Emerging-Market Multinationals Becoming a Potent Force in Reshaping the Process of Industrial Globalization
Long relegated to second-tier status, emerging-market companies are becoming powerful forces and agents of change in the global industrial and financial landscape. Trends in foreign direct investment (FDI) flows are one indication of this shifting status. Between 1997 and 2003, companies based in emerging economies engaged in cross-border investment through M&A deals of $189 billion, or 4 percent of the value of all global M&A investments over the period. Between 2004 and 2010, that amount increased to $1.1 trillion—17 percent of the global total. Since 2003, approximately 5,000 firms based in emerging markets have established a global presence through 12,516 greenfield investments of $1.72 trillion. More than one-third of FDI inflows to developing countries now originate in other developing countries: Of the 11,113 cross-border M&A deals announced worldwide in 2010, 5,623—more than half—involved emerging- market companies, either as buyers or as takeover targets by advanced-country firms. As they venture overseas, companies based in emerging markets tend to seek assets that will help them accomplish one or more of several goals: diversify cation of their growth, a larger global market share, exploitation of growth opportunities not available in their domestic economies, or freedom from an unfavorable domestic economic climate.
As they pursue growth opportunities abroad, corporations based in emerging markets play an increasingly prominent role in global business, competing with firms based in advanced countries for natural resources, technology, and access to international markets. Many emerging- market firms often have an advantage over advanced-country firms in navigating difficult policy environments in other developing countries, because they have experienced similar conditions in their home countries. These two trends, together with the overall strengthening of South- South trade links, will ensure that South-South investment continues to expand. Further, M&A activity by emerging-market firms in developing countries is on the rise and is becoming an important source of FDI. Because such transactions typically occur within close geographical proximity, they will not only deepen regional economic ties, but also accelerate the integration of low-income countries into the global economy. Emerging-market firms have also been active in South-North acquisitions, especially in advanced economies with sophisticated equity markets and favorable growth prospects. The annual value of cross- border M&A transactions undertaken by double by 2025, while the annual number of cross-border M&A deals is expected to more than triple (from fewer than 2,500 in 2011 to almost 8,000 in 2025). This trend outpaces the underlying GDP growth rates in emerging-market firms’ home countries.
The development of emerging-market firms into a potent force for globalization in their own right will have important implications for cross-border capital formation, technology generation and diff usion, and financing of commercial activities. A number of innovative and dynamic emerging-market firms are on a path toward dominating their industrial sectors globally—much in the same way that companies based in advanced economies have done over the past half century. Many emerging-market firms have already begun overtaking their advanced-country competitors in terms of the priority accorded to developing innovative technologies and industrial processes, with 114 firms from emerging economies ranking among the top 1,000 firms worldwide by R&D spending as of 2009, twice as many as five years earlier. This is a particularly noteworthy accomplishment given that the private sector traditionally has not been the main financier of R&D in developing countries. In 2025, a luxury sedan is as likely to be a Hyundai or Tata as a Mercedes or Lexus, is as likely to be powered with fuel from Lukoil or Pertamina as from ExxonMobil or BP, and is as likely to be financed by China’s ICBC (Industrial and Commercial Bank of China Ltd.) or Brazil’s Itaú as by Citi or BNP Paribas.
There are strong signs of mutually reinforcing links between commercial and financial globalization
The shift in economic and financial power toward the developing world is also reshaping cross-border corporate finance, transforming emerging-market firms into significant participants in international capital markets. The progress of a growing number of developing countries in improving the soundness and transparency of domestic institutions and policies has enabled their firms to gain increased access to international bond and equity markets, and at better terms, in their efforts to expand globally. Nearly two-thirds of emerging-market firms that have been active acquirers since the late 1990s—those firms that have undertaken 10 or more acquisitions—have tapped international markets to access one or more forms of financing through syndicated loans, bond issues, and equity listings. As evidence of the mutually reinforcing links between commercial and financial globalization, a growing number of emerging-market firms undertake at least one cross- border acquisition within two years of accessing international capital markets. International bond issuance, in particular, by borrowers based in emerging markets has grown dramatically since the mid-1990s and is now one of the main sources of capital inflows for those countries. Since 1995, a large number of emerging private companies have engaged in high-profile global bond market transactions, with 80 of them issuing bonds over $1 billion each, of which 10 were issuances of over $2 billion. Some prominent issuers include Petrobras International Finance Company of Brazil, América Móvil of Mexico, Novelis Inc of India, and VTB bank of Russia. Over the next decade and beyond, there is likely to be significant scope for emerging-market companies to further expand their access to international capital markets and at more favorable terms.
In emerging-market economies such as Brazil, Chile, and Mexico, where local capital markets have seen considerable growth and maturity in recent years, companies have the capacity to found their growth through a more balanced mix of local and international capital market issuance. Furthermore, in some emerging growth poles, particularly those in Asia, signs already exist that their local capital markets are evolving into regional financing hubs. During the next decade and beyond, as local consumer demand continues to rise in the fastest-growing emerging markets and as local capital markets in those countries become deeper and better regulated, manufacturing and consumer goods firms based in developed countries can be expected to also seek access to capital markets in emerging markets. Crosslistings of securities by developed-country firms, although initially motivated by the desire to raise their firms’ brand recognition, will be followed by issues that tap large pools of available savings in emerging markets.
From a policy perspective, the growing role and influence of emerging-market firms in global investment and finance may make it more possible— and indeed, critical—to move forward with the sort of multilateral framework for regulating cross-border investment that has been derailed several times since the 1920s. In contrast to international trade and monetary relations, no multilateral regime exists to promote and govern cross-border investment. Instead, the surge of bilateral investment treaties (BITs)—more than 2,275 BITs were in place in 2007, up from just 250 in the mid-1980s—has provided the most widely used mechanism for interstate negotiation over cross-border investment terms, including access to international arbitration of disputes. Though BITs have proven to be suboptimal from an economic point of view, there are reasons to believe that their proliferation and the associated experience of formulating, negotiating, and implementing them across a large number of developed and developing countries have set the stage for transition into a multilateral framework. The elimination of investment restrictions through BITs, for example, may be supportive of more general multilateral liberalization eff orts. Moreover, BITs have also set the stage for complementary institutional advancements at the global level. Indeed, the International Centre for the Settlement of Investment Disputes (ICSID) has experienced growing demand for cross-border investment dispute settlement services—cases registered with the ICSID averaged 25 per year between 2001 and 2010, up from an average of about two cases per year between 1981 and 1990. This increase in demand has allowed the maturation of an institutional infrastructure that is well positioned to serve as an important foundation, especially on legal aspects, for a multilateral framework in the future.