In recent years there has been unprecedented growth of emerging economies, particularly Brazil, Russia, India and China (the BRICs).

Currently they top the rankings of global investment attractiveness.


A somewhat less pronounced but no less significant phenomenon is the increasing internationalisation of companies from these economies, and particularly, their penetration into European markets. Despite recent surging interest, the topic of ‘emerging multinationals’ remains greatly under-researched.

While the phenomenon of companies from less advanced and developing countries embarking on business abroad is not entirely novel, it is only now that the magnitude of this process has changed enormously. Multinational companies from emerging economies invest not only in the neighbouring countries of the same level of development, they more assertively target advanced economies. More so, they compete vehemently between themselves. The case of the battle between India’s Mittal and Russia’s Severstal for the ‘diamond’ of the European steel industry, Arcelor, is illustrative in this respect.

While the stocks of outward direct investment from emerging economies cannot be compared to those of developed economies (the entire outward FDI stock of the BRIC

economies is slightly more than $500bn), FDI flows from emerging economies are on the rise. Even in the current global economic malaise, there are not yet indications of decreasing business activity of emerging multinationals.

Subsidiaries of emerging multinationals engage in a variety of functions, ranging from sales and logistics to R&D. It is within the advanced Western economies in particular that they seek to conduct their R&D activities, benefiting from co-operation with local research institutions and domestic companies. The EU is becoming a favourite destination for direct investments by emerging multinationals. The power of the Single European Market of 27 member states acts as a magnet for emerging multinationals that can access a large consumer base, advanced technology

and know-how, and modern managerial techniques. To reap the benefits, emerging companies have to establish physical presence through FDI rather than engaging in occasional export activities.

This internationalisation has been met with suspicion and mistrust.

Whether the motives of these companies are purely commercial – such as access to technology – or whether part of home governmentorchestrated strategy, one thing is

clear: these new global players are here to stay and can be ignored neither by policymakers in Europe nor by European businesses who find themselves competing with newcomers on their home soil.

Destination Europe

While the EU is a single economic bloc, each member state is idiosyncratic in its level of economic development (and industrial and economic structure). Moreover, there is a clear distinction between the founding member states of western Europe and the new EU member states of central and eastern Europe that joined in 2004 and 2007. These national differences determine their strategies.

The barriers to market entry in Europe for emerging multinationals are high (different business cultures, environmental regulations, managerial techniques, labour union agreements, etc). It is therefore unsurprising that the acquisition of a domestic company is a viable solution for emerging multinationals entering the European market. Even then, a newly acquired company has to sustain a competitive advantage, together with certain quality standards, especially for European consumers who place a high premium on product quality. These challenges force emerging multinationals to craft a successful strategy, both capitalising on their low-cost base and satisfying European consumer demands.

In general, emerging multinationals regard western Europe as a repository of technology and knowledge, so the dominant business strategy is acquisition of existing companies.

Emerging multinationals, particularly from China, prefer to acquire engineering companies in financial hardship. There are several cases where Chinese investors have acquired German companies on the verge of bankruptcy, such as Schiess AG. Some parts of Schiess’ production process has already been transferred to China, and after acquisition, the core business – production of heavy-duty machines – is to stay in Europe. For the Chinese investor, acquisition enables it to gain access to Schiess’ unique expertise.

Central and eastern Europe represents a slightly different case. It is a destination for efficiency-seeking FDI, with the purposing of establishing a manufacturing base and exporting to affluent Western consumers dutyfree within the boundaries of the

Single European Market. European regulations require that more than half of the value of parts and labour used in production come from within Europe. The rest may come from the home country so that the emerging economy multinationals may capitalise on their low-cost base.

Manufacturing costs even in the new EU member states are much higher than in a home base, yet the fact that goods produced within EU borders may be sold duty-free across

the single market justifies manufacturing inside the EU over import of

these goods from a home base. This strategy – moving a key part of supply chains closer to customers – enables companies to decrease transportation

costs and avoid tariffs.

Emerging economy multinationals may pursue a diversified FDI strategy in Europe. A company wishing to build a competitive presence has the possibility of acquiring a manufacturing firm in western Europe with the purpose of accessing superior

European technologies and know-how (asset-seeking motive) while relocating the manufacturing process to eastern Europe (efficiency-seeking motive) and still serving the common European market (market-seeking motive).

Moreover, companies from emerging economies have particular preferences for specific European countries due to historic, cultural, linguistic and other reasons.

Partner or perish

Strategic alliances between companies have become a distinctive phenomenon globally. They imply a lesser degree of commitment than FDI and provide for more flexibility.

When the emerging economies initiated openness for foreign investors, Western multinationals were often looking for local partners in order to enter the booming markets.

That was particularly the case of China, although the situation was not much different in other emerging economies. Recently, a reverse trend has become more pronounced of emerging multinationals seeking partners in Europe in order to access European markets.

In eastern Europe, companies from emerging economies tend to form strategic alliances in logistics and marketing. Through these alliances, emerging multinationals seek to understand the market conditions in Europe and adapt to European standards and technological requirements.

As a rule, these alliances are based on tacit skills rather than formalised knowledge. However, emerging multinationals prefer to form technological alliances with the Western European companies, with the purpose of generating and exchanging new technology. These alliances are mostly based on the codified knowledge.

Good and bad FDI

Traditionally, FDI flows between developed economies have been widely praised. Likewise, FDI flows from triadic economies to developing countries have been hailed, based on the assumption that they would lead to technology transfer, learning and efficiency and therefore would have a strong developmental effect. Acquisition of assets

in Europe by newcomers – companies from emerging economies or even prospects of such acquisition (for example, Gazprom’s intention to buy Centrica in UK) has stirred up controversies for a variety of reasons.

Commonly cited concerns include the potential of political leverage by home governments (particularly by China and Russia) and widespread dubious managerial practices.

The phenomenon of emerging multinationals has raised a fundamental problem of ‘good’ and ‘bad’ FDI, ie, developmental and detrimental impacts of foreign investment, yet paradoxically, this time in the context of developed economies as recipients.

It has been alleged that costs of FDI from emerging economies outweigh their benefits for host countries.

Nevertheless, investment promotion agencies of many European countries particularly target these investments and set up dedicated offices in emerging economies.

Strategic alliances offer an alternative means of internationalisation for emerging multinationals, and, if managed properly, may lead to a win-win situation because they do not entail the loss of ownership control yet allow for technology learning and market access.

On the policy side, the first response from certain contingents seems to be increasing protectionism and screening of investment projects coming from emerging economies.

Although the precise nature of the policy response is yet to be investigated and designed, it is critical that policymakers should resist calls for more protectionism and other policies that restrict free flows of FDI. In these times of global economic crisis,

with FDI flows on the global scale set to decrease, investments by emerging multinationals may prove beneficial for European nations.


Sergey Filippov is a doctoral fellow at the United Nations University, Maastricht,

The Netherlands