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Columbia Center on Sustainable InvestmentEmerging Markets Global Players Project
Denis Tan | [email protected] of Public Administration in Environmental Science & Policy Candidate ‘15
Columbia Center on Sustainable Investment (CCSI)CCSI is a joint center of The Earth Institute & The Columbia Law School that is focused on studying and helping to enhance sustainable investment decisions by emerging-market multinational enterprises.
Project ScopeI look at existing data from the emerging market global players project to identify global and regional trends on
foreign direct investment from 2006 to 2012.
Finding 1The most foreign asset-rich emerging market multinational enterprises (MNEs) are not the necessarily the most
outward oriented.
Finding 2Manufacturing has displaced resource extraction as
the top industry that MNEs invest in abroad.
Finding 3Asian MNEs, surprisingly, prefer to invest in Latin
American than within their home region
Emerging Market Global Players Project (EMGP)EMGP is a collaborative effort led by CCSI, brings together leading Foreign Direct Investment scholars from leading institutions in emerging markets to gather, analyze and publish original data and findings.
Emerging Markets Global Players Report
Chapter 1: Aggregate Findings 8
1.1.6 Transnationality Taking various indicators of outward orientation together, the transnationality index (UNCTAD, 1998) is constructed for the MNEs in our data set. The Transnationality index is the simple mean of three indices: the firm’s foreign to total asset ratio, foreign to total sales ratio, and foreign to total employment ratio. Figure 1.8 depicts the top 10 MNEs in terms of TNI. Two conclusions can be drawn: First, the most foreign asset-rich MNEs (Figure 1.1) may not be the most outward oriented. Second, European and Middle Eastern MNEs appear to be the most outward oriented. We speculate that this could be attributed to political uncertainty in the Middle East (faced by Israel) over the past few years, the relatively small size of home markets of European economies in our data set, and the geographic advantages of being adjacent to other large EU economies in the region.
Our speculation will be further substantiated subsequently in Chapters 2 and 3 when we examine home region preferences of emerging market MNEs. We primarily find that European MNEs, particularly government owned Hungarian and Polish MNEs, prefer investing in Europe rather than in other regions like the Middle East, supporting our view that their proximity to the EU affects its investment decisions.
“…the most foreign asset-rich MNEs may not be the most outward oriented.”
Figure 1.8: Top 10 MNEs by TNI
Note: Top 10 MNEs listed in decreasing order of TNI based on unbalanced panel data from 2006 to 2012. MNEs color-coded based on MNEs’ home region: Middle East and Africa (Yellow), Asia and the Pacific (Pink), Europe (Light Green). Vertical axis depicts TNI. The horizontal red line illustrates mean TNI of the top 10.
Mean 86
Emerging Markets Global Players Report
Chapter 1: Aggregate Findings 2
Figure 1.1: Top 10 MNEs by Foreign Asset Size from 2006 to 2012
Note: Top 10 MNEs listed in decreasing order based on foreign asset size based on unbalanced panel data from 2006 to 2012. Mean assets of top 10 MNEs reflected by red horizontal line. MNEs color-coded based on MNEs’ home region: Asia and the Pacific (Pink), Europe (Light Green), Latin America (Orange).
There was a significant reordering of the top emerging market MNEs before and after 2009. Figure 1.2 presents the top 10 emerging market MNEs pre-2009 while Figure 1.3 displays the ordered listing after 2009 (inclusive). It is important to note that for the period after 2009 (inclusive), data from Chinese, Indian, and Slovenian MNEs were not collected and, hence, conspicuously absent from the figure. We also need to note that Chinese and Indian MNEs ranked in earlier years were likely to stay in the top lists, if data were collected, because outward FDI flows from these two countries remain strong and come primarily from their largest MNEs. From Figures 1.2 and 1.3, it is also clear that the total accumulated foreign assets have grown from less than US$ 20 Billion in 2006 to almost US$ 25 Billion in 2012.
“…total accumulated foreign assets [of emerging market MNEs] have grown from less than US$ 20 Billion [pre-2009] to almost US$ 25 Billion…”
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Emerging Markets Global Players Report
Chapter 1: Aggregate Findings 10
Figure 1.9: Top Five Industries by Number of Foreign Affiliates and Foreign Involvement (Assets, Sales, Employment)
Figure 1.10: Top Five Industries by TNI, Foreign to Total Ratios (Assets, Sales, Employment)
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Emerging Markets Global Players Report
Chapter 3: Government Ownership, Pubic Listing & Internationalization 29
CHAPTER 3 - Government Ownership, Public-Listing, and Internationalization
3.1 Home Region Preferences For many reasons including cultural similarity, geographic adjacency, and higher intensity of mutual migrations, outward oriented MNEs begin their foreign investment within their home region before expanding to destinations that are further away. Using our data set, we test this hypothesis. We do so by aggregating firms at the regional level and applying two sample ANOVA tests to compare the mean regionality index of the home region with the indices of the other three, foreign regions. If home region preferences exist, the ANOVA test would give a positive and significant difference. The regionality index denotes the regional orientation of the MNE and is the ratio of foreign affiliates in a given region to the total foreign affiliates that an MNE has. For instance, to construct the regionality index in the Middle East, we take the simple average of the ratios of foreign asset in Middle East to total assets, foreign employment in Middle East to total employment, and Foreign Sales in Middle East to total sales. Table 3.1: Summary of ANOVA results testing Home Region Preferences
Home Region Middle East & Africa Asia & the Pacific Europe Latin America
Is Home Region Preferred to Middle East & Africa?
Yes (34.49***)
Yes (81.46***)
Yes (64.82***)
Is Home Region Preferred to Asia & the Pacific?
No (-14.18***)
Yes
(79.11***) Yes
(63.14***)
Is Home Region Preferred to Europe?
No (-47.72***)
Yes (16.98***)
Yes
(59.76***)
Is Home Region Preferred to Latin America?
No (-6.63***)
No (-26.92***)
Yes (70.50***)
Is Home Region Preferred to North America?
No (-27.68***)
Yes (24.58***)
Yes (66.78***)
Yes (48.83***)
Sample Size 29 47 106 73
Note: Absolute value of difference in regionality index given in parenthesis. * Significant at 10% level ** Significant at 5% level *** Significant at 1% level. Sample size 255. Period of analysis = 2006 to 2012. Economies included (14): Argentina, Brazil, Chile, China, Hungary, India, Israel, Mexico, Poland, Russia, South Korea, Slovenia, Turkey, Taiwan. From our data, it is clear that home region preferences exist. Most of the MNEs tend to have more affiliates in their home region than in other regions. However, there are two clear exceptions in our data. First, Asian and Pacific MNEs are more likely to invest in Latin America then in Asia and the Pacific. Since Asian and Pacific MNEs concentrated in such industries as manufacturing, infrastructures, and natural resources, a high propensity into populous and developing markets such as Latin America with rich raw materials is not surprising. This supported by our data: firms from the Asia Pacific region are involved in such industries with more than 10 in manufacturing, eight in mining/quarrying, four in construction, three in energy. Second, MNEs from Israel prefer to invest in all other regions than in their home region. This observation is potentially due to the political instability of the Middle East, ideological