The developed world still accounts for 90 percent of global outward FDI flows, but direct investment originating in the South is growing rapidly—rising from $14 billion in 1991 to $83 billion in 2004. The annual outward FDI growth from emerging market economies averaged 27 percent between 1999 and 2004, compared with the developed world’s roughly 11 percent growth rate. According to the United Nations Conference on Trade and Development’s World Investment Report (2005), the total outward FDI from emerging market economies exceeded $1 trillion in 2004, representing 11 percent of the cumulative global stock. The sources have changed over time; Asia has seen a steady and consistent rise in FDI outflows, while the share from Latin America and the Caribbean has fallen. South-North investment has also increased, as multinationals in emerging markets have looked to acquire strategic assets in developed markets.

Four of the five economies with the largest FDI stock are in Asia (Singapore, Hong Kong, China and Taiwan).

The growth of South-South FDI flows has two key consequences. First, emerging countries are becoming more integrated with one another as a result of the activities of Southern multinational corporations (MNCs). Second, these markets are benefiting from improved access to beneficial sources of investment. Data suggests that South-South capital flows are less volatile than North-South flows.

A confluence of factors has led to the increase in South-South FDI. These include reduced capital controls, increased wealth in the emerging world, trade liberalization and regional integration. The World Bank identifies three objectives driving outward FDI from the South: access to resources, access to markets and access to strategic assets.

The desire to secure energy and commodity supplies is behind many investments by MNCs from the South. China and India, in particular, have been competing to gain access to energy resources elsewhere in the developing world, as could be seen in the competition to acquire PetroKazakhstan, bought by China National Petroleum Corporation for $4.18 billion in 2005.

The desire to gain access to markets is also a powerful driver. In many cases, domestic markets have become saturated, so to continue to grow, Southern MNCs have to acquire access to other opportunities. Telco providers and IT companies from the South have leveraged their low-cost structures to tap into demand abroad. Their familiarity with social and cultural factors provides a comparative operating advantage over companies from the developed world. This leads naturally to an intraregional bias of South-South flows, reflecting an underlying competitive advantage that MNCs from the South have over their competitors from the North: the ability to operate effectively in a similar economic environment.

In certain cases, emerging market governments have created incentives for outward FDI via investment insurance, preferential loans or tax breaks. China and Malaysia both offer programs of this nature.

Unlike the motivation for North-South investment, seeking efficiencies has generally been less of a goal. However, this is changing as developing-country MNCs grapple with the need to maintain competitiveness in the face of rising competition from cheaper labor economies, or to offset disadvantageous economic developments such as currency appreciation. These factors drive some of the Korean and Taiwanese investments in China.