In terms of sectors, South-South FDI flows have been dominated by infrastructure and extractive industries. Southern MNCs have also been expanding in the telecom sector, with Mexican, Russian and Egyptian companies acquiring assets abroad.

TOP VIEW Historically, foreign direct investment has flowed from North to South. But that direction is changing. Emerging market multinationals of the South are investing in other Southern economies, many of which share similar challenges and opportunities. Some Southern multinationals are also reversing the historical flow of FDI, investing in the North in their quest to capture coveted skills, brands and production facilities.

There are a number of reasons why the extractive sector has led the process. First, state-owned oil companies in emerging market economies have access to reserves that can provide a natural source of long-term comparative advantage. There has also been a stimulus to acquire access to supplies of energy and other raw materials to fuel rapid economic growth and industrialization in markets like China and India, which are net importers of oil. This has created a need to look abroad to secure resource access.

MNCs in Korea, Malaysia, Singapore and South Africa have a well-established track record of investing abroad. Companies in others countries, including Chile, Mexico, Brazil, China and India, have emerged as players more recently. Geographically, outward FDI from emerging market economies is now concentrated in Asia. Hong Kong has a higher FDI/Gross Fixed Capital Formation (GFCF) ratio than most developed countries. Taiwan has a higher FDI/GFCF ratio than the United States, Germany and Japan; its FDI mostly flows to China. Chile and Malaysia have ratios higher than Germany and Japan. Four of the five economies with the largest FDI stock are in Asia (Singapore, Hong Kong, China and Taiwan), the other being Brazil. These five economies account for more than 70 percent of the total FDI stock from the South.

Total foreign assets of the top 50 MNCs from the South climbed to $249 billion in 2003 from $195 billion in 2002. The five largest MNCs accounted for almost half of the total assets of the top 50. Hutchison Whampoa of Hong Kong was the largest Southern MNC and alone accounted for 25 percent of the total foreign assets held by the top 50. Asia dominated the top 50 with 39 enterprises. The other 11 companies are from South Africa, 4; Mexico, 4; and Brazil, 3. Singapore and Hong Kong were the most important home economies, with nine and 10, respectively, of the top 50 MNCs ranked by outward FDI. Taiwan had eight.

Southern multinationals have also been acquiring assets in the developed world. This is evident in the recent acquisition of brands and distribution capability, in particular by Chinese producers. Chinese corporations TCL and Lenovo have acquired IBM, RCA and Thompson brands, allowing them to short-circuit the lengthy brand- and loyalty-building process that companies in Japan and Korea had to go through to increase global market share.

Southern MNCs have also invested to gain access to production facilities or, in some cases, complete businesses from production through to distribution capabilities. Mexican cement giant Cemex’s purchase of UK-based RMC Group, another cement manufacturer, in 2005 was one such landmark transaction for a company from the South. Brazilian brewer AmBev’s acquisition of Labatt in Canada and South African brewer SABMiller’s purchase of a number of beer companies in developed markets are other examples of companies acquiring and building global brands. Russian natural gas company Gazprom raised concerns in the UK last spring with its interest in UK gas utility Centrica.

There have also been a number of investments by MNCs in R&D in the North to access technologies and knowledge to strengthen competitiveness and move up the production value chain. Indian IT firms have been active in this, investing in a number of developed markets. Even so, in net terms, the flow is still in the other direction, and India and China have been important beneficiaries of Northern investment in R&D.