New Voices in Investment : A Survey of Investors from Emerging Countries

Abstract

One out of every three dollars invested
 abroad in 2012 was originated in multinationals from
 developing countries. This study sheds light on the
 characteristics, motivations, strategies, and needs of
 emerging market investors. By including information on
 investors, potential investors, and non-investors, the study
 identifies differentiating factors among them that are
 associated with investment decisions. Results show that
 emerging market investors are active players in
 international trade markets; they operate predominantly in
 manufacturing, and are publicly listed and larger than
 non-investors. They exhibit a strong regional bias: they
 invest more heavily in neighbors and in other countries in
 their own regions. Outward FDI from emerging markets is
 primarily market-seeking. Expanding regional and host
 markets emerged as the most important factor influencing the
 location of investments. However, emerging markets'
 firms face binding costs of investing in distant, culturally
 dissimilar markets, resulting, in practice in a trade-off
 between market size and market familiarity. Transaction
 costs associated with geographical and cultural differences
 have a greater impact on services sector firms that exhibit
 a stronger regional bias. Bilateral investment treaties
 (BITs) partly offset these costs associated with investing
 in faraway and/or unfamiliar markets. In addition,
 international trade agreements increase the perceived
 attractiveness of a host country to potential investors.
 Political factors constitute binding constraints that deter
 emerging markets' firms from investing in developing
 markets. Yet, investors value political stability and
 transparency more than corruption control, fair and regular
 elections, and risk of expropriation in the host country.
 IPAs play only a marginal role in raising awareness of
 investment opportunities in developing countries, and may be
 particularly ineffective in many African countries.
 Nevertheless, IPAs appear to be a widely used and useful
 resource for investors once they have made the decision to
 enter a specific market. IPA services tend to be more
 valuable for smaller and less productive firms. Overall, the
 new TNCs from emerging economies do not appear to differ
 dramatically from their predecessors from developed and
 developing countries in previous waves of OFDI. Results
 suggest that to attract FDI from emerging economies,
 countries need to maintain market-friendly, liberal trade
 and investment policies. In addition, joining international
 trade and investment agreements can be benefitial to reduce
 transaction costs associated with cross border investment.
 Countries also need to provide a stable and predictable
 political and institutional environment. Last and not least,
 it is important to revamp IPAs and increase their
 effectiveness in raising awareness of investment
 opportunities and meeting investors' needs.