Since the 1960s multinational corporations from emerging market countries have begun to spread theiroperations in other countries. For example from the 1960s to the 80s there was a surge of Latin American firms investing in neighbouring countries. However, the real phenomenon has been taking place more recently in the past 15 years and today more than a third of the total flow of investment comes from emerging market countries.
Professor Roberta Rabellotti, who was trained in development studies at Oxford University and University of Sussex, currently works from the University of Pavia in Italy and consults for international organisations about this new trend in emerging market multinational enterprises (EMNEs). She explained that the two main sources of this phenomenon are China and India and other minor but top players include Brazil and South Africa. In fact, there is a significant increase of Asian companies in the global top 500 companies list and a clear sectorial composition that signals the specialisation of these countries. For example, China became a big player in resource extraction and India in pharmaceuticals and IT.
What is interesting about EMNEs is that their main destination nowadays is advanced economies. Firms from BRIC countries for example mainly branch out to the EU. Hence, there is a clear south-north tendency developing and Rabellotti, together with other researchers of this field, is investigating on whether the traditional frameworks created to explain foreign direct investment (FDI) and the growth of multinational enterprises can be applied to EMNEs or not.
A framework that has been commonly used to understand why companies are becoming multinational is the OLI paradigm, which lists three advantages the firms should possess – ownership, location and internalisation. Traditionally it is stated that a multinational enterprise would own a competitive advantage such as technical knowledge, economies of scale or an efficient organisational model. The location they choose to enter would have other advantages such as low cost of labour and more access to natural resources. Lastly, within the firm there would be vertical integration due to technology transfer and dissipation.
However, Rabellotti explains that the advantages EMNEs possess and seek are different from this model. For example, what EMNEs own are frugal engineering – i.e. technology that is key to development in emerging countries – and familiarity with heavy bureaucracy. At the country-level, these firms are offered not only cheap labour but cheap capital and state support, such as the case of the low-interest credit offered to firms in China. The motivation behind FDI for EMNEs is different as well, where they do not choose a destination to extract resources at cheaper value but to create spaces for new opportunities. In addition, Rabellotti reminded us that EMNEs are at early stages of their development compared to advanced multinational enterprises (AMNEs) and that their origins are in fast growing markets where often times they have been part of the global value chain, working as a subsidiary to AMNEs. As a result, the link to the advanced economies pre-exists and the trade flow is now starting to reverse.
In all, at first glance EMNEs seem to be taking counter-intuitive decisions by choosing to invest in countries far away from them and getting involved in mergers and acquisitions which require immediately high commitment. However, Rabellotti’s analysis shows how there is a different set of advantages operating behind these taken decisions and that perhaps the basic structure of the OLI paradigm can still be used but otherwise there is a need to develop a new framework for EMNEs.
Ayako Iba 