When two worlds meet: How high-growth market companies are changing international business

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HELPING YOUR BUSINESS GROW INTERNATIONALLY

WHEN TWO WORLDS MEET: HOW HIGH-GROWTH MARKET

COMPANIES ARE CHANGING INTERNATIONAL BUSINESS

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When two worlds meet: How high-growth market companies are changing international business 1

About the reportWhen two worlds meet: How high-growth market companies are changing international business is a UK Trade & Investment (UKTI) report commissioned from the Economist Intelligence Unit. It examines the growing international footprint of companies based in fast-growing emerging markets and the ways in which firms from Western Europe and North America are responding to a phenomenon that is redefining the global economy. The report also assesses the risks and opportunities that lie ahead for Western economies and their companies.

As part of the research for this report, the Economist Intelligence Unit conducted a survey in August 2011 of 459 executives from companies based in Europe and North America. The respondents are from a range of industries and they represent companies of varying sizes. One-half of the respondents are C-level executives or board members.

All graphs and tables in this report are from the Economist Intelligence Unit’s survey unless otherwise stated.

The EIU also conducted in-depth interviews with senior executives from companies in Europe, North America and high-growth markets as well as with independent experts. We are particularly grateful to the following for agreeing to share their insights for this study:

■ Ferdinando Beccalli-Falco – President and Chief Executive Officer, GE Europe and North Asia

■ Lewis Booth – Chief Financial Officer, Ford Motor Company

■ Ishaat Hussain – Chief Financial Officer, Tata Sons

■ Gareth Jenkins – Managing Director, FSG Tool & Die

■ Zafer Kurtul – Chief Executive Officer, Sabanci Holding

■ Rainer Ohler – Senior Vice President, Airbus

■ Karl P. Sauvant – Executive Director, Vale Columbia Center on Sustainable International Investment at Columbia University

■ Oliver Seidl – Chief Executive Officer, Loewe AG

■ Santiago Fernandez Valbuena – Chief Executive Officer, Telefonica Latin America, and until recently, Chief Strategy Officer, Telefonica SA

■ Maarten Wetselaar, Executive Vice President (Finance), Upstream International, Royal Dutch Shell Plc

■ Yuan Xiaolin, Head of Chairman’s Office, Volvo Car Corporation

1

When two worlds meet: How high-growth market companies are changing international business2

EXECUTIVE SUMMARY

With their increasing numbers and growing ambition, multinational corporations (MNCs) based in high-growth markets – emerging economies growing at above average rates – are at the forefront of forces helping the global economy to recover from the financial crisis of 2008 and the subsequent recession.

The rise of this new kind of MNC represents either an unprecedented challenge or an opportunity for companies based in the developed but low-growth economies of Western Europe and North America. Firms rooted in emerging and mature markets may be quite different entities today but their futures are likely to be increasingly intertwined, either as partners or as competitors.

The “new” MNCs already account for an increasing share of outflows of foreign direct investment (FDI). In 2010 these flows reached a record high of US$377 billion, up 21 per cent on 2009, and amounted to a 29 per cent share of the global total for FDI compared with 15 per cent in 2007. At the same time, almost one-half of developed countries’ investments of US$970 billion in 2010 went to developing countries, compared with 30 per cent in 2007, according to the 2011 World Investment Report from the United Nations Conference on Trade and Development (UNCTAD)1.

Confidence among European and North American firms may be fragile after the global economic downturn but they are sitting on nearly US$5 trillion of cash that is ready for investment, according to UNCTAD. Research for this report suggests that Western firms are pursuing a variety of strategies to deal with their new challengers on the global stage. Some are sharpening their competitive edge while others are exploring partnership options. The report points to increased investment flows not only from developed to developing economies, and vice versa, but also from one developing economy to another.

The main findings of the report include the following:

European and North American companies see the rise of high-growth market companies on the global stage more as an opportunity than a threatSeven out of 10 respondents in the survey for this report see expansion by companies based in high-growth markets as beneficial for their own firms. 43 per cent cite improved access to emerging markets as the main benefit of doing business with high-growth market MNCs; 35 per cent of Western executives expect this new force in world trade to stimulate demand for their own products and services, while others view partnership opportunities as a way to reduce operating costs. A significant minority of respondents also see foreign investment by high-growth companies boosting economic growth, employment and consumer choice in developed markets. A much smaller proportion cite greater volatility, higher unemployment and loss of control over strategic assets as the biggest risks posed to developed markets by the expansion of high-growth market MNCs.

The growing international footprint of high-growth market companies is making the competitive landscape more challenging for European and North American firms A majority of survey respondents admit competition is becoming increasingly intense, more so in emerging markets than in their home or developed markets. Nearly one-half of executives agree it will become harder for Western firms to compete on price, pointing to lower labour costs as the main competitive advantage of high-growth market MNCs. A similar number of respondents also believe that developed market firms are underestimating the competitive challenge from high-growth market companies. As Santiago Fernandez Valbuena, the CEO of Telefonica Latin America and until recently the Spanish telecommunications provider’s chief strategy officer, points out: “The newcomers represent a threat in the competitive sense; they’re very competent, they ask all the right questions and their prices are unbeatable.”

When two worlds meet: How high-growth companies are changing international business 3

Western firms see their edge in technology and innovation as their greatest competitive advantage Companies in Western Europe and North America are responding to the new competition by investing in innovation across all aspects of their operations: from their business model and supply chain to their marketing and product portfolio. While more European survey respondents than North American ones think the way forward lies in innovation, a greater number of manufacturers than service-providers favour innovation as a path to growth. “The fundamental way to respond is to stay ahead of the curve,” says Ferdinando Beccalli-Falco, president and CEO for GE in Europe and North Asia. A majority of survey respondents also think Western firms can add the greatest value in any partnership with their advanced technology and their expertise in business strategy.

Mergers and acquisitions are likely to replace partnerships and joint ventures as the favoured form of FDI by high-growth market companies North American and European executives anticipate a flurry of cross-border merger activity after an initial period of collaboration or partnership with their emerging challengers. Currently at least two out of five Western firms are likely to be doing business with or partnering with companies based in high-growth markets. Over the next 12 months, while the global economic outlook remains uncertain, survey respondents see high-growth market MNCs opting for lower-risk options such as join ventures, equity swaps or franchising and outsourcing agreements as the preferred route for international expansion. However, Western executives expect high-growth market companies to pursue growth primarily through M&A thereafter.

Risk aversion in Western economies is likely to help high-growth market FDI flow more and more into the developing world One-half of European and North American executives see protectionist barriers going up in their home markets, not least as a result of their governments coming under increasing pressure to shore up their weak economies and shield local businesses. A majority of survey respondents also admit their companies have little appetite to significantly increase their risk exposure by doing business with their high-growth market rivals, involving as it does overcoming differences in culture and corporate governance standards. That, along with the relatively better growth opportunities and untapped resources in developing economies, is likely to make high-growth market MNCs favour emerging markets as an investment destination.


The global economy is at a historic crossroads. Much of Western Europe and North America continues to be mired in the economic downturn triggered by the financial crisis of 2008. Meanwhile, many developing economies have been growing robustly, becoming in the process important engines of globalisation. The International Monetary Fund talks of a two-speed global recovery at best: earlier this year it forecast 2.5 per cent growth in advanced economies for 2011 and 6.5 per cent in emerging or developing economies. It may well now bring forward the date when the latter account for more than half of global output (in terms of purchasing power parity) from its projected 2013.

According to Min Zhu, deputy managing director at the IMF, recent structural changes in developing economies support the three key drivers of growth: “The labour force is growing at a rapid pace and populations are urbanising, investment is growing with support from ample foreign capital and productivity is increasing as production moves up the value-added chain.”2 On current trends, he adds, annual global output will more than double in two decades from US$78 trillion to US$176 trillion (at today’s prices), with three-fifths of that extra output coming from emerging or developing economies.

The most influential of the developing economies known collectively as the BRICs – Brazil, Russia, India and China – are increasingly shifting the emphasis of economic policy towards domestic consumption as tens of millions in these developing giants are lifted out of poverty.

1. INTRODUCTION


400

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300

250

200

150

100

50

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

30

25

20

15

10

5

0

Bill

ions

of d

olla

rs

Share Value

FDI outflows from developing and transition economies: the value and their share in global FDI outflows, 2000-2010

Source: UNCTAD

The Boston Consulting Group, a management consultancy, forecasts that the middle class in rapidly developing or high-growth economies will account for 30 per cent of the global population by 2020 and 50 per cent by 2030.3 It is hardly surprising, therefore, that in 2010 developing economies absorbed the major chunk (53 per cent) of FDI flows for the first time, according to UNCTAD. They also accounted for 29 per cent of global FDI outflows in 2010 – doubling their share from 2007 – with China (including Hong Kong) investing more overseas than either Germany or France. China, in the process, overtook Japan for the first time in terms of FDI outflows.

Annual global output will more than double in two decades from

US$78 trillion to US$176 trillion.


According to UNCTAD’s Global Investment Trend Monitor No.6 published in April 2011, developing economies are increasingly important investors in the international arena. This is particularly true for East and South-East Asia, where outward FDI from Hong Kong, China, South Korea, Taiwan and Malaysia rose by more than 20 per cent from 2007 to 2010.

MNCs driving this surge in investment after the financial crisis are hungry for access to new markets and basic materials, as well as new skills and technology. In the Financial Times’s 2007 list of the world’s 500 biggest companies by capitalisation, China – excluding Hong Kong – shared eighth place, with eight companies in the list. In the 2011 list, China was in fourth position, with 27 companies, behind the US, UK and Japan. Other BRIC countries have also moved up the rankings: India has 14 companies in the 2011 list, compared to eight in 2007; Brazil is up to 12 from seven and Russia now has 11 companies in the list compared to nine in 2007.

“Companies in China and India are not cheap toy producers anymore but have the capability to produce high-technology goods and services,” says Mr Beccalli-Falco of GE. “It’s got to the point where what we call developing countries are not really developing countries any more; they’re developed.” Karl P. Sauvant, a former UNCTAD official who is now executive director of the Vale Columbia Center on Sustainable International Investment in New York, says: “Outward FDI from emerging markets will grow significantly as their firms are subject to the same pressures of globalisation as their developed country competitors.”


The rise of the “new kids on the block,” as Dr Sauvant calls MNCs based in high-growth market economies, has led to some headline-making acquisitions in developed markets such as the purchase by India’s Tata Group of revered British brands such as Tetley, Corus and Jaguar Land Rover (JLR) – in sectors as diverse as tea, steel and automobiles – all within the past few years. Tata is now Britain’s biggest manufacturing company, and under its ownership, JLR has invested in new products and innovation, resulting in more jobs in Britain and handsome profits for the previously ailing firm.

Gareth Jenkins, managing director of FSG Tool & Die, a small Welsh precision engineering company that is also a supplier to JLR, says of the newcomers: “There’s always a threat to everything but, based on our experience thus far, I would have no difficulty in viewing (the rise of high-growth MNCs) very positively.” His attitude is surprisingly common among respondents to the survey, with as many as 70 per cent viewing the phenomenon of high-growth market MNCs as a positive development for developed economies and their companies.

This holds equally true for executives from both North America and Europe though, on the whole, American firms are more sanguine about the new competition. This perhaps reflects the differences in the competitive landscape and business culture on both sides of the Atlantic. However, within both groups around one-half of the respondents see greater FDI outflows from high-growth markets as contributing to economic growth in Western economies and in their home markets.

2. FDI FLOWS UPSTREAM

How might greater outbound FDI from high-growth markets benefit Western economies? Select up to three

Will contribute to economic growth

Will add to consumer choice

Will help make developed world firms more competitive

Will provide more jobs

Will make developed world economies less vulnerable to economic shocks

Will help reduce the debt burden of developed world economies

This poses no benefit to developed world economies

Don’t know

0 10 20 30 40 50 60 70 80 90 100

45%

37%

36%

29%

27%

16%

2%

3%

70 per cent view the phenomenon of high-

growth market MNCs as a positive development

for developed economies and their companies.


Growth in Western economies has been at a near standstill as the credit crisis of 2008, subsequent recession and an ongoing sovereign debt crisis have sapped business confidence and dampened consumer demand. As companies from developed markets cope with a low-growth environment, those based in developing economies have set themselves ambitious double-digit growth targets. Towards that end, with growth in their home markets also starting to cool down, many of them are aggressively expanding overseas via acquisitions, partnerships, joint ventures and greenfield projects. For instance, in the largest overseas acquisition by a Chinese company so far this year, state-owned oil group Cnooc bought Canada’s Opti for US$2.1 billion.

Western manufacturers, proportionally, are benefiting more from the changing competitive landscape. While in comparison to the services sector they have suffered more during the recession in their home markets, almost one-half of manufacturing executives in the survey – compared with 29 per cent of respondents from services – say the rise of high-growth market firms has given their own companies a lifeline by, for instance, opening up access to new markets. Western manufacturers, in many cases, are becoming important cogs in the supply chain for high-growth market companies.

The global civilian airliner market has long been dominated by Western firms but Russia’s United Aircraft Corporation is the new force to reckon with: it aims to gain a sizeable market share with its Superjet 100 plane. After a slow start, orders have started pouring in, not least because the Superjet 100 is up to 15 per cent cheaper than the competition. But to compete on quality, the Russian manufacturer has had to rope in partners. As a result, the Superjet 100 is now 50 per cent produced in Russia and 50 per cent abroad, with its engines produced jointly with France’s Snecma.


Almost one-half of manufacturing executives in the survey say the rise of high-growth market firms has given their own companies a lifeline.

What do you see as the main benefits for your company of partnering or engaging with a high-growth market MNC? Select up to three.

43%

35%

25%

24%

24%

16%

16%

0%

4%

3%

Better access to emerging markets

Source of new business growth

General ability to reduce operating costs

Access to low-cost labour

Better / cheaper access to raw materials and resources

Access to local skills/talent

Improved innovation, including so-called frugal innovation

Other, please specify

None of the above

Don’t know

0 10 20 30 40 50 60 100


Tough times in their traditional markets are forcing some European and North American companies to think and act boldly. Some established MNCs such as Ford are responding to the economic slowdown by not only slashing costs but also by investing in innovation and new products and by expanding ever more into emerging markets. “In 2009, when we started returning to positive cash flows, we turned our sights on growth markets,” says Lewis Booth, Ford’s chief financial officer, pointing to substantial investments in China, India, South Africa and South America. “But we had already decided to continue to invest in new products in the traditional parts of the business. We have no desire to handicap our existing business just for the sake of growth markets.”

Ford, which posted a profit of US$5 billion in the first half of 2011, now plans to export India’s ‘Car of the Year’, the Figo, from its plant in Chennai to 50 countries around the world. Mr Booth says the company expects its worldwide sales to rise by 50 per cent over the next four or five years – and more than half that growth is expected to come from the Asia-Pacific region. But Ford has also announced 7,000 new jobs in its North American units over the past two years, providing a fillip to US manufacturing.

3. ADAPTING TO CHANGE

What is your company doing or planning to do in order to respond to increasing competition from high-growth market MNCs? Select all that apply

40%

36%

35%

32%

25%

22%

18%

15%

1%

3%

3%

Investing in innovation, research and development

Introducing new products and services

Expanding into new markets

Adapting our business strategy/operating model

Cutting costs

Acquiring emerging-market competitors

Investing in brand development

Changing our business model

Other

None of the above

Don’t know

0 10 20 30 40 50 60 100

This self-renewal is the key driver among respondents to regaining or sustaining competitiveness. While two in five survey respondents say their companies plan to invest in innovation, research and development, 36 per cent will introduce new products and services, 35 per cent will expand into new markets and 32 per cent will adapt their business strategy.

Rainer Ohler, senior vice-president for public affairs at the European aircraft manufacturer Airbus, says: “The way to stay ahead of the Chinese is to take them seriously but ensure it’s you with the cutting-edge technology.” GE’s Beccalli-Falco adds: “The fundamental way to respond is to stay ahead of the curve.”


The survey reveals an underlying confidence among Western firms, with only 20 per cent thinking that competition will go up significantly in their home markets. “One or two of these newcomers represent a threat in the competitive sense; they’re very competent, they ask all the right questions and their prices are unbeatable,” says Mr Fernandez Valbuena of Telefonica. “You can’t compete with them economically but on skills, quality, boardroom competence.”

Western manufacturers overall are more bullish than service-providers about the rise of high-growth market companies, with 47 per cent saying orders placed by the new players have helped boost profits. Mr Jenkins from FSG says his company responded to the recession by investing £750,000 in new technology as domestic and overseas competitors went out of business. Based in Llantrisant, next door to Cardiff in Wales, it has 260 global customers, some as far away as Indonesia, and expects to win new clients in Russia and Ukraine. Exports now account for 40 per cent of revenues, which have risen substantially in recent years to a likely £6 million this year, as demand for FSG’s hi-tech, niche products soars.

Mr Jenkins is less worried these days than he used to be about the new competition and their lower pricing and costs. “My view (of any potential threat) has gone through various stages from blind panic to don’t worry about it,” he says. “You look at JLR and Tata Steel and what you’ve got is a warm feeling; they’ve done a good job and gone from strength to strength, and their employees – and customers of ours in their supply-chain – are clearly happy.” Among survey respondents, 44 per cent cite lower labour costs as the main competitive advantage of the new MNCs but Mr Jenkins says: “Whereas people here earn £12 an hour, they may get that in a week or a month in China, but on the other hand, they’ve got weaknesses in quality, service and environmental costs.”

CASE STUDY

Loewe Finding a niche of its ownLoewe, a German manufacturer of electronic products, faces intense competition from rivals based in emerging Asia. South Korean giants such as Samsung are tough competitors when it comes to selling attractively priced flat-screen TVs.

In response to the competition, Loewe has chosen to focus on the luxury end of the market. Loewe spotted a gap when it noticed that low-cost competitors, with their focus on scale and volume, were mostly interested in the mass-market segment. “We intend to orientate our range even more closely around the needs and wishes of the customer in the European premium market”, says Oliver Seidl, chief executive.

Loewe sees its competitive advantages in design and the use of advanced technology. Agreements concluded with German universities, for instance, have allowed the company to monetise innovations such as television sets with an integrated hard disk earlier than competitors.

Selective distribution is the other key to Loewe’s premium branding. In Europe, more than 3,000 registered stockists sell the company’s TV sets with strict guidelines: Loewe is in charge of the salesforce’s training and the design of the shops. “A further focus of our strategy is the systematic development of the premium marketing approach. In this respect, we rely on close collaboration with qualified specialist retail partners,” says Mr Seidl.

Despite the economic slump in Europe, the company expects to do quite well in 2011, according to Mr Seidl. “New technologies such as 3D TV, the integration of Internet and television and even more convenient operating concepts represent attractive growth potential for us.”


UNCTAD’s latest World Investment Report suggests that with MNCs sitting on record levels of cash, combined with the favourable outlook for emerging economies, FDI flows should bounce back to their pre-crisis levels or US$1.9 trillion by 2013. But it cautions: “Risk factors such as the unpredictability of global economic governance, a possible widespread sovereign debt crisis, and fiscal and financial sector imbalances in some countries as well as rising inflation and signs of overheating in major emerging market economies may yet derail the FDI recovery.”

This uncertainty is mirrored among survey respondents who tend to see strategic alliances or joint ventures with the emerging competition as the way forward in the immediate future. However, within three years, by when the storm clouds over the global economy will have hopefully blown over, North American and European executives expect high-growth market companies to favour mergers and acquisitions as their preferred vehicle for international expansion. Currently, 40 per cent of survey respondents partner or do business with a high-growth market MNC, and 17 per cent of those who do not plan to do so within the coming year.

4. IF YOU CAN’T BEAT ‘EM…

If your company is doing business with high-growth market MNCs, what is the nature of that collaboration? Select up to three.

0 10 20 30 40 50 100

18%

18%

16%

13%

12%

10%

8%

7%

15%

3%

We have a joint venture with them

We collaborate on R&D

We provide or sell products, materials or services to them

We hold an equity stake in them

We source products, materials or services from them

We hold an outsourcing contract with them

We have a franchise/licensing agreement with them

They hold an equity stake in us

Not applicable, we do not do business with a high growth market MNC

Don’t know


A few high-growth markets figure prominently in the FDI plans of Western executives: the BRICs, especially China, figure very strongly, and there is significant appetite for investment in Indonesia, Mexico, Argentina, the Ukraine and Egypt. The survey responses, however, suggest that the drive towards other emerging markets – the “Next 11” countries identified by Goldman Sachs, the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) named by the Economist Intelligence Unit or the similar VIPES (Vietnam, Indonesia, Philippines, Egypt) – has yet to get into top gear.

Where are Western firms going in search of partners? (Top ten picks only)

CASE STUDY

ArcelorMittal No mountain high enoughLakshmi Mittal, the Indian billionaire who runs a global steel empire from his base in Europe, overcame political hostility to take over European steel producer Arcelor in 2006 and form the world’s largest steel group, ArcelorMittal. As the CEO and chairman, he has since expanded the combined business through a series of bolt-on acquisitions and he has no plans to stop.

However, ArcelorMittal faces obstacles in its plans to expand steel-making inside emerging markets. For instance, in the face of local objections, Indian authorities have forced the company to scale down two major projects in the states of Jharkhand and Orissa. “Making progress is slow,” says Mr Mittal.

At the presentation of his company’s first-half 2011 results he pointed out that the global steel industry is suffering from over-capacity. “When demand is low there’s a tendency to export and we’re facing this threat from China, Russia and to some extent India. This is a threat to businesses in Europe and the US; there’s always pressure because of cheaper imports coming in from these countries.”

With the aim of securing supplies of iron ore and coking coal, the main ingredients for making steel, ArcelorMittal has joined forces with US coal-producer Peabody to make a US$4.7 billion bid for Australia’s biggest coking-coal producer, Macarthur. “We have this strategy of raw material security and it is on track,” says Mr Mittal.

The summary of the table is:

Number 1 ranking country is China with 65 respondents

Number 2 ranking country is india with 47 respondents

Number 3 ranking country is brazil with 36 respondents

Number 4 ranking country is mexico with 20 respondents

Number 5 ranking country is russia with 18 respondents

Number 6 ranking country is singapore with 17 respondents

Number 7 ranking country is hong kong with 14 respondents

Number 8 ranking country is argentina with 13 respondents

Number 9 ranking country is indonesia with 11 respondents

Number 10 ranking country is south africa with 11 respondents


Perhaps rattled by the economic gloom in their home markets, Western firms’ risk appetite for foreign investments is quite muted at the moment. When asked to describe their company’s appetite for risk in seeking collaboration or partnership with high-growth market MNCs, 37 per cent of respondents say their employer has a moderate risk appetite: they rarely move to seize emerging opportunities before a business case is made. Over one-third of respondents say their company has a low risk appetite: they won’t do business with high-growth market MNCs until opportunities are solidly proven.

That explains why apart from a handful of companies such as the UK-based Standard Chartered Bank, 64 per cent of whose revenue comes from developing countries, most Western multinationals have so far not radically altered their business model. American companies taken together generate just 7 per cent of their revenue in developing countries and British ones 13 per cent, according to HSBC, another British bank with a significant presence in developing countries.

Which of the following best describes your company’s appetite for risk in seeking partnership or collaboration with high-growth market MNCs?

0 10 20 30 40 50 100

14%

37%

35%

10%

5%

Strong risk appetite – We move quickly when we see opportunities emerge

Moderate risk appetite – We are rarely first movers but will do so once a business case is made

Low risk appetite – We don’t do business with high growth market MNCs until the opportunities are solidly proven

None – We have no appetite for such engagements

Don’t know/Not applicable


While Western firms move gingerly into new markets, high-growth market companies are expanding vigorously with both Chinese and Indian oil groups, for instance, keen to improve their countries’ energy security through extensive M&A activity. Ishaat Hussain, chief financial officer of Tata Sons, the Indian conglomerate, says the group is focused on consolidating recent acquisitions such as JLR and Corus but indicates that if another compelling opportunity came on the block “and it makes sense, we would consider it.”

In general, he is sceptical of high-value purchases in developed economies. “Competition is that much stiffer in advanced markets,” he says. “High-profile bids for big Western companies are often determined by the stage of maturity of the business and growth potential.” He believes that the best investment opportunities for firms like his will be in other emerging markets: “Clearly, the South-South proposition is going to be very strong across the group.”

Some of India’s biggest home-grown consumer goods companies such as Dabur, for instance, are challenging the dominance of Western giants such as Unilever, Nestlé and Procter & Gamble by taking their home-grown innovation and production processes to other developing economies and establishing their own range of low-cost Indian brands in Africa and South America in an attempt to create an “emerging-market Unilever”.

According to UNCTAD, the lion’s share of developing countries’ FDI is already directed to others in the peer group. However, when and if the West’s economic recovery is secured, there will be a significant increase in FDI flows from developing to developed economies, believes Vale Columbia Center’s Dr Sauvant, “because that’s where the profitable markets are.” This view is seconded by survey respondents, a vast majority of whom think FDI flows into developed markets will increase significantly over the next three years.

5. KEEPING FDI IN THE EMERGING MARKETS FAMILY

What are your expectations in your home market for the value of foreign direct investment (FDI) by high growth markets in the next 3 years?

0 10 20 30 40 50 100

Will increase by up to 5%

Will increase by 5%-10%







Will increase by more than 100%

Will stay more or less the same

Will fall from current levels

Don’t know

17%

30%

23%

12%

3%

2%

0%

1%

0%

7%

1%

4%


Dr Sauvant considers the threat from high-growth market MNCs to Western firms to be exaggerated. “If a Chinese company buys a concession or oil-field for US$5 billion that’s front-page news but if Shell or Exxon does the same it’s on page 25,” he says.

“Chinese FDI outflows in 2010 were almost US$70 billion out of US$1 trillion and if you look at the financial firepower Western firms are sitting on and the total flows of investment, 70 per cent still comes from developed countries.”

CASE STUDY

Sabanci Playing close to homeTurkey is one of the fastest growing economies in the world, yet it attracts little foreign direct investment compared to, say, China or Russia. This has a lot to do with the foreign investor’s perception of risk. In response, Turkey is determined to become the leading regional economic power.

Sabanci Holding, the country’s biggest conglomerate, mirrors this focus on domestic and regional dominance despite several long-standing joint ventures with Western firms such as Aviva in insurance, Verbund in energy and Carrefour in retailing.

Zafer Kurtul, chief executive, says: “Emerging and underdeveloped economies present better growth opportunities for Sabanci Holding. Neighbouring Middle East and Balkan countries with low levels of product and service penetration, unsaturated markets, growing population, proximity and cultural similarities are more attractive for us.”

The group has eschewed major acquisitions or mergers in the developed world – unlike its Chinese or Indian equivalents. “Our companies have competitive advantages in developing economies,” says Mr Kurtul. “These economies also have higher growth opportunities.”


When Geely acquired Volvo from Ford for US$1.8 billion not too long ago, many questioned how a small Chinese car-maker could nurture a revered Swedish brand; others feared serious infringement of intellectual property rights. The fears have proven to be unfounded.

Yuan Xiaolin, who brokered the acquisition as ex-head of M&A at Geely, is now head of the chairman’s office at Volvo. He says the deal has emboldened other Chinese companies to follow suit. “Geely’s success certainly boosts the confidence of a large number of Chinese companies, large and small, to go out and test the waters in investment outside China.”

The key to the merger’s success, Mr Yuan suggests, is two-fold: good governance and putting the right people in charge. They may have the same owner but Volvo and Geely have remained separate entities, with Volvo retaining an independent board made up of world-class industry veterans and financial experts. “The new Volvo car was, unusually, not crammed with Chinese faces but with people, especially top managers, chosen from all over the world on a meritocratic basis.”

Volvo has helped Geely’s owner, Li Shufu, expand his business outside China and positioned the group as a brand that “can compete with its industrial peers which joined forces with foreign brands some time ago in China.” A revitalised Volvo, meanwhile, has acquired a second home market in China.

6. PROSPERING IN PARTNERSHIP

CASE STUDY

Case study: Airbus Breaking out of Fortress EuropeThe goal of the ‘internationalisation’ strategy of EADS, the parent of Airbus, is “a better balance between our European roots and our global footprint.” It has pursued a series of investments and acquisitions in pursuit of its 2020 target of having 20 per cent of employees and 40 per cent of sourcing from outside Europe.

“There’s a clear need for us to get into other markets with competencies we can’t find in Europe,” explains Rainer Ohler, senior vice president at Airbus. EADS has used its €11 billion cash reserves to spend more than €2 billion on buying European companies this year but it also sees companies from high-growth markets as desired partners.

Its search for new markets, new technology and low-cost materials has run into a spate of obstacles that highlight the pitfalls of expansion into new markets in a few sectors such as aerospace. For example, India does not allow foreign takeovers in its aerospace industry, so EADS has settled for partnership with the state-owned Hindustan Aeronautics Limited (HAL), which builds half of all A320 forward passenger doors.

In China, a final assembly line in Tianjin producing three A320s a month, and the brand-new Harbin Hafei composite manufacturing centre building parts for the A350, both involve large-scale technology transfers.

Explaining the rationale for seeking partnerships in developing economies, Dr Ohler says: the duopoly in bigger jets that Airbus and its main American rival Boeing have “enjoyed” for 30 years will, in 10 to 15 years, inevitably come to an end as the likes of Brazil’s Embraer, Russia’s UAC and China’s AVIC spread their wings. Hence, the push to turn future rivals into partners.


Royal Dutch Shell, an Anglo-Dutch oil company with a global presence, believes worldwide demand for energy could triple by 2050 on 2000 levels, and therefore plans to invest US$100 billion by 2014 in potentially 30 new projects around the world, both in developed and developing countries. FDI is now truly multi-polar – or at least “tri-polar” (US, Europe, BRICs), according to Dr Sauvant.

Maarten Wetselaar, head of finance at Shell Upstream International, points out that Western companies such as his have had to rethink their relations with resource-rich countries and their MNCs. “If you look at our company and its profit-and-loss statements, the rise of the major resource-holders has not knocked us back. But you absolutely need to reinvent your business model and listen like hell to what they want and be relevant to their needs.”

This entails understanding the bigger concerns of emerging market partners, particularly in regions like the Middle East that are grappling with soaring unemployment despite huge oil reserves. “We really have to be on the cutting edge not only of technology and financial power but sharing knowledge and skills and (creating) more jobs in order to keep the right to extract oil and gas,” says Mr Wetselaar. “As we meet their aspirations in terms of technology and international access they’re increasingly willing to meet our growth interests.”

Where do you think developed world companies can add the greatest value in their relationship with high-growth market MNCs? Select up to three

Technology/Innovation

Strategic advice

Branding and marketing

Investment

Knowledge of local markets

Supply chain partner

Financial management

Cost management

Risk management

Other, please specify

None of the above

0 10 20 30 40 50 60 100

54%

28%

28%

25%

23%

22%

19%

15%

14%

0%

1%

Most North American and European executives are likely to agree with that view: a majority of survey respondents say the greatest value Western companies can bring to a partnership with high-growth market MNCs is in technology and innovation.

“You have to be very mindful about which technologies you expose and which ones you don’t,” says Mr Wetselaar from Shell. “But the partner is equally or more interested in your ways of working, that is, modern management techniques and the like.”


“Emerging market multinationals are becoming a force in reshaping global industry in a truly multi-polar world,” says Justin Yifu Lin, the World Bank’s chief economist.4

Even so, one-half of executives surveyed for this report believe that Western economies will respond to the rise of high-growth market MNCs with protectionist measures. The US’s opposition to plans by China’s Huawei to buy relatively small American telecommunications firms because of its supposed links to the Chinese military is a recent example. Around one in three Western executives also sees cultural differences, lack of transparency and poor corporate governance as obstacles to partnership with their high-growth market counterparts.

“FDI is the productive core at the heart of the globalised world economy,” says Dr Sauvant of the Vale Columbia Center. “But the case has to be made again and again that on balance foreign investment is not only good for companies but for the host countries and especially for emerging markets.”

By 2020, Ford expects a third of its global sales to come from the Asia-Pacific region alone. By then, thousands more firms from today’s emerging markets will consider themselves multinational. “We’re an international company whose headquarters happens to be in Dearborn, Michigan,” says Ford’s Mr Booth. “Some people’s model is to send everybody out from the mother ship. But we don’t work that way – and we haven’t for 105 years.” That sounds like a model for a multi-polar world.

7. CONCLUSION


1. Global Investment Trends Monitor No 6 (Global and Regional Trends of FDI Outflows in 2010), United Nations Conference on Trade and Development (UNCTAD), April 2011, updated July 2011.

2. Min Zhu, ‘Straight Talk’, Finance & Development, IMF, June 2011.

3. The 2011 BCG Global Challengers: Companies on the Move, Boston Consulting Group, January 2011.

4. World Investment Report, UNCTAD, July 2011.

BIBLIOGRAPHY

UK Trade & InvestmentUK Trade & Investment is the government department that helps UK-based companies succeed in the global economy.

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The Economist Intelligence UnitThe Economist Intelligence Unit is the world’s leading resource for economic and business research, forecasting and analysis. It provides accurate and impartial intelligence for companies, government agencies, financial institutions and academic organisations around the globe, inspiring business leaders to act with confidence since 1946.

The Economist Intelligence Unit is headquartered in London, UK, with offices in more than 40 cities and a network of some 650 country experts and analysts worldwide. It operates independently as the business-to-business arm of The Economist Group, the leading source of analysis on international business and world affairs.

For more information please visit www.businessresearch.eiu.com

HELPING YOUR BUSINESS GROW INTERNATIONALLY

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UK Trade & Investment is the Government Department that helps UK-based companies succeed in the global economy, and is responsible for the delivery of the SfB product “Helping Your Business Grow Internationally”.

We also help overseas companies bring their high-quality investment to the UK’s dynamic economy – acknowledged as Europe’s best place from which to succeed in global business.

UK Trade & Investment offers expertise and contacts through its extensive network of specialists in the UK, and in British embassies and other diplomatic offices around the world. We provide companies with the tools they require to be competitive on the world stage.

For further information please visit www.ukti.gov.uk or telephone +44 (0)20 7215 8000.

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Published September 2011 by UK Trade & Investment © Crown CopyrightURN 11/1300