea, Republic of 1.55 Mexico 2.00

13 Saudi Arabia 1.26 Argentina 1.62

14 Bermuda 1.04 Chile 1.52

15 Libian Arab Jamahirya 0.89 Indonesia 0.98

Source: own calculations from UNCTAD, 2007

Brazil and China’s outward FDI, flows and stock, by destination, 2003-2005

Brazil2003 2004 2005 2006

Developed Europe 39.14 64.36 66.75 69.51Canada & US 17.90 12.92 15.10 10.83Japan ANZ 0.71 0.56 0.37 0.25Developing Asia n.a. n.a. n.a. n.a.Latin America 41.51 21.79 17.41 19.07ROW 0.73 0.61 0.37 0.08Total 100.00 100.00 100.00 100.00

China2003 2004 2005 2006

Developed Europe 1.19 1.13 1.29 4.04Canada & US 1.65 1.62 1.62 2.83Japan ANZ 1.66 1.49 1.35 0.7Developing Asia 79.84 74.50 71.37 85.5Latin America n.a. n.a. n.a. n.a.ROW 15.66 21.26 24.38 7.5Total 100.00 100.00 100.00 100.00

Sources: Banco Central do Brasil and 2006 Statistical Bulletin of China’s Outward Foreign Investment

Summary statistics for the largest companies from Brazil and China

Brazil ChinaTotal Average Total Average

Sales ($b) a 255.49 11.61 438.33 9.96Profits ($b) a 32.84 1.49 54.62 1.24Assets ($b) a 693.93 31.54 2,930.56 66.60Value ($b) a 367 16.68 1,357.82 30.86

Foreign assets ($b) b 13.60 4.53 19.17 4.79Foreign sales ($b) b 23.90 7.97 6.43 2.14Foreign jobs b 16,042 5,347 65,962 21,987TNI b 32.70 33.97

Foreign affiliates b 73 8.11 170 14.17Foreign plants c 35 8.75 5 2.50

R&D ($m) d 448.03 149.34 530.5 132.63R&D 4-year growth d 72.33 102.75R&D/sales d 1.77 2.10

Patents e 13 2.17 37 7.40

Source: Forbes Global 2000 for Sales, Profits, Assets, Value; UNCTAD (2006) for foreign assets, sales, jobs, and affiliates, and TNI; DTI Global R&D Scoreboard for R&D, R&D growth and R&D/sales; Fleury and Fleury (forthcoming) and authors’ self-compilation for foreign plants; WIPO PatentScope for patents

The IDP framework

• Dunning 1981, 1986 there is a relationship between a country’s net foreign direct position (NOIP) and its structure and level of economic development – economic development as a process of structural changes– these structural changes affect both inward and outward

investment (Durán and Ubeda, 2001)

• Ideally, as a country develops, the conditions for domestic and foreign economies change, affecting not only FDI flows but also OLI advantages and vice versa

• The government plays an important role in shaping a country’s investment conditions, hence in affecting its NOIP.

The IDP five stages1. inward and outward FDI flows are very small. Domestic economies are

characterized by weak local demand, inadequate infrastructure and, in general, a non-attractive environment for investment.

2. development of some location specific advantages. Increase in the inflow of FDI. Internationalization activity of domestic firms does not develop yet. NOIP becomes negative and usually inward FDI growth is faster than GDP growth.

3. As domestic firms become more competitive in comparison to foreign firms, OFDI flows increase. Outward flows surpass inward flows, but NOIP remains negative (i.e. inward FDI stock is bigger than outward FDI stock).

4. NOIP turns positive and the rate of outward foreign investment increases faster than the rate of inward investment. Development of intra-industry production, which will be followed by intra-industry trade.

5. NOIP will be oscillating around zero, alternating between positive and negative balances, depending on the short-term evolution of exchange rates and economic cycles.

Latecomers (developing countries and transition economies) may skip these five stages -- especially those which experience some leapfrogging and accelerate the movement along the IDP (UNCTAD, 2007, Liu et al., 2005, Goldstein 2007).

The IDP in 2004

Source: WIR 2006, UNCTAD

Estimating the IDP

2210 GDPGDPNOIP

nnGDPGDPGDPGDPGDPNOIP ...4

43

32

210

Quadratic form (Dunning, 1981)

Polynomial form (Buckley and Castro, 1998; Bellak, 2001; Marton and McCarthy, 2007)

Data

• Annual data for the period 1980 to 2006 both for China and Brazil.

• All variables are expressed in real terms (Liu et al., 2005 and Marton and McCarthy, 2007).

• VARIABLES:

– FDI Stocks from UNCTAD, 2007.

– Population from WDI.

– GDP deflator (1990=100) from UN National Accounts Main Aggregates Database.

– GDP per capita from UN National Accounts Main Aggregates Database.

Specification and Results

China Dependent Variable log (NOIP_China)

Brazil Dependent Variable NOIP_Brazil

Log GDP_China -17.25*** (.80)

GDP_Brazil -40.51** (17.66)

Log GDP_China2 1.18*** (.066)

GDP_Brazil2 .019** (.008)

GDP_Brazil3 -4.32e-06 (1.89e-06)

GDP_Brazil4 3.51e-10 (1.54e-10)

Adj-R2 0.89 Adj-Rsq 0.76

Durbin-Watson statistics 0.83 Durbin-Watson statistics 1.37

)_()_(

)_()_(_4

43

3

2210

BrazilGDPBrazilGDP

BrazilGDPBrazilGDPBrazilNOIP

)_log()_log()_log( 2210 ChinaGDPChinaGDPChinaNOIP

Standard errors in parentheses*** statistical significant at the 1% level, ** statistical significant at the 5% levelAll variables are per capita and the constant was omitted

Conclusions and policy implications/1

• Corporate data, although limited to a small number of MNCs due to data availability, suggest that Brazilian and Chinese MNCs are grosso modo similar in size and depth of their ownership advantages.

• Testing the IDP theory, we found a close relationship between the level of national economic development and the NOIP.

• The role of the government in enhancing the movement along the path is crucial especially through the promotion of outward FDI.

• Discovering, developing and sustaining ownership-specific advantages is necessary to reach the levels of competitiveness required for the next stages of the IDP.

• Attitudes have been very different in the two countries– China: “Go abroad” policy measures; WTO

accession; necessity to develop and sustain strong ownership and competitiveness specific advantages under the surveillance and help of the government institutions

– Brazil: new measures are only now being implemented by BNDES APEX

• The role of the government in enhancing the movement along the path should be more active in Brazil

Conclusions and policy implications/2