Page 1 Notes on FDI By Saul Estrin

Page 2 Outline of Presentation  Context on FDI to Emerging Markets odefinitions oscale  The Determinants of FDI  Findings From our Survey  Findings From the Cases  Learning Points

Page 3 Context of FDI to Emerging Markets  Definition of FDI  Role of FDI  Scale of FDI

Page 4 Foreign Direct Investment – an investment involving a long term relationship and reflecting a lasting control of a resident entity in one economy (“parent enterprise”) into an enterprise resident in another economy (“foreign enterprise”) Three Components  Performance  Control  Via equity and reinvestment

Page 5 Why is FDI Important?  Permits investment to exceed savings without foreign borrowing – source of growth – evidence?  Transfer of technology  Transfer of skills Spillover effects  Transfer of managerial know-how  Integration into world economy

Page 6 Why is FDI Important?cont But in emerging markets……..  Can lead to dual economy – lack of spillovers  Forward and backward linkages  Can weaken development of local institutions e.g. capital markets  Can lead to increase in domestic monopoly power

Page 7 Table 1 FDI to Whom: Inflows ($bn)

Page 8 Table 2: Emerging Markets: FDI to whom ($bn)

Page 9 Table 3 Outflows: Major Countries ($bn)

Page 10 Reasons for FDI - OLI Paradigm FDI occurs when three sets of determining factors occur simultaneously:  O – Ownership-specific advantages of firms;  L - Location advantages of host countries;  I - Internalisation - firms able to exploit O and L advantages through internalisation rather than via the market ; o If firm only has O, it will rely on exports, licenses and sale of patents in foreign market. o If it has O and I, it will invest directly abroad. o L advantage of the host country determines where.

Page 11 Main Economic Determinants of FDI Type of FDI  Market Seeking;  Resource Seeking  Efficiency Seeking; Determinants  market size;  market growth;  access to global/regional markets;  raw materials; oil, gas,minerals,timber  cost of resources and assets, e.g. labour, skills, technology.  input costs e.g. transport, communication;

Page 12 Overview of Research Project  Study of FDI in Egypt, India, South Africa and Vietnam  Surveys of FDI subsidiaries – 600+ firms  12 cases (four per country)  Summarise comparative findings from survey and case results

Page 13 Our Countries  Very different in size, history, institutions  Similar in “level of” development  Similar in scale of FDI

Page 14 Table 1.1: FDI in Emerging Markets

Page 15 Table 1.2 Key economic and social data in Egypt, India, South Africa and Vietnam Sources: IMF: International Financial Statistics; World Bank: Development Report, Competitiveness Indicators; UN: Human Development Report, various years. Notes * averages over the and , ** data refer to 1975 and 1999, *** Gini coefficient refers to different years between 1993 and 1998, **** data refer to 1990 and 1995.

Page 16 Industry Sector of Affiliate Firm

Page 17 Size of Employment of Affiliate Firm

Page 18 Geographic Regions of Parent Firms

Page 19 Global Employment of Parent Firm

Page 20 Mode of Entry

Page 21 Domestic Markets vs Exports

Page 22 Figure 5: Critical Resources Chosen

Page 23 Figure 5a: Local Firm Source of Resource

Page 24 Figure 5b: Foreign Parent Source of Resource

Page 25 Figure 5c: Other Local Source of Resource

Page 26 Figure 6: Labour Market Evaluation - by Country

Page 27 Figure 7: Local Inputs - by Country

Page 28 Figure 8: Institutional Environments - by Country

Page 29 Figure 9: Performance - by Country

Page 30 Lesson from Survey  Most FDI small – not a motor of employment creation  Local familiarity, experience and integration to regional trading blocks very important  High proportion of FDI is market - seeking  Entry mode mainly greenfield and JV  Contribution of key resources mainly from foreign firms  Business environment particularly weak in terms of institutions and policy

Page 31 Table 1: Sectoral Distribution of Case Studies EgyptIndiaSouth AfricaVietnam ServicesECMSABN Amro --- Food & Beverages Manufacturing, intermediate products Manufacturing, final products (Telecom) Heinz ( ketchup) ---- GlaxoSmithKline (pharmaceuticals) (banking) Barcardi-Martini (spirits) Packaging (packaging) ABN Amro (banking) --- NGK/Behr (autmotive suppliers) EST SEAB/Carlsberg (brewing) ABB (Electrical components) Honda (motorcycles)

Page 32 Findings from Cases  Global strategies are prime drivers of FDI  Promote global or regional supply base, e.g. Honda  Extend market research, e.g. Carlsberg  Follow customers e.g. Ziton  Follow competitors, e.g. NGK  Impact of institutions usually not general but specific, but a few, e.g. Impact of labour law in India, Egypt Bureaucracy in Egypt Visas in South Africa

Page 33 Findings from Cases cont  FDI given opportunity by liberalisation/privatisation  Regional factors in country significant determinants of location e.g. Vietnam, India.

Page 34 Capital Markets  Acquisitions rare because capital markets are not well developed in emerging markets. Explains differences between South Africa and others  Privatisation, capital market development and FDI related e.g. Vietnam or India  Need “supply” of acquisition targets

Page 35 Industry Specific Institutions  Industrial policy important for FDI – creating “clusters”; SA automotive policy based on “local content”; motorcycles in Vietnam.  Removals of barriers to entry – India and high technology.

Page 36 Conclusions From Research  FDI to emerging markets increasing and likely to do so even more  Firms solve the problem of how to operate in institutionally weaker environments – size, entry mode  Global strategies are important but so are regional ones  Spillover benefits greater from acquisitions but integration into global market also relevant