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Outward FDI from developing countries are up, notably South-South flows

Dilek Aykut's picture

After a short-lived setback in 2009, investment flows from developing countries are back on their upward trend and reached an estimated $210 billion (1.1% of GDP) in 2010 (see Global Economic Prospects 2011 for details).

The economic crisis had dampened developing countries’ outward investment in 2009, when FDI declined by 28 percent to $149 billion following a record $207 billion in 2008. Despite its severity, that decline was significantly below the 45% drop in FDI flows from developed countries. Normally FDI is relatively resilient, but these sharp declines reflected parent companies reliance on international debt markets to finance their overseas expansions and the drying up of this kind of financing. FDI outflows from developed countries did not expand as rapidly as FDI from developing countries and as a result the share of developing country in global FDI outflows reached 18 percent, almost double the 10 percent average of previous three years.

FDI outflows from the BRIC (Brazil, the Russian Federation, India and China) continue to lead, accounting for more than 60 percent of outward FDI (OFDI) flows from developing countries. In terms of destination, detailed cross-border M&A and Greenfield data shows that sixty percent of the OFDI flows from developing countries went into other developing countries, mostly in the form of Greenfield investments. Developing country FDI into high-income country mainly takes the form of mergers and acquisitions (M&A). The difference between the sum of the M&A and Greenfield data and OFDI may be the result of underreporting of OFDI flows from developing countries as well as the fact that actual cross-border flows from an M&A transaction might be less than its face value.

With the sharp decline of OFDI flows from developed countries since the crisis, the importance of investment from other developing countries (South-South FDI) increased and accounted for an estimated 34 percent in 2010 compared to 25 percent in 2007. With the acquisition of telecom company Zain Africa (now called Airtel) by Indian Bharti for $10.7 billion earlier this year—the largest South-South M&A deal and other large mergers in the sector, services sector contested the dominance of extractive sector in South-South flows in 2010.

South-South FDI flows have been particularly important for Sub-Saharan Africa and low income countries. For example, the relative resilience of the FDI flows to Sub-Saharan Africa region was partly supported by the rise of South-South investment particularly from Asian countries such as China, Malaysia and India (see my earlier post on capital flows to Sub-Saharan Africa).

Comments

Submitted by Paul on
Thanks for this Dilek. S-S FDI is a big priority for MIGA support, and its good to know we are pushing on an open door. I wonder whether SS FDI is (a) as worried about political risk as N-S investors; (b) if so, what methods they use to mitigate these risks, whether PRI or other. A fruitful area for further research. Paul

Submitted by Dilek on
Thanks Paul. The questions you raised are important ones but yet to be answered. While there isn't any study that I know of that addresses those issues at the moment, I would expect that South-South investors are less likely to rely on political insurance that North-South investors. One reason is the relative dominance of state-owned enterprises among Southern investors. These investors usually get insurance from their own export-import agencies etc. The type of investors varies by region, however. In Latin America, South-South investors are mostly private. Some sources that you might want to check out: Aykut, Dilek; and Goldstein, Andrea. “Developing Country Multinationals: South-South Investment Comes of Age.” Working Paper No. 257, Organization for Economic Cooperation and Development, December 2006. Goldstein, Andrea. Multinational Companies from Emerging Economies: Composition, Conceptualization and Direction in the Global Economy. New York: Palgrave Macmillan, 2009. Goldstein, Andrea; and Pusterla, Fazia. “Emerging Economies’ Multinationals: General Features and Specificities of the Brazilian and Chinese Cases.” Working Paper No. 223, CESPRI

Submitted by Yan Wang on
Thanks Dilek for this informative piece. Paul's question is an important one. Having worked on China-Africa FDI flows, I also observed that a) Chinese entrepreneurs are willing to take on more risks and working in poorer investment climate, and this is why S-S investment may be effective. There is a saying that "despite the strong wind and wild waves the deepwater still has fish to be found". They behave as venture capitalists - where success is a small probability event. b) They are in Africa for a very long term - experienced several ups and downs in the 1970s and 80s. c) A few are large SOEs, with a state owned insurance company backing up. But still there is a need for MIGA to insure the political risk, according to what we know. Yan

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