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Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited
Article Type: Book review From: Multinational Business Review, Volume 20, Issue 1
Foreign Direct Investments from Emerging Markets: The Challenges aheadEdited by Karl P. Sauvant, Geraldine McAllister and Wolfgang A. MaschekPalgrave MacmillanNew York, NY2010
This book, edited by Karl Sauvant et al., presents both a wide and highly thoughtful evaluation of the rapidly expanding participation of emerging market MNEs in global outward FDI. The volume brings together contributions from some of the field’s luminaries to shed new light on the developments in two primary issues, viz., the implications on developing new theory of the MNE, and the changing policy landscape facing both outward and inward FDI from emerging market MNEs. These two intellectual thrusts are complemented by specific area studies drawing empirical and anecdotal evidence covering FDI activity in the key emerging market economies.
The book covers this wide intellectual terrain in 23 chapters. These are structured into five sections, addressing (in order): new theoretical precedents set in the wake of the expansion in FDI from emerging markets; specific country-level issues and observations of MNE activity from BRIC nations; policy implications of outward FDI from emerging market economies; policy implications of inward FDI from emerging markets; and finally, a forward looking appraisal of the future challenges that are likely to be faced by MNEs from emerging markets as they expand across borders.
An overview of the volume in the first two chapters is engaging, as it consolidates new intellectual and empirical facets of the growth in FDI from emerging market MNEs as well as providing a useful contemporary context, namely the impact of the global financial turmoil and resource constraints on emerging market MNEs. The opening chapter by the editors points to the several imperatives of FDI from emerging markets as changing and characterising the international business landscape. The first is the plurality of motives and heterogeneity in the sectoral composition, scale, and strategic geographies of FDI from emerging markets. The second is the preference of mergers and acquisitions (M&A) over greenfield and other investments as a foreign entry mode. The third is the notable political element in FDI from emerging markets, exhibited by the significant undertaking of FDI by state-owned enterprises (SOEs). The fourth is fragmented and uneven policy toward both inward and outward FDI from emerging markets. Each of these is a recurring theme that is expanded upon in the individual chapters of the book.
Some insightful commentary can be found in the four chapters dedicated to the theory of the MNE. In my view, the question as explored therein, “Do we need a new theory of the MNE?”, is especially important for two reasons. The first is the greater geographic diversity of corporate assets of MNEs from emerging markets which, unlike Triad based FDI, are not founded on similar macro-economic characteristics of the inward and outward partners. The second is the preference for the M&A route by such MNEs to facilitate expansion in developed market economies. Both of these factors point to potentially different geographic portfolios and the relative strength of asset or ownership advantages of emerging market MNEs vis-à-vis their developed country rivals, which combined may have significant implications for theory. Yair Ahoroni’s reflective chapter urges a reappraisal of the conventional assumptions on which received wisdom in international business is based given the sea changes in the global economic landscape. For instance, at an elemental level, it is unlikely that emerging market MNEs expand internationally only once growth in the home country has been exhausted, as the quest for worldwide learning and the acquisition of strategic assets supersede conventional efficiency motives of maximising scale and scope through global integration or achieving national responsiveness.
The focus on the nature and strength of firm-specific advantages (FSAs) of emerging market MNEs sets the stage for an important chapter in the book by Alan Rugman, who identifies different approaches toward international business activity on the basis of strategic interactions between FSAs and country-specific advantages (CSAs) of emerging market MNEs. This insightful analysis argues that the M&A activity undertaken by such firms in developed markets are often in response to weak ownership or FSAs when operating across borders – where such assets or competencies required to compete internationally cannot be readily built up in the home country given weak CSAs toward new knowledge creation and managerial competence. Whilst the analysis suggests that no new theory of the MNE is required to explain the cross-border activities of emerging market MNEs, the absence of strong FSAs (as the conventional basis for FDI) among such MNEs is an intellectual lacuna that is given sparse treatment. Here, the widely held theoretical imperative in which a CSA (that leads to trade) is replaced by an FSA that leads to FDI (Rugman, 1981) breaks down in the case of emerging market MNEs. Clearly, more thought seems essential.
The difficulties in conceptualising the growth of emerging market MNEs in a more robust manner becomes apparent given the significant heterogeneity reported in the detailed country case studies presented in the book, which draw upon extensive FDI and firm-level data from each BRIC nation. For instance, with the importance of location as a strategic variable, there are fundamental differences reported between MNEs from BRIC nations in their geographic configurations; for example, with Brazilian MNEs preferring regional locations in Latin America as compared to Indian MNEs focusing international expansion in the core triad. Beyond the excellent commentary of mostly secondary data in each country case study, it is difficult to extract a more rigorous explanation of the finer grained differences, which is a resultant drawback of the book’s heavy reliance on FDI data. A notable exception is the chapter by Rui, Yip and Pranshantham exploring differences in the foreign acquisitions of Chinese and Indian MNEs, which draws more on careful firm-by-firm case evidence as opposed to aggregated data. Their analytical work highlights some refined observations that suggest that motives for strategic asset seeking among three major Chinese investors can operate at several levels. Interestingly, this can include using foreign acquisitions to coerce joint venture partners, in competition, to yield vital technology and know-how, as Chinese firms evolve from being agents or partners to imitators and finally to fully fledged global players.
Perhaps some of the most consequential analysis can be found in sections three and four of the book, dealing with policy implications of outward FDI for home and host countries. This analytical work is important, as although our understanding of policy and inward FDI is established, there is little corresponding literature addressing outward FDI, especially in the case of such investment from emerging market economies (Rugman and Brewer, 2001). Here, the impression emerges of a dynamic regulatory landscape in both home and host countries characterised by two key features:
the strong political dimensions surrounding the activity of emerging market MNEs; and
the fragmented and inconsistent policy frameworks governing their international investment.
A salient issue taken up by Peter Buckley and colleagues explores what lessons emerging market economies can learn from outward direct investment policies of advanced countries. This analysis highlights how such policies have in the past been directed towards other (often subsidiary) objectives that have unsuccessfully dealt with realising potential gains of outward FDI for the home country, such as development and enhanced global competitiveness. In a follow-up chapter, Beule and Van Den Bulke assess changing policy regimes, and usefully classify several country regimes along a continuum between investment promotion and control in a framework that brings perspective and clarity against the patchwork of global investment regulation. Moreover, the authors caution against assuming a link between outward FDI promotion and national competitiveness, for which there is little concrete evidence.
On the flipside of the investment regulatory coin, several chapters engage the policy landscape from a host-country perspective to consider whether, in the case of the EU and the USA, such economies are ready for a future, more intense, onslaught of inward FDI from emerging markets. The answer is a resounding “no”, as the climate for investment, particularly from China, is increasingly less welcoming. For instance, Karl Sauvant illustrates how 83 per cent of all Chinese outward investment is undertaken by SOEs. Moreover there is concern that China’s sovereign wealth fund, backed by increasing foreign exchange reserves, will accelerate the extent of its foreign investments to achieve wider geopolitical goals. Such prospects will likely increase tensions, inciting nervousness and distrust that may destabilise an already incendiary policy environment.
In overview, the breadth and organisation of analysis contained in this book on the growth of FDI from emerging markets is one of its strongest attributes. Currently, it is perhaps the single most authoritative analysis of this important feature of the global industrial landscape, containing thought leadership from eminent scholars in the field of international business. Whilst this may reflect the book’s first-mover advantage in bringing to the fore this relatively new empirical phenomenon, like any nascent streams of literature, its delineation of new intellectual territory leaves much to be filled in terms of the finer contours and topography of the new terrain. In this regard, the book’s reliance on FDI statistics is a blunt instrument to shed light on important aspects of the heterogeneity that characterise international business activity of emerging market MNEs. Such data, for instance, cannot uncover the finer grained issues of strategic asset seeking or the apparent weaknesses in the proprietary asset advantages of emerging market MNEs, which can operate at many different levels. Nor can they elucidate the wider strategic implications of the closer engagement of international business and international relations, which will inevitably become stronger in years to come. These are empirical and intellectual caveats that will require a more sustained and detailed effort for better informed theory and practice.
Emphasising that “in practice, there are elements of both country and firm specific factors in existence” (Rugman, 1981, p. 40).
Saliya JayaratneJohn H. Dunning Centre in International Business,School of International Business and Strategy, Henley Business School,University of Reading, Henley-on-Thames, UK, Visiting Research Fellow, email@example.com
Rugman, A.M. (1981), Inside the Multinationals: The Economics of Internal Markets, Croom Helm, London
Rugman, A.M. and Brewer, T.L. (2001), The Oxford Handbook of International Business, Oxford University Press, Oxford