1 Multilatinas in the Global Economy: Trends and Issues OECD Expert Meeting Paris March 27th 2006 Javier Santiso Chief Development Economist & Deputy Director OECD Development Centre

2 The emerging multilatinas: a global trend and a global issue The value of outward FDI stock from developing countries rose from $130 billion in 1990 to $860 billion in South-South FDI accounts for one third of all FDI going to developing countries. These flows increased from 15 USD billion in 1995 to 50 USD billion in In most cases, these deals involved direct investment in other developing countries. But South-North FDI is also on the rise up from 1 billion in 1995 to 7 billion in In 2005, more than 50% of the M&A operations in Latin America have been driven by local firms. In Argentina, 60% of the 62 M&A operations conducted in USD 3,5 bn) have been driven by local capital (36% from Brazil).

3 According to the main stream of international business literature on the topic of multinationals from emerging countries, there are generally five motivations for multinationals to invest abroad; They seek resources, technology, markets, diversification, and strategic asset (e.g., Dunning, 1993; Khan, 1986; Wells, 1983). This strategy tend to pay: EMNCs on average perform better than their respective country market indices, a widely used EM benchmark, S&P500 and, global market index (MSCI- World) during the period (Aybar et al., 2005). These firms on average earn 13.21% return on assets, 8.97% return on equity, and 11.96% return on invested capital. Emerging multilatinas and emerged multinationals: more of the same?

4 Brazilian and Mexican Firms have started to expand overseas only recently

5 Number of firms in Forbes IndiaSpainChinaBrazilMexicoChile Source: Forbes 2000 The emerging multilatinas: A lonely Brazilian and Mexican race? The 50 more profitable firms BrazilMexicoChileArgentinaColombiaEcuadorPanamaPeruVenezuela Source: America Economia 2005

6 Top 100 firms in Latin-America BrazilMexicoChileArgentinaEcuadorColombiaPeruVenezuela Source: America Economia 2005 Brazilian Firms have started to expand overseas: global or pure regional players?

7 Why are Multilatinas expanding abroad? Risk diversification versus market seeking Push factors: Competition as a blessing in disguise. Between 1991 and 2001, the ownership of the 500 largest companies in Latin America changed dramatically… … With non Latin multinational ownership growing to 39% from 27%. The rising global competition pressured local Latin companies. The most ambitious are aiming to compete with the world’s largest companies beyond Latin America. However to date only a very happy few local Latin firms have taken on the world or tried to create large multinationals.

8 The cost of capital Upon securing top positions at home, some Latin firms started to expand more aggressively abroad. Typically they followed a multilatina cycle starting to increase exports to neighboring countries; then establishing alliances to obtain access to distribution channels; and subsequently setting up small operations abroad or making acquisitions. But this ultimate stage hard to reach. With the exception of a very happy few (Cemex) multilatinas remain heavily constrained by the cost of capital to expand abroad.

9 The Center and the Periphery Emerging Markets only represent 7% of MSCI… … and 75% of world population. … and 40% of world GDP. The ratio of market capitalization / GDP is on average around 30% (80% in OECD countries). More and more OECD companies are searching for yield in emerging markets. Some of them became true multilatinas (Spanish companies). More and more non OECD companies are moving abroad and looking for M&A opportunities in investment grade countries. Mittal is only the tip of the iceberg.

10 The biggest challenge posed by these up-and-coming rivals will not be in Western markets, but within developing nations. That's the arena of fastest global growth. Through long experience working in a Third World commercial environment, companies such as India's Bajaj Group (transportation), Egypt's Orascom Telecom, and Turkey's Sabanci Holdings (packaging, tires) will have an advantage in supplying goods and services that are cheaper, simpler to operate, and more effectively distributed than those of many Western rivals. But what about multilatinas moving ahead to tap the growing US-Hispanic market? But what about M&A activity involving takeovers by non- OECD multinationals in OECD countries? The Center and the Periphery

11 In recent years, South-South deals but also North-South and South-North deals have been growing in number and size. Examples such as the merger between South African Breweries and Miller (and later the takeover of Bavaria by SAB Miller), the takeover of International Steel Group by Mittal of India, or the acquisition of the IBM PC business by Lenovo of China, bear testimony to the rapid emergence of true global players from emerging countries. What are the main obstacles to increased flows of investment from developing to developed countries? The Center and the Periphery

12 The search for global champions : a clash of civilizations or a brave new world?

13 Thank you for your attention!