Energy demand boosts south-south FDI
Dr M.S.Kapadia looks at a perspective study on
'South-South' FDI and Political Risk Insurance: Challenges and Opportunities by
Multilateral Insurance Guarantee Agency of the World Bank.
Global foreign direct investment flows reached an estimated $1.5 trillion in
2007, according to a recent report by the Economist Intelligence Unit, and are
set to continue on an upward path, with some year-to-year fluctuations. While
FDI is expected to decline somewhat in 2008 as global merger and acquisition
activity slows down, analysts forecast a steady growth over the next three
FDI flows going to emerging markets are expected to reach $535 billion in 2007,
decline somewhat in 2008, and continue growing in the subsequent three years at
an annual rate of 3-4 per cent. North Africa and the Asia-Pacific region are
expected to fare particularly well. China is expected to retain its position as
the largest recipient of FDI. Sub-Saharan Africa is likely to continue to
attract resource-seeking investors, while investment flows to Latin America are
forecast to grow modestly. Much of this growth is expected to be driven by the
relocation of labor-intensive manufacturing to emerging markets and the off
shoring of services.
Emerging markets are becoming important sources of FDI for the rest of the
world. Overall, FDI flows from emerging markets increased from $12 billion in
1991 to $99 billion in 2000, and are estimated to be around $210 billion as of
2006. While still small relative to global FDI flows, they have been growing
rapidly in recent years.
'South-South' FDI (investment outflows from emerging markets to other emerging
markets) has been growing even faster, increasing from under $5 billion in 1994
to over $50 billion in 2000. It is estimated that South-based FDI accounts for
about one-third of all FDI flows into emerging markets, reflecting the growth of
intra-regional investment, the rise of new multinationals and relaxation of
foreign exchange controls. By investing in other developing countries,
South-based multinationals, like their North-based counterparts, are looking for
new markets, natural resources and lower costs.
What drives South-South FDI?
A variety of factors encourage South-South investment:
u Rising demand for
energy in emerging markets: Many national oil companies based in China, and to a
lesser extent in India and Malaysia, are actively pursuing joint ventures and
other forms of collaboration in Asia (e.g. Myanmar), Sub-Saharan Africa (also
North Africa; Libya) and Central Asia. Russian energy and mining companies are
also turning to Sub-Saharan Africa and Central Asia, while Brazil has oil
exploration activities in Mexico and is pursuing more in Sub-Saharan Africa.
l Increase in South-South
trade: The share of trade amongst developing countries has more than doubled
(currently 43 per cent of world exports compared to only 20 per cent in 1970).
Trade interdependence and FDI interdependence go hand in hand given the close
relationship between overall trade and trade between multinational enterprises
and their foreign affiliates (and amongst foreign affiliates).
u Proximity and cultural
affinity: Being small and medium- sized compared to their peers in
industrialized countries, South-based firms' competitive advantages often lie in
their ability to operate in economic environments similar to those found at
u Cost competitiveness:
Like North-based firms, South-based multinationals seek to improve their
competitiveness by building international networks of affiliates that take
advantage of cost differences.
u Government support:
Governments of several developing countries are not only allowing outward FDI,
but they are also actively promoting it through loans on preferential terms, tax
rebates, and investment insurance. Outward investment promotion has been
supported by a sharp increase in the number of bilateral investment treaties and
double taxation agreements concluded amongst developing countries over the past
In December 2007, MIGA's Investment Information Services group conducted a
survey of private companies based in developing countries. The main findings of
the survey regarding South-based investor perceptions were:
u Political risk is
rising and is higher in emerging markets than in industrialised countries. The
expected trend is that political risk in emerging markets will stay the same or
increase over the next five years.
u Virtually all companies
consider it important carry out some type of political risk assessment.
[May 19-25, 2008]