Businessmen, from India and other developing economies are busy finding new ways to beat the constraints of their domestic systems. For instance, they have turned tradition on its head by investing abroad?through mergers and acquisitions (M&As), outright purchases or green-field investments. It is almost as though Indian businessmen, instead of playing defensively off the back-foot, as has been their wont, are prepared to leave the crease to meet the competition half-way. It is as though they have opted to face rivalry on alien ground. Worldwide, the process only started in the second half of the 1990s.
The latest, finalised, numbers from Unctad?s World Investment Report 2007 (WIR ?07) show that Brazil?s outward FDI (at $28 billion) was the highest in 2006, followed by India?s ($20.4 billion), Russia?s ($18 billion) and China?s ($16 billion).
In Asia, it is almost as though India and China have started competing against the existing front-runners of the region, like Hong Kong (China), Singapore, South Korea and Taiwan Province of China. Their share of total outward FDI has jumped fifteen percentage points (from 10% to 25%) between 2004 and 2006. So it is clear that the race is being fiercely fought?and particularly so, by the traditional front runners. But China and India are clearly ahead. China?s outward FDI rose by 32%, to $ 16 billion, in 2006 whilst India?s went up by almost four times.
The expansion out of China is taking place at the behest of the Chinese state and includes the deployment of a major dollar-component for setting up ?overseas economic and trade cooperation? zones. The objective is to use them in the task of promoting China?s trade and investment. Beijing has also set in motion the plan to create a government-run investment company funded from its trillion-dollar plus balance of payments surplus. Indian companies, in contrast, have been abiding by market signals and commonly admitted financial principles when acquiring international firms.
The important thing to note in China?s buyouts and mergers is that all but one (out of the five concluded in 2006) involved buyouts of foreign energy producers. The target economies were Canada, Ecuador, Nigeria and the Russian Federation. And the companies taken over were, in the order of the above-named economies, Nations Energy Co Ltd by CITIG Ltd, EnCana Ecuador Corp by China?s Andes Petroleum Co, NNPC-OML130 by CNOOC Ltd, and TNK-BP?s Udmurtneft (to be 49% held by Sinopec, and 51% by Rosneft). The only other takeover of note occurred in the real estate or financial sector when China Construction Bank purchased BankAm (Asia) Ltd.
That is a clear sign that China is more interested in greenfield ventures abroad, and that it just wants to assure itself of a steady supply of raw materials like metals and hydrocarbon-based products. If, in fact, producers in China do buy out or establish JVs, that is an effort to acquire new markets, maintain the growth momentum, get access to cutting-edge technology, develop new product mixes, improve operating margins and increase efficiency ? in short, take worldwide competition head-on. Indian take-overs have, for instance, included the Tata Steel purchase of the Anglo-Dutch Corus Group for $8 billlion, Suzlon Energy Ltd?s of Germany?s Repower Systems AG for $1.7 billion, United Spirits? of Whyte & Mackay for $1.11 billion Power?s purchase of a significant stake in PT Kaltim Prima Coal and PT Arutmin (both Indonesian) for $1.1 billion, the Essar Group?s acquisition of Canada?s Algoma Steel for $1.55 billion
Hindalco?s of Novelis for $6 billion and JSW Steels?annexation of three US firms (Jindal United Steel Corp, Saw Pipes USA and Jindal Enterprises LLC) for $940 million. That makes Tata-Corus the world?s fifth largest steelmaker, revenue wise, and it follows the second largest such transaction by a developing economy company. (The largest was the $17 billion merger in 2006 between Brazil?s Cia Vale Rio Doce (CVRD) SA, and Canada?s iron ore giant, Inco Ltd.)
Even the sector-spread hints at a wide range of competencies and the operation of free-market, decision-making. Thus, take-overs in pharmaceuticals, IT and energy run neck-and neck with others in metals, industrial goods, auto components, beverages, cosmetics and mobile communications. There are greenfield ventures too, in software and financial services. Thus, Indian investments span an entire range.
Other big investors from amongst the Bric member-states are Brazil and Russia. Brazil heads the outward FDI list for 2006 owing to $28 billion in investment outflows during 2006. The one in iron ore (involving Brazil?s CVRD) has already been mentioned, and the only other is a buy-out by Brazil?s AmBev of Argentina?s QUILMES SA, a producer of malt beverages. Other, smaller, FDI outflows involved Brazilian corporates like Itau (in Banking), Petrobras, Votorantim (basic sector goods like cement, pulp, steel) Gerdau (steel) and others. Brazil has also been the biggest source of outward FDI in the Latin America-Caribbean region. Not only was its $28 billion the highest that the economy had ever invested abroad, the sum was also larger than Brazil?s FDI inflows for 2006. As for the Russian Federation, it deployed $18 billion in 2006, and the major sectors involved were metals (aluminium, nickel), finance (banks) and neighbourhood greenfield ventures. The unprecedented fallout of the above is that developing economy firms have now become the ones who underpin the West?s prosperity phase, and drive the latters? bourses.