Emerging-Market Multinationals Becoming a Potent Force in Reshaping the Process of
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: diversification 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 emerging-market firms is forecast to more than 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 diffusion, 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 fi ve 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. cont'd
FDI is increasingly driven by emerging-market corporations, as evidenced by M&A activity as well as greenfield investments