The last 20 years have seen vital internationalisation of firms from developing economies in terms of their greater participation in international trade, growing outflows of foreign direct investment (FDI), and a surge in their cross-border mergers and acquisition activity. Outward investment from developing countries isn’t a brand new development however in recent years there has been a marked increase within the magnitude of flows and a qualitative transformation in their pattern.
Flows of outward FDI from developing countries rose from about $6 billion in 1989–1991 (about 2.7% of global outward flows) to $383 billion for 2011. https://www.imf.org/external/pubs/ft/wp/2013/wp1352.pdf
Within this broad trend, the growing internationalization of firms from two fast-growing developing countries, China and India, is especially notable. Exports are a central feature of the growth of the Chinese economy over the last three decades and, recently, they have made an apparent contribution to Indian growth too. Outward FDI from China and India has grown quickly in recent years, and companies from these two countries are progressively involved in overseas mergers and acquisitions.
A significant chunk of Chinese outward FDI has gone to tax havens and to southeast Asia, however recently a considerable quantity has flowed to Africa too. Sovereign wealth funds (SWFs) became a new channel for outward FDI, with the China Investment Corporation, established in 2007, playing a major role. Chinese overseas investment has targeted on oil and petroleum (with China National Petrol Corporation and China National Offshore Oil Corporation leading the charge), however there are vital investments in construction (China State Construction Corporation), shipping (China Shipping), telecoms (China Mobile and China Telecom), and steel (Shanghai Baosteel) too. a lot of the outward investment from China is carried out by large state-owned enterprises (SOEs).
Outward FDI from India has spanned investments in a very broad range of sectors, such as steel, pharmaceuticals, information technology, and services, as well as food and beverages. India’s Oil and natural gas Commission has made a considerable investment in oil and energy; Indian conglomerates like the Tata group have made overseas acquisitions in automobiles (acquiring jaguar in the UK) and steel (the Anglo-Dutch firm Corus); Ranbaxy has made global forays in pharmaceuticals and Infosys in information technology and business processing.
Firms from China and India have been involved in significant and growing levels of mergers and acquisitions abroad. Over the period, cross-border purchases by Chinese firms average about $3.5 billion per annum, while those by Indian firms averaged $1.5 billion per annum. To the extent M&A activity is financed with funds raised in international markets or in the host economy the acquisitions are not fully recorded in measured FDI outflows. Hence measures of outward FDI probably underestimate the extent of internationalization of firms from these two countries.
New Patterns of Internationalization
The patterns of internationalisation of Chinese and Indian companies suggest some common elements. both countries have experienced rapid growth in recent decades, which led to large inflows of FDI and portfolio capital. These inflows, combined with high rates of domestic saving, created large reserves of capital at the macroeconomic level, that in turn led to relaxation of policy restrictions on capital outflows. Policy regimes that had previously prohibited capital outflows at the company level became more and more permissive.
At the same time, there are important differences in the international behaviour of companies from the two countries. while Chinese overseas acquisitions are more commonly carried out by state-owned enterprises, Indian outward FDI involves largely private-sector corporations, usually the large, diversified, business houses. Chinese overseas investments are more likely to have been in primary sectors, notably minerals and energy, whereas Indian investments are more distributed across a variety of sectors, including steel and pharmaceuticals at one end to information technology and business services at the other.