Talk to any official tasked with attracting inward investment and they will probably say that Brazil, Russia, India and China (the BRICs) are a panacea to all FDI-related woes. These emerging economies are thought of as the new engines of economic growth, replacing the lacklustre developed economies of the West. But do these economies really represent the most promising growth prospects and, more importantly for those looking to attract investment, are they the leading sources of outward investment?
A comparative analysis of investment outflows before the financial crisis – between 2003 and 2007 – and during the crisis – between 2008 and 2012 – reveals that, while China performed very strongly, the rate of outward investment from Brazil, Russia and India did not increase significantly between the two five-year periods. And none of the BRIC economies were among the top 10 outward investors.
According to greenfield investment monitor fDi Markets, China increased its outward investment by 152% between the two five-year periods, the biggest increase of any country in the world. This made it the 12th largest outward investor in the world between 2008 and 2012, moving up from its ranking as the 17th largest investor in the 2003 to 2007 period.
Germany, the US, India and Australia were the main beneficiaries of the increased investment coming out of China, accounting for one-third of all Chinese investment between 2008 and 2012. But, according to Arvind Ramakrishnan, principal Asia analyst at global risk and strategic consulting firm Maplecroft, the geographical preferences of Chinese companies are about to change.
"Due to continuing political opposition [to China] in Western countries, exacerbated by recent accusations of Chinese state-sponsored cyber warfare, China is likely to intensify its investments in Africa, Latin America and central Asia,” he says.
India moved only two spots up the ranking, from the 13th largest outward investor to the 11th, while Russia and Brazil remained in the same positions at 20th and 31st, respectively.
"Outward greenfield FDI from the BRICs was impacted by the debt crisis in Europe, and by stuttering growth in Brazil and much slower growth in China,” says Dr Henry Loewendahl, a senior adviser for fDiIntelligence, the FDI analytics unit of the Financial Times to which fDi Magazine also belongs.
Oiling the FDI wheels
The second highest increase in FDI outflows was recorded by the United Arab Emirates. It was the 14th largest outbound investor in 2008 to 2012, moving up nine places compared with the 2003 to 2007 period. It now ranks above larger countries such as South Korea and Australia.
Elsewhere in the Middle East, investments from Kuwait, Bahrain and Qatar have also increased significantly between the two five-year periods, although they are still far behind UAE levels. Comparing the two periods, the number of outward FDI projects from Kuwait doubled, the number from Qatar increased threefold and the number from Bahrain increased fivefold.
"These countries have benefited from stronger attempts by the authorities to diversify the economy away from hydrocarbons between 2008 and 2012,” says Torbjorn Soltvedt, senior Middle East and north Africa analyst at Maplecroft.
Between 2008 and 2012, Middle Eastern companies, many cash-rich from high oil prices, invested heavily in real estate and financial services, two traditional areas of activity for investors from the region. In terms of geography, Middle Eastern investors largely avoided the struggling economies of Europe and North America, and instead opted for investments in the Middle East and India.
Mr Loewendahl estimates that as much as 80% of the growth in outward FDI from the Middle East between 2010 and 2012 came from intraregional investments and new projects in India.
South Africa witnessed the third largest increase in outward FDI between the two five-year periods. The number of FDI projects coming from the country increased by 119%. The growing internationalisation of South African companies can be attributed to the recent spurt of economic growth in many other African countries.
"As established markets are flat-lining, the real growth can be seen in completely new markets, such as Africa,” says Tim Carnegie, national director at the London office of real estate services company Jones Lang LaSalle.
The cultural differences inherent to African markets, combined with the risk of entering newly emerging markets, deters many investors outside Africa from investing in these countries. But South Africa is well positioned to take advantage of the opportunities in these growing economies. "South Africans understand the risks in the continent better and some of the elements of the cultural mindset,” says Mr Carnegie.
Thor Valdmanis, managing director of the Johannesburg office of FTI Consulting, an international business advisory firm, says that South African companies are increasingly interested in investing in Africa. "Many of our South African clients are putting substantial bets on continued rapid-fire economic growth on the continent,” he says. He adds that sectors such as financial services, energy and infrastructure are proving the most popular.
Among the top 10 countries receiving FDI from South Africa, only two – the UK and the US – were not African and more than half of all investment from the country between 2008 and 2012 stayed on the continent.
Surprisingly, given the economic troubles that have gripped both countries in recent years, Spain and Ireland recorded the fourth and fifth largest increases in outbound FDI between the two five-year periods of 106% and 93%, respectively. According to Mr Loewendahl, the increases are accounted for by exceptionally large expansions by a small number of companies rather than a general expansionist trend among Spanish and Irish companies.
In Spain, for instance, clothing manufacturer Inditex and bank Santander Group account for a significant proportion of outbound FDI from the country. One-tenth of all outbound Spanish FDI projects between 2008 and 2012 were accounted for by Inditex, while Santander accounted for the same proportion of all Spanish overseas hires in the same period.
In Ireland, the rise in outward FDI is connected to the growth of Rynanair, an Irish low-cost airline operator, but also to the government's pro-FDI policies that have attracted companies, such as public relations and advertising behemoth WPP Group, to establish head offices in the country.
Switzerland also recorded a healthy increase in outward FDI of 82% between the two five-year periods. The main sectors for Swiss outward FDI are financial services, food and tobacco, and consumer products, which is driven by the expansion of a number of multinationals, such as food company Nestlé.
The destination of Swiss investment has changed between the two five-year periods, no doubt as a result of the financial crisis. Before the crisis, between 2003 and 2007, a significant amount of Swiss investment went to emerging economies, but in the 2008 to 2012 period Swiss companies invested more heavily in developed markets.
The main explanation for this change is the growing strength of the country’s currency. "Investing in Switzerland became a bit more expensive and at the same time the purchasing power of the Swiss franc has been higher,” says Daniel Loeffler, director at the economic development office in the canton of Geneva. As a result, Swiss investors, who have historically viewed internationalisation as a means to overcome the limited size of their home country, gained yet another reason to venture abroad and look for assets, especially in cash-strapped American and European companies.
Ones to watch?
Two other countries that recorded surges in outbound FDI between the two five-year periods were Chile and Thailand, which experienced increases of 97% and 80%, respectively.
Expansion among Chilean companies was fuelled by two factors, according to Cristian Lopez, director of the London office of ProChile, the country’s international trade development agency. One was the growth of other emerging Latin American countries and the second was the growing strength of the Chilean peso.
"As much as 83% of global investments out of Chile was concentrated in Latin American countries. Chilean companies investing outwardly during the 2008 to 2012 period were making the most of the opportunities created by the international financial crisis,” says Mr Lopez.
Thai investors were also buoyed by the strengthening of the baht and the growth of neighbouring countries. "The emerging markets of neighbouring countries, such as Indonesia and Myanmar, have grown exponentially and overseas investment has helped lessen the baht’s appreciation,” says Supisara Chomparn, director of the New York branch of the Thailand Board of Investment.
Putting rupees to work
The flow of FDI in the Indian business process outsourcing (BPO) sector has witnessed something of a reversal in the past five years. After a decade-long surge in investments in BPO projects in India, now the country's largest companies, including Infosys, Crisil and Mindtree, are making significant outward investments.
According to data from fDi Markets, in 2012 Indian companies created an estimated 10,800 jobs through crossborder greenfield BPO projects, a threefold increase from 2004. Given the low price of labour in India – traditionally the main factor influencing the decision to outsource – why is the sector expanding out of the country?
"The need for local support and a talent pool that can serve the higher end of operations,” says Scott Staples, president of US operations at Mindtree, a Bangalore-based IT consulting company that launched a development centre in Gainesville, Florida, in 2012.
Sanjeev Sinha, president of the research and analytics arm of Crisil, a Mumbai-headquartered risk and policy advisory, says that by venturing overseas, Indian companies manage to gain a local footprint.
"In an increasingly competitive landscape, clients welcome value-added services such as analytical support in local languages. Our research centre in Hangzhou, China, offers reports in Mandarin, while the Buenos Aires centre provides support in Spanish,” says Mr Sinha.